Why the π (Pi) – and why it is in your business interest to lobby Washington

One of the first things clients and colleagues notice about the PFS logo is the silhouette of the U.S. Capitol dome with the Pi symbol prominently displayed. The logo is no accident and the π has nothing to do with the irrational number 3.14159… Instead, the logo is the clearest and most effective way to convey what we know to be true:

     to maximize profits, your business absolutely, positively has to lobby                  Washington with deliberate strategy and disciplined execution.

This way of thinking runs counter to the view of many executives who tend to believe that if they ignore Washington, Washington will ignore them, or that Washington is simply a “cost-center.”

In business school, students are taught about the theory of the firm (i.e, firm, company or corporation), the theory of production, Cobb-Douglas production function, and profit maximization – most often represented with the π (Pi) symbol. Students are taught that profit is equal to total revenues minus total costs, where costs are usually just a function of production. Rarely are laws or regulations or government intervention quantified in these formulas, and even more rare is it understood or acknowledged that Washington rules and regulations can significantly impact a firm’s profitability and day-to-day operations.

The truth is, the market for laws and regulations is just as dynamic as private markets. Regulators were born to regulate and are incentivized to “do something.” Members of Congress want to get re-elected and are always responding to constituent needs, desires and demands (real and perceived).

There are many theories of regulation and regulatory economics, but here in the real world, real actions by Congress and the regulators have real implications on how most do business. For example:

  • Volcker Rule – ban on proprietary trading – according to the OCC, will cost U.S. national banks up to $4.3 billion and 445,000 paperwork hours to implement;
  • Swap Data Recordkeeping Rule from Dodd-Frank – estimated cost of $3.6 billion;
  • Home Mortgage Disclosure changes to Reg C due to Dodd-Frank changes – estimated annual cost to industry of $327 million;
  • CFPB disclosure and delivery requirements for copies of appraisals – $40.3 million industry wide and 1,811,058 paperwork hours;
  • Increased enforcement actions from CFPB on wireless cramming ($120 million redress from Sprint and Verizon) plus $38 million fines; and
  • SEC Cybersecurity Enforcement Proceedings[1]

The Good News

Academic and data driven studies have proven that corporate lobbying in Washington increases market returns.[2] One academic study suggests that for every one dollar a firm spends on federal lobbying, the entity receives in excess of $220 in return.[3] In a more recent study, the Sunlight Foundation reported that the most politically active corporations receive $760 for every dollar spent on lobbying.[4] If that isn’t enough to convince you, one brokerage firm has even designed a thematic stock portfolio of public companies with large lobbying expenditures.[5] Real money looking for excess returns.

While it is true some companies lobby for grants or special tax credits, government loans, loan guarantees and even bailout assistance, some companies lobby for competitive advantage or regulatory barriers to entry. Many companies lobby just to be left alone – for the government not to intervene in the marketplace or interfere with their business model or efforts to serve customers.

Whatever your perspective – the critical point to understand is that you can influence the outcome of policies emanating from Washington, and the First Amendment of the Constitution grants you the right to do so. In fact, you “have to” lobby Washington to maximize profits and enterprise value.

Government picks winners and losers every day – sometimes knowingly, sometimes unknowingly. If you do not advocate for your own business interests, no one else will. Do not let your competitors, academics or public interest groups define you or your business in Washington and do not rely on hope for a strategy.

As the saying goes, “if you are not at the table, you are on the menu.” It’s time to grab a chair.

 

[1] Matter of R.T. Jones Capital Equities Management, Inc., Admin. Proc. File No. 3-16827, SEC Investment Advisers Act Release No. 4204 (Sept. 22, 2015).

[2] Cooper, M.J. & Ovtchinnikov, A.V. (2010). Corporate Political Contributions and Stock Returns, Journal of Finance, Volume 65, Issue 2, 687-724; Hill, Matthew D. and Kelly, G.W. and Lockhart, G. Brandon & Van Ness, Robert A., Determinants of Effects of Corporate Lobbying, Financial Management, Volume 42, Issue 4 (Winter 2013), pp. 931-957; Faccio, Mara. 2006. “Politically Connected Firms.” American Economic Review, 96(1): 369-386.

[3] Alexander, Raquel Meyer and Mazza, Stephen W. and Scholz, Susan, Measuring Rates of Return for Lobbying Expenditures: An Empirical Case Study of Tax Breaks for Multinational Corporations (April 8, 2009). Journal of Law and Politics, Vol. 25, No. 401, 2009.

[4] Sunlight Foundation, “Fixed Fortunes: Biggest corporate political interests spend billions, get trillions. November 17, 2014.

[5] See Motif Investing, “Kings of K Street” at https://www.motifinvesting.com/motifs/kings-of-k-street.