Do corporate lobbyists really serve the interests of the corporations they represent? Don’t be so sure.
The lobbying business has been slow in 2011, according to The Hill, an inside-the-Beltway newspaper. The debt-ceiling debate has crowded out consideration of other legislative measures, and lobbying shops have suffered as a result. Whereas last year K Street boomed while Congress considered (and enacted) numerous pieces of legislation, large and small, the current budget battle has pushed nearly everything else off the table. With fewer substantive measures under consideration, there’s less for lobbyists to do — and less for which they can bill.
The decline in lobbying revenues underscores one of Washington’s dirty little secrets. The interests of K Street do not align with the interests of those whom they purport to represent. Businesses benefit when Washington leaves them alone to manage their own affairs. Lobbyists benefit when their clients are under siege. Corporate executives prefer clear, simple rules that create a stable and predictable business climate. But if the rules are simple and clear, there’s less for lobbyists and lawyers to do. How many tax attorneys advocate a flat tax?
When Congress was considering Obama’s health-care and financial-services overhauls, lobbyists, lawyers, and public-affairs consultants were in high demand. Nearly every company with any interest in these sectors had to ensure that it was represented. If a new round of reforms is considered, this pattern will repeat. But don’t expect too many K Street types to advocate outright repeal of the most noxious provisions of Obamacare or Dodd-Frank, as success would curtail future business. There are millions to be made helping companies influence and navigate the new regulatory architecture being imposed on the health-care and financial sectors. Indeed, regulatory consulting and advocacy is the one part of K Street that is still flush.
The tension between corporate representatives and the firms they represent is a perfect example of the principal-agent problem. Although the agent works for the principal, they do not share the same interests. The more threats there are to a company’s bottom line, the more a Washington agent is worth to that company. And if lobbyists are too successful at advancing their client’s aims, they may be out of a job. If a costly regulatory program is eliminated one year, what will justify a large retainer in the next?
This principal-agent problem is hard to fix because it is difficult and costly for businesses to monitor and police the actions of their D.C. representatives. How is a firm to know the difference between the best deal possible and premature capitulation? Companies seek Washington representation in order to take advantage of inside-the-Beltway connections and expertise. Former Hill staffers and executive-branch officials know the ins and outs of the political process and have access to those in power. Yet they rarely have much experience with, let alone affinity for, the productive endeavors that fund their retainers. The same things that make Washington representatives valuable — their knowledge, connections, and expertise — make it difficult for those outside the Beltway to know whether they are getting their money’s worth. It is in the lobbyist’s interest to curry favor with political players, cut deals, and build alliances, even at the expense of their clients. If the lobbyist pushes too hard on behalf of one client, it could undermine his value to the next. And many D.C. insiders are loath to do anything that could compromise their ability to get a plum position in the next administration or climb the ranks of interest-group insiders.
The principal-agent problem is not confined to outside lobbyists. Many corporations have whole divisions whose interests are at odds with those of shareholders and management. Consider the typical vice president for environment, health, and safety. Such positions were created to oversee company compliance with the myriad rules and regulations issuing from Washington, D.C., and from state capitols. The more rules there are, and the greater the costs they impose, the more important an EHS VP becomes. It’s no wonder such executives are so often seen hobnobbing with activists at environmentalist soirees.
Principal-agent problems of these sorts do not have an easy fix, but there are steps companies can take. One is to align incentives, such as by tying agent compensation to corporate performance. This gives agents an interest in the company’s bottom line. Another is to increase monitoring and information flow between agents and their clients. Among a firm’s D.C. representatives should be some who actually understand something about the firm, perhaps even some who worked their way up within the firm. It’s shocking how many of those who purport to represent corporate interests could not explain the first thing about how their clients’ businesses actually operate. Washington connections are important, but so is knowledge of the economic interests to be represented.
It’s also important for business executives to take a longer view and supplement the firm’s tactical lobbying efforts with strategic initiatives to defend the broader free-enterprise system upon which the ultimate success of business depends. This sometimes means forgoing a seat at the table and defending free enterprise for its own sake. It may produce fewer invitations to Washington cocktail parties, but it could ultimately do more for the bottom line — and for the country.
— Jonathan H. Adler is a professor of law and the director of the Center for Business Law and Regulation at the Case Western Reserve University School of Law, and a fellow at the Property and Environment Research Center.