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International Journal of Law and Management
Lobbying: a critical dimension of business strategy
Clifford D. Scott
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Lobbying: a critical dimension of
business strategy
Lobbying
Clifford D. Scott
Department of Business Administration, University of Arkansas,
Fort Smith, Arkansas, USA
17
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Abstract
Purpose – This paper aims to prepare executives to pilot a US lobbying effort within the bounds of the
US Federal law. Lobbying law may be thought of as the “regulation of regulation”, as it defines the
ground rules for those wishing to have a direct impact upon all other regulatory systems. The article
outlines what the US lobbying law requires, what it forbids and, perhaps most important, what the law
does NOT regulate.
Design/methodology/approach – The paper takes the full spectrum of US laws and regulations
relevant to lobbying – including the Internal Revenue Service Code (tax code), the Federal Election
Campaign Act, the Ethics in Government Act, the internal rules of both the House and Senate, the US
Criminal Code and the Honest Leadership and Open Government Act – and organizes them into a single
2 ⫻ 2 matrix, explaining what all parties must do as well as what they must not do. Via this approach,
the rules that govern the “marketplace” for lobbying in the USA are explained. The competition to shape
US government policy transpires within this marketplace.
Findings – Few activities the executive may engage in carry the potential payback of a well-executed
lobbying campaign: empirical estimates range to returns on investment in the thousands of per cent. But
the uninitiated may easily step over the line and invite both legal and public relations (PR) nightmares.
Practical implications – Effective lobbying can afford a corporation or industry a lasting
competitive advantage. Every well-rounded business strategy should include such a component, and
every well-rounded executive should be capable of performing in this arena. A solid grounding in the
legal matrix forming the boundaries of this activity is a prerequisite for effective performance.
Originality/value – The paper organizes and outlines lobbying law in a fashion digestible by
executives without legal training. It is of value to anyone wishing to engage in lobbying activities
targeted at the US Government.
Keywords Strategy, Lobbying, US federal government
Paper type Conceptual paper
Introduction
Can a single word be worth billions of US dollars? Yes, it can. Buried deep in the recent
1,500-page overhaul of US banking regulations was the statement that when a bank
processed a charge-card transaction for a retailer, a bank may charge only the
“incremental cost of transactions”. That “incremental” cost is miniscule. Once the
charge-card system is up and running, the cost of an additional transaction is almost
non-existent. Soon the banking lobby had the single word “incremental” removed,
allowing banks to charge for the “costs of transactions”. Every aspect of designing,
building and operating the entire charge-card system is within the scope of the “cost of
transactions”. The net effect was that rather than charging only the trivial cost of
Many thanks to Prof Terrence Gabel for his assistance on an earlier version of this paper.
International Journal of Law and
Management
Vol. 57 No. 1, 2015
pp. 17-27
© Emerald Group Publishing Limited
1754-243X
DOI 10.1108/IJLMA-04-2013-0013
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18
processing an electronic payment, banks could set fees so as to amortize the total costs
of their entire retail charge-card operations. Rather than the banks bearing the costs of
the operations, the costs would be borne by the retailers. With the deletion of one single
word, billions of dollars changed hands (Sidel and Fitzpatrick, 2010). Lobbying the US
Federal Government is a very, very big business.
Many authorities long ago recognized the centrality of lobbying to any successful
business strategy. This point was emphasized more than a quarter-century ago by
Philip Kotler, the Dean of US academic marketing. Writing in the Harvard Business
Review, Kotler explained that the business strategist “needs political skill and a political
strategy”, and must flex “sophisticated lobbying […] skills” (Kotler, 1986, p. 120).
Reginald Jones, former CEO of General Electric, flatly stated that:
I can do more for General Electric by spending time in Washington and assisting in the
development of responsible tax policy than I can by staying home and pricing refrigerators
(Birnbaum, 1993, p. 197).
Yet as recently as 2007, fewer than half of global firms polled by McKinsey & Co. even
engaged in lobbying (McKinsey & Co., 2007). This is shocking in view of the return on
investment (ROI) numbers reported for those firms wise enough to invest in lobbying
activities. For example, one study shows a return of between 1,100 and 3,600 per cent on
lobbying expenditures (De Figueiredo and Silverman, 2006). A second study shows an
average ROI of a stunning 22,000 per cent (Alexander et al., 2009).
