Does spending on political lobbying pay? by Adi Gaskell of PEX on 15-Jun-2012

With the Leveson enquiry lurching from lurid headline to lurid headline, it seems a good time to investigate whether investing in political activity really works.

Research from Rice University has set out to discover whether spending time and effort greasing the political wheels is actually worthwhile.

They analysed the relationship between political activity and financial returns for nearly 1000 large companies between 1998 and 2008. They found that the larger the companies political involvement, the worse their stock market performance.

The study also found that cumulative political investments worsened financial performance, whilst placing ex-politicians on your board had a similar effect.

"The view of corporations meddling in politics to the downfall of public interests is nothing new," says Doug Schuler, study co-author and associate professor of business and public policy at Rice’s Jones Graduate School of Business.

"This study simply demonstrates that it might not be quite the return on investment that corporate America or the public at large believes it to be."

The paper suggests there are four main reasons why political involvement has less than desirable consequences:

1. Managers who support corporate political giving may in general take overly risky business decisions.
2. Corporate political giving may represent poor-quality investments.
3. Corporate political giving is difficult for shareholders to monitor.
4. Personal reasons of senior managers, such as self-aggrandizement, ideological beliefs and other pressures may influence corporate political activity.

The only examples of political involvement delivering results for companies were when they operated in highly-regulated industries.

"We believe this may reflect the critical role that government can play in controlling resources and limiting behaviours through its rulemaking and enforcement processes, necessitating some level of political activities by the regulated firms," Schuler says. "In regulated industries, firms are better able to target specific agencies and get to know their staff, which is more likely to result in more stable interactions."

Maybe this will encourage executives to think twice before thinking they can gain from Whitehall investment.

Adi Gaskell is Head of Online at Process Excellence Network.

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