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September 18, 2006
Academic Joins Shareowners in Advocating Corporate Lobbying Reform
    by Bill Baue

Yale University Professor Bob Repetto issues paper calling for companies to rapidly adopt best practice on corporate lobbying, including oversight and approval by independent directors.

Shareowners have been registering heightened concern this proxy season over corporate political contributions. It is the issue that has garnered the highest vote of any social or environmental resolution so far: 75.5 percent at Amgen (ticker: AMGN) in May. According to the Center for Political Accountability (CPA), a non-partisan nonprofit that coordinated the political contributions resolution campaign, average support for the nearly 30 corporate lobbying resolutions reached 21 percent this year, almost double the 11 percent average last year. Now, academia is joining the chorus of concern. Earlier this month Bob Repetto, professor of economics and sustainable development at Yale University, issued a working paper entitled Best Practice in Internal Oversight of Lobbying Practice.

"Should corporate management lobby on public policy issues with broad societal implications, using shareholders' money, with no oversight by shareholders' representatives on the board of directors?" Prof. Repetto asks rhetorically in the paper.

Prof. Repetto first documents the rise of corporate lobbying, noting that corporate political action committee (PAC) spending increased almost 15-fold over the past three decades, from $15 million in 1974 to $221.6 million in 2005. Companies argue that this lobbying is necessary to protect their business strategies from unanticipated changes in government policy that could adversely affect companies' profitability, according to Prof. Repetto.

"If lobbying on public policy issues is an intrinsic and important aspect of a company's business, then boards of directors, as part of their fiduciary 'duty of care,' have a responsibility to be informed about the company's lobbying activities and positions and to oversee them, just as they are bound to oversee other aspects of their company's business strategy," states Prof. Repetto. "Why should it be expected that companies' lobbying strategies are any less subject to error and failure than other aspects of corporate strategy or any less in need of board review and oversight?"

"Despite corporations' entwinement in political processes, there is little oversight, transparency, or accountability," he points out. "[O]nly a small fraction of US corporations now have . . . a system of board oversight in place, despite the potential sensitivity of lobbying activities."

The paper cites several studies to document this fact. Of the 120 company websites surveyed in a 2005 study by the CPA, only two stated the board exercises oversight of corporate lobbying expenditures. A 2005 Stern Stewart study finds that only 13.6 percent of S&P 500 companies have a standing board committee on public policy or social and corporate responsibility.

Complicating the issue is the fact that corporations lobby not only in their own name, but also through trade associations.

"Many such associations take conservative 'lowest common denominator' positions on public policy issues, though these positions might not be consistent with the interests of the best positioned companies, which nonetheless go along with the herd in order to provide a unified industry front," states Prof. Repetto. "Thus, for example, the Edison Institute supports no more than voluntary measures to control greenhouse gas emissions, though several of the electric utilities in its membership believe correctly that, on balance, they would benefit from mandatory government-imposed limitations."

In addition to this cross-purpose problem, corporate donations that support lobbying through trade associations are even less transparent than more direct donations.

Another confounding aspect of corporate lobbying from a shareowner perspective is the fact that much of the public is now exposed to investing through large pension funds that manage widely diversified portfolios such that any benefits of corporate lobbying can cancel itself out.

"Thus, if company A lobbies successfully on public policy issues to the detriment of companies B and C, its shareholders do not necessarily benefit," states Prof. Repetto--because they also hold companies B and C. Large pension funds and insurance companies "internalize within their portfolios the externalities generated by individual firms and are harmed by activities with adverse aggregate economic impacts."

Due to the multiple problems associated with corporate lobbying identified in the paper, Prof. Repetto argues in favor of the "rapid adoption of best practices in corporate governance of corporate lobbying activities." Best practice comprises oversight and approval of corporate lobbying expenditures and positions by a board committee, the majority of whom would be "outside directors with a broad view of the economy and political horizon."

The paper identifies a handful of companies enacting some form of best practice. For example, of the 77 companies responding to the Global Reporting Initiative (GRI) questionnaire on corporate governance issues, only Advanced Micro Devices (AMD), Alcoa (AA), and General Electric (GE) report that they have a process for board approval of lobbying on public policy issues.

Other companies identified in the paper as enacting some form of best practice include Eli Lilly (LLY), Sunoco (SUN) and ConocoPhillips (COP), which have standing board committees on public policy or public affairs. Other companies have adopted elements of best practice in response to shareowner engagement on the issue, including McDonald's (MCD) and Southern Company (SO).

"Clearly, there are leaders in corporate governance of public policy lobbying but this vanguard is now relatively few in number," concludes Prof. Repetto. "Of course, although instituting a system requiring approval of lobbying activities and positions by a standing board committee would be a move to adopt best practice, it is not a panacea."


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