Any executive seeking to take advantage of the opportunities afforded by lobbying
the US Federal Government would be well-advised to know the basic rules of the road.
This article provides an executive briefing on the topic of the US lobbying law, outlining
both what is required and, perhaps more important, what the law does NOT proscribe.
Lobbying law may be thought of as the “regulation of regulation”, as it defines the
ground rules for those wishing to have a direct impact upon all other regulatory
schemes.
To create a meaningful context for this discussion, we will first define what we mean
by “lobbying”, and specifically mention what lobbying is not. This will be followed by a
brief discussion of the history of lobbying in the USA, which is necessary for a
comprehension of how the US lobbying law is structured and why lobbyist’s activities
are so relatively unfettered.
Definition of “lobbying”
Lobbying may be defined as “the act of directly expressing your views to elected
officials in order to influence the action of that person or persons with the goal of
affecting the law” (Libby, 2012, p. 14). The key point to be made here is that lobbying is
distinct from making a contribution to a campaign or a candidate. While donations may
provide access, true influence comes from established relationships – as it does in any
other setting. A lobbyist develops influence with lawmakers by providing something
useful; in this case, information and analysis. Lobbyists are information brokers.
Lobbying’s legal framework
Lobbying activities helped in the formation of the USA, prior even to the nation’s
inception. For example, William Hull lobbied for better wages on behalf of the
Continental Army (Nipper, 2007, p. 342). James Madison, the father of the US
Constitution, anticipated the actions and influence of lobbyists in Federalist No. 10,
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published prior to the Constitution’s ratification (Madison, 1787). The first lobby formed
expressly to influence legislation for a business interest was the Philadelphia Society for
the Promotion of National Industry, formed by Alexander Hamilton, the first Secretary
of the US Treasury (Johnson, 2006, p. 11).
The history of lobbying regulation, however, is quite compact: the first act to regulate
lobbyists was not signed into law until 146 years after the USA’s formation. These
earliest laws, triggered by national scandals, targeted only public utilities and shipping
corporations rather than lobbyists in general. As one might anticipate, this piecemeal
approach proved ineffectual. (Zorack, 1990). The first legislation to address the full
breath of the lobbying industry did not pass until 1946. Taking an approach parallel to
current legislation, the Federal Regulation of Lobbying Act required registration and a
certain level of disclosure. The sweep of this Act was so constricted by the courts that
registration became largely a voluntary act (Bassett, 2008, Part III A).
The next major overhaul of lobbying law had to wait almost a half-century. The
Lobbying Disclosure Act of 1995 closed many of the loopholes in the legal definition of
“lobbyist”. Specifically, an attorney conducting lobbying activities for a client could no
longer avoid registration by simply characterizing the work as straight legal
representation. This act also broadened the level of disclosure required, calling for
documentation of client identities, issues lobbied upon and level of payments (Lawson,
1996, p. 1177).
The most recent revision is the Honest Leadership and Open Government Act of
2007. This update represents the current state of lobbying law at the federal level. While
there have been only a very few bills to address lobbying directly and in a
comprehensive fashion, many other statutes, regulations and rules interact with and
augment these major bills, including the Internal Revenue Service (IRS) code, the
Federal Election Campaign Act, the Foreign Agents Registration Act, the Ethics in
Government Act, the internal rules of both the House and Senate and the US Criminal
Code (Bauer and Gordon, 2008, p. 371).
Lobbying law, thus, Table I, exists within a largely immutable context of
Constitutional rights and basic US history. This yields a state of affairs where, for many
observers, there exists a sharp contrast between what one feel the limits on lobbying
should be and what the limits can be. Protections for, and a reverence for, the act of
lobbying weave through the very DNA of the USA. Thomas Jefferson’s Declaration of
Independence specifically calls out limits on lobbying activities as a catalyst for the
American Revolution. He states: “In every stage of these oppressions we have petitioned
for redress in the most humble terms: our repeated petitions have been answered only by
repeated injury” (The Declaration of Independence, 1776).
The First Amendment to the US Constitution echoes Jefferson’s exact terms,
protecting the right “to petition the government for a redress of grievances” (USA
Senate, 2011a, 2011b). Of course, appealing directly to one’s duly elected representatives
and stating one’s case for a change in the law is what we today call “lobbying”. In the
USA, any law or regulation that impinges upon a Constitutional freedom must pass the
judicial test of “strict scrutiny”, the most exacting level of scrutiny used by the Supreme
Court (Korematsu v. USA, 1944, 323 US 214). Specifically, it must both serve a
“compelling state interest” and be “narrowly tailored” (Johnson v. California, 2005, 543
US 499). To give the reader a context for understating what the Court means by a
Lobbying
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Supply of access/influence (Senate and/or
House members)
Requirements
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Prohibitions
Table I.
The supply of and
demand for lobbying
access and influence
Demand for access/influence (lobbyists
and lobbying firms)
Register with Secretary of Senate and
Clerk of House
Disclose quarterly, for each client:
Identity information
Houses/agencies contacted
Bill numbers lobbied upon
Issue areas lobbied upon
Estimates of income and expenses
Disclose semi-annually:
Statement of familiarity with and
adherence to House/Senate gift rules
Identities of all political committees
controlled by lobbyist
Contributions to campaigns,
Presidential libraries, inaugurations
Payments for events connected to
government officials
Finance lobbying activities with posttax dollars:
Limitations on charity’s/private
Foundation’s ability to lobby or risk
losing favorable tax status
Constitution prohibits the Federal
Default rule: Lobbyist may not give
Government from imposing most limitations gifts to government officials (over 20
on lobbying activity based upon “free
exceptions each for House and Senate)
speech” and the right to “petition the
government”
“Revolving door”: “Cooling off” periods
Contingency-fee arrangement not
prohibit former House or Senate or staff
normally enforced by courts
members from having direct lobbying
contact with former colleagues for two years
Liable only for statements made with
“actual malice”
“Switching sides”: Executive branch
Limits on ability to lobby IF in receipt
officials face certain permanent limits, if
of federal contracts or loans
they had personal involvement with the
issue
May not solicit gifts
Default rule: Members of Congress
may not receive gifts from private
sources (over 20 exceptions each for
House and Senate)
“compelling” state interest, the first such interest to ever pass Constitutional muster was
protecting the lives of US citizens during World War II (Korematsu v. USA, 1944, 323
US 214). Clearly, the Court’s intent is to see that very few interests rise to the level of
“compelling”.
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Even if the Court agrees that the state’s interest in trimming a Constitutional freedom
rises to the level of “compelling”, the solution offered must be “narrowly tailored” to be
approved by the Court. “Narrowly tailored” implies that the law takes the smallest bite
possible out of Constitutional freedoms while serving the compelling state interest. For
example, even a rule that might make citizens less likely to make public statements,
while still not prohibiting any speech whatsoever, may be struck down for the “chilling
effect” it has on the exercise of the Constitutional freedom of free speech (New York
Times v. Sullivan, 376 US 254, p. 300). Even such a “chilling effect” is a bite too large to
pass Constitutional muster.
The right to lobby is doubly protected, as any limit on lobbying may also be seen as
an infringement of the right to free speech. The US Supreme Court has repeatedly
reinforced the centrality of freedom for political speech, in particular. Justice Brennan
summed it up by noting our “profound national commitment to the principle that debate
on public issues should be robust, uninhibited and wide-open” (New York Times v.
Sullivan, 376 US 254, p. 270). This famous decision demonstrates just how serious the
Court is about allowing “wide-open” debate: it concludes that even speech that is less
than factual will often be protected, provided that the speech concerns a public issue.
This zealous protection of free political speech, combined with the high bar presented by
strict scrutiny, makes it appear most unlikely that we will see any laws placing
significant limits on the right to lobby – the right to speak freely to government
officials – in the foreseeable future.
While the right to lobby appears well-protected, and the content of lobbying
discourse must be kept wide open, Congress has created parameters to make the practice
of lobbying more transparent and less prone to ethical questions. Those legal
parameters defining the limits of public policy marketplace activities may be organized
into a two-by-two matrix (Table I). The horizontal axes represents the supply of and
demand for access to policy makers and the concomitant potential to impact policy,
regulation and statutes. Elected officials and their staffs, of course, control the supply
side of the matrix. On the demand side, we see lobbyists providing information, analysis
and deep insight into constituency perspectives to earn access to the process. The
vertical axis differentiates what various players are legally required to do from what
they are legally precluded from doing. These dimensions, supply/demand and
requirements/prohibitions yield the 2 ⫻ 2 matrix seen in Table I. Each quadrant will
now be discussed in turn.
The “marketplace” for lobbying activity
Lobbying practice in the USA is regulated by intertwined aspects of numerous
federal laws and regulations, e.g. the IRS code, the Federal Election Campaign Act,
the Ethics in Government Act, the internal rules of both the House and Senate and
the US Criminal Code – that was significantly amended in 2007 with passage of the
Honest Leadership and Open Government Act (Bauer and Gordon, 2008; Hrebenar
and Morgan, 2009). Collectively, this policy both protects the rights of citizens to
engage in lobbying activity and structures and controls the nature of lobbying as
practiced in the highly competitive marketplace for public policy. Each function of
lobbying policy is addressed below.
Lobbying
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Regulatory control of lobbying practice
The legal limits of what lobbyists – and policy makers – can and cannot do are both
summarized in Table I and discussed in further detail below. The “supply” of access/
influence is controlled by policy makers and their staffs. On the “demand” side,
lobbyists provide targeted entities with analysis, information and insight aimed,
ultimately, at influencing policy.
Requirements on the supply side (i.e. of policy makers)
As suggested by the empty upper-left quadrant of Table I, Members of the Congress
have placed the weight of “requirements” upon lobbyists. While it is entirely
possible that a diligent combing of all laws pertaining to lobbying could reveal some
actions required of legislators, the author found none worthy of inclusion in this
overview.
Prohibitions on the supply side (i.e. of policy makers)
These prohibitions place limits on whom the corporate strategist may hire to carry out
specific lobbying activities. To temper potential problems arising when legislators or
staff members leave office and become lobbyists, the law imposes “cooling off” periods
during which “revolving door” lobbyists are precluded from engaging in lobbying
activities. As a general rule, members of the House, and their senior staffers, are barred
from lobbying for a period of one year after leaving government employ. Senators and
their senior staffers are subject to a two-year moratorium (USA Code 2009, 18 USAC.
§ 207(e)).
Similar rules apply to hiring members of the executive branch, who are precluded
from engaging in lobbying for one year after leaving their positions. Very high-level
officials, such as the Vice President or a Cabinet-level appointment, are barred for two
years (USA Code 2009, 18 USAC. § 207(a)). Members of the executive branch are further
limited by the “switching sides” restrictions. These provisions preclude former
executive branch employees from lobbying any department of the executive branch
concerning any matter in which the employee was personally involved. Unlike any other
of the revolving door laws, this is a permanent restriction (USA Code 2009, 18 USAC.
§ 207(a)(2)).
What is NOT regulated
In all quadrants, what is most interesting is what is not required or not prohibited. For
example, while a corporation would be ill-advised to hire an executive branch official to
lobby other members of the executive branch, it would not be a violation for that same
official to lobby Senate members (USA Code 2009, 18 USAC. § 207(c) and (d); Maskell,
2007, p. 13). For former House staffers, the restriction applies only to the particular
House Member employing that staffer; not to any other Member or Senator (USA Code
2009, 18 USAC. § 207(e)). Further, during “cooling off” periods, “revolving door”
lobbyists may:
• provide information and advice to, and otherwise “coach”, their new co-workers,
who may be directly targeting the revolving door lobbyist’s former colleagues
(Horwitz, 2008); and
• target constituents of policy makers by organizing grass-roots campaigns (Lynch,
2010).
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Requirements on the demand side (i.e. of lobbyists)
Provisions dictating what lobbyists can and cannot do should be of interest not only to
the professional lobbyist but also to the corporate strategist. Corporate executives can
easily fit the legal definition of a “professional lobbyist” and must, accordingly, comport
with federal law. The two key legal requirements of professional lobbyists involve
disclosure of their activities and IRS regulations concerning how these activities are
financed. Requirements in each area are discussed below.
Lobbyist disclosure. While the heart and soul of lobbying law concerns lobbyist
disclosure, it should be noted that compliance is only necessary if one fits the definition
of a “lobbyist”. Regulations are crafted to apply only to professional (in-house or agent)
lobbyists; definitional leeway exists to exclude individual citizens acting out of their
own concerns, particularly when participating only at the state or local level. The law
defines one as a “lobbyist” once either an expenditure threshold – of above $10,000 for a
single client – or a contact/time threshold – of more than 20 per cent of one’s time being
devoted to lobbying activities for a single client – is passed (Maskell, 2007, p. 4; USA
Code 2009, 2 USAC. § 1,603(a)).
All parties fitting the definition of a lobbyist must register with the Secretary of the
Senate and the Clerk of the House. Most of what must be disclosed on the registration is
simply identity information for the entities involved. The lobbying firm, or corporate
entity, must also reveal if any of the individuals acting as lobbyists have worked in the
executive or legislative branches of the Federal Government (USA Code 2009, 2 USAC.
§ 1,603 (b)).
Following registration, lobbyists must file quarterly reports and more detailed
semi-annual reports. The quarterly reports focus on individual clients. In fact, a lobbyist
must file a separate quarterly report for each client served, including identity
information for that client and the client’s financial partners. For each client, the firm
must provide an enumeration of specific bill numbers lobbied upon and issue areas
addressed, an accounting of federal institutions contacted and a good-faith estimate of
revenues and expenses (USA Code 2009, 2 USAC. §§ 1,604 (a) and (b)).
An in-house lobbyist, having only his or her employer as a client, would file a single
report. Corporations hiring a lobbying firm would be well-advised to see that these
reports are up-to-date, as well as complete and accurate in divulging relevant
information. The semi-annual reports focus on ethical concerns (rather than clients and
contacts). It is not enough that the lobbyists state that they have adhered to the law
themselves; they must certify that they have not caused policy makers to deviate from
House and Senate ethics rules (most notably those prohibiting the giving gifts to
Members) (USA Code 2009, 2 USAC. § 1,604 (d)).
What is NOT regulated
Of equal interest are things that lobbyists are not required to disclose. While a lobbyist
must reveal that they did “lobby Congress”, there is no requirement to name specific
persons contacted. The law requires no disclosure of either contact hours or itemization
of expenditures reflecting relative effort devoted to targeted individuals. The lobbyist is
under no obligation to state the specific sections of a bill addressed (despite the fact that
bills may run more than 1,000 pages in length and contain sections on unrelated
matters). Also not mandated is disclosure of having submitted draft legislation; either
directly to House or Senate members or indirectly through Members, to the House or
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Senate Office of Legislative Counsel (OLC) [due to the application of the traditional
attorney– client relationship to OLC work (Zorack, 1990, p. 947)]. Finally, there is no
requirement to indicate if the lobbyist’s efforts succeeded; just as there is no general
requirement for lobbyist disclosure of being able to influence targeted policy maker
behavior.
Payment for lobbying activities. Lobbying expenses are not tax-deductible (Internal
Revenue Code 2006, § 162(e)). As a measure to level the playing field between tax-paying
and tax-privileged entities, private foundations and charitable organizations are largely
precluded from engaging in lobbying activities (Internal Revenue Code 2006, § 162(e);
§ 170(c)(2)(D)).
Prohibitions on the demand side (i.e. of lobbyists)
The three main prohibitions on lobbyist activity involve relationships with clients or
policy makers, the making of false statements and financial limits on lobbying activities
by certain groups. Each matter is addressed below.
Relationships. With regard to their interactions with policy makers, lobbying entities
have traditionally been limited in their ability to give gifts; not by statute law but by the
House and Senate Ethics Rules. Registered lobbyists must provide certification of their
familiarity with these rules (USA Code 2009, 2 USAC. § 1,604(d)(1)(G); Maskell, 2007,
p. 15).
Within House Rules, the default rule that lobbying entities may not give gifts to
policy makers is stated in a single sentence; the Rules then continue with 18 pages of
exceptions to this rule (USA House of Representatives, 2011, Rule XXV, 5(a)(1)(A)). A
parallel situation exists in the Senates Rules (United States Senate 2011, Rules of the
Senate). For lobbyists, a key exception to these rules concerns gifts of travel, which are
acceptable, regardless of sponsor, if for a one-day event. A night’s stay, or, in some cases,
two night’s stay, is acceptable within these rules (USA House of Representatives 2011,
25 cl. 5 (b)(1)(C); USA Senate, 2011a, 2011b, 35, 2(a)(2)). No lobbyist, in-house or agent,
may accompany a legislator traveling to or from such an event, but lobbyists may attend
the event itself (USA House of Representatives 2011, Rule 25 cl. 5 (c)(1)(A); USA Senate,
2011a, 2011b, Rule 35 2(a)(1)).
With respect to client relationships, lobbyists are not to be paid on a contingency-fee
basis (with compensation tied to attainment of a specified legislative outcome).
Although no federal statute bans the practice, the courts have a long-standing tradition
of non-enforcement of such contracts (Marshall v. Baltimore & Ohio R.R. Co. 1853, 57 US
314, pp. 335-436). Simply stated, a contract to gain a federally mandated advantage for
one party, presumably at the expense of another party, is viewed as contrary to public
policy (Hazelton v. Sheckells, 1906, 202 US 71, p. 79).
Making false statements. Like any other entity, lobbyists are precluded from making
false statements; doing so can constitute slander, deceptive trade practice or even fraud.
However, the law operates differently in regulating political speech, which is afforded
the most Constitutional protection and, therefore, the greatest latitude. Our legal system
recognizes that the occasional “erroneous statement is inevitable in free debate” (New
York Times Co. v. Sullivan, 1964, 376 US 254, pp. 271-79) and, further, that the “theory of
our Constitution is that every citizen may speak his mind […] on matters of public
concern […]” (New York Times Co. v. Sullivan, 1964, 376 US 254, p. 298). Accordingly, all
Americans engaging in politically oriented speech – lobbying entities included – are
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accorded first-amendment protection, unless they act with “actual malice” [defined as
knowing that the statement is false, or demonstrating a “reckless disregard” for the
truth (New York Times Co. v. Sullivan, 1964, 376 US 254, pp. 279-80)].
Financial limits. The final category of demand side/lobbyist preclusions effectively
limits corporations from using federal money to subsidize their lobbying efforts. For
example, entities receiving contracts or loans from the Federal Government may not
spend these monies on lobbying the Federal Government in an attempt to renew these
loans/contracts or to obtain new loans/contracts (USA Code 2009, 31 USAC. § 1,352(a)).
Charities enjoying tax exempt status can lose that status by engaging in lobbying
activities (Maskell, 2007, p. 12).
A final example is of the shell-game variety inspiring cynicism of government
regulation. Parallel to the discussion in the above paragraph, a “social welfare”
organization formed under § 501(c)(4) of the Internal Revenue Code is precluded from
engaging in lobbying activities if it receives any federal funding. However, there is
nothing in the law stopping this very same organization from forming a separate
§ 501(c)(4) – an entity receiving no federal funding – and engaging in an unlimited
amount of lobbying via this new entity (Maskell, 2007, p. 12).
Conclusions
Lobbying the US Federal Government is quite complex – but holds the promise of
massive payoffs. An executive would be foolhardy to embark on a lobbying campaign
without a solid understanding of the basic regulations of lobbying activity. Yet the far
more foolish move would be to leave the influence game to one’s competitors.
Influencing the regulatory schemes impacting one’s industry is a pillar of any sound
business strategy.
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About the author
Professor Clifford D. Scott received his J.D. from the University of Colorado, Boulder, and his
Doctorate in Business from Louisiana State University. He held Professorships in both the
Virginia and California state university systems, publishing 20 peer-reviewed articles in outlets
such as the Journal of Consumer Research, the Journal of Retailing and the Journal of Marketing
and Public Policy. He spent 10 years in the fields of bio-tech and high-tech, specializing in product
launches for the $1.5-billion Silicon Valley firm, Exodus Communications, and directing the
Center for Customer and Competitive Intelligence for Beckman Instruments (now Beckman
Coulter; Fortune rank: 735). Dr Scott’s research interests focus upon legal aspects of the marketing
function. Most recently, he has published on the Internet’s impact on trademark law. He has been
an Associate Professor at UA Fort Smith since 2007. Clifford D. Scott can be contacted at:
cliff.scott@uafs.edu
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