Corporate Political Activity

Corporate political activity (CPA) represents attempts by firms to access the public policy sphere at the local or state level, the national level, and the regional, supranational, or global level, to achieve corporate goals. Typically defined as a nonmarket strategy, as it occurs in the public policy arena, this strategy is gaining momentum in the United States and abroad. Corporate reputation and the related concept of legitimacy may provide specific benefits to politically active firms, as having higher reputation can help in firms’ access to the public policy arena and thus leverage CPA. Alternatively, CPA may also increase firm reputation in the public policy arena.

In the Unites States, CPA has been observed since the early days of the republic, but scholarly interest in CPA gained significant momentum in the 1960s with the publication of Mancur Olson’s The Logic of Collective Action, which focused on the incentives and consequences of CPA. Since then, theorizing on CPA and research on CPA have increased substantially. Theorizing on CPA reflects distinct theoretical viewpoints: a political science viewpoint, an economic viewpoint, a public choice theory extended later by a sociological viewpoint, a legal viewpoint, and more recently a management-strategic viewpoint. This entry first discusses the various approaches to CPA and their main contributions. It then discusses the types of CPA that corporations engage in, research and theoretical debates on CPA, and the strategic implications of research findings and debate on firms’ CPA.

Theoretical Views Relating to CPA

Political Science Views on CPA

First, from a political science viewpoint, interest group theory suggests that the (democratic) public policy process is an attempt to reach a compromise between the competing goals of a multitude of interest groups. The main reason for political activity in this view is the political activity of other interest groups. For example, environmental or labor groups can threaten the interests of business groups; the two groups will try to outbid each other in attempts to obtain access to policymakers. Others, however, focus on the importance of ideology as a motivator for businesses’ political action. Specifically, businesses engage the government to push a market-oriented corporate rationality rather than alternative ideologies, such as a social one. Although one can explain some of the political activity of firms from an ideological viewpoint, this stream has been criticized as failing to account for the largely independent nature of firms’ CPA and the understanding that CPA is strongly affected by firm-level considerations, as documented by management research.

Second, collective action theory focuses on the collective benefits that accrue from firms’ CPA. CPA involves firm-level investments, and larger-market-share firms are likely to benefit more from it than smaller ones. Furthermore, many public policy outcomes demanded by firms affect entire industries and not just a politically active firm. Thus, this theoretical view suggests that smaller firms would free ride on the CPA of larger-market-share firms. This view, however, has received only mixed empirical support over the years. Furthermore, collective action theory assumes that firms know the political actions of other firms and use a rational calculus of costs and benefits to make the decision to be politically active. However, such assumptions are tenuous, as scholarship notes that firms do not have full access to or understanding of the political activity of their competition or a full understanding of the political marketplace. Neither are they fully economically rational in understanding and evaluating the costs and benefits associated with CPA, as implied by the behavioral theory of the firm, developed by James March, Herbert Simon, and Richard Cyert in the late 1950s and early 1960s.

Third, public choice theory depicts the political process in general, and firms’ CPA specifically, as an exchange process between policymakers and private actors such as individuals, firms, and other interested parties. In this context, public policymakers provide or supply policy, and private actors, such as corporations, are public policy demanders, perceived as purchasers of beneficial policy. Public choice theory assumes that actors (suppliers and demanders) are rational and self-interested parties, and as such this theory tries to assess their incentives for political activity and can help us understand why firms employ specific tactics. This viewpoint is the one most commonly used in recent management work on CPA.

Economic Views on CPA

First, transaction cost theory (originated by Ronald Coase in the late 1930s and elaborated by Oliver Williamson later) is concerned about which intrafirm or extrafirm organizational arrangements are the most efficient from an economic cost perspective, examining ways in which firms internalize or externalize transactions, or shift firm boundaries for maximum economic efficiency. Internalizing a transaction implies that a firm is more committed to it as it needs to create permanent internal functions for it; contracting out may result in creating an agency problem (i.e., where the contractor acts against the interests of the firm), and the firm would need to deal with the related risk associated with such a problem (opportunism, moral hazard issues, etc.). While transaction cost economics does not help explain firms’ motivation for CPA, it can help explore the conditions under which firms act independently or in unison to achieve political gains, or attempt to internalize or externalize their own political strategies, such as in the use of external or internal lobbying.

The second economic viewpoint applied to CPA is game theory, which focuses on the actions of a limited number of actors making decisions under conditions of uncertainty. This theory is relevant to firms’ CPA to the extent that parties engaged in CPA make decisions based on the anticipated behavior of other parties. That is, firms are politically active due to the activity of other firms. However, systematic applications of this view to CPA are scant, and its application is still strongly related to collective action or interest group approaches rather than sociological or managerial ones.

Sociological Views on CPA

From a sociological perspective, resource dependence theory, institutional theory, and class cohesion theory all have applications for firms’ CPA. Resource dependence theory argues that organizations’ or institutions’ dependency on other actors in their environment affects the relationship between the parties in an observable and expected manner. This happens when an entity’s behavior is controlled or constrained by other entities’ decisions or when one entity controls important resources that other entities require. Such dependence is not desirable as it limits the range of choice and the strategic leeway of firms. For example, firms are regulated by different governmental agencies, which, in theory, constrains their behavior and limits their volitional action. This dependence has been shown to affect firms’ CPA. Thus, CPA does not necessarily reduce the impact of firms’ dependence on the government; rather, it reduces the uncertainties or risks associated with this dependence and the probability that this dependence will result in adverse consequences for firms.

Another viewpoint, institutional theory, suggests that firms engage in CPA to increase their institutional legitimacy in their nonmarket environment. Firms’ institutional environment encompasses the rules, norms, and expectations with which firms must comply to obtain rewards and/or legitimacy; ignoring such pressures can penalize the firm. In the context of CPA, political activity is a way to achieve favorable policymaking, favorable opinion, and improved power, which can enhance firms’ legitimacy. Thus, this theory provides another important factor explaining firm CPA. Such sociological views are also important as they focus on the firm as the main actor or unit of analysis, rather than assume that overall macroforces affect CPA.

Last, class cohesion or elite theory views the impetus for CPA as originating from social class membership; being a top executive reflects common ideological and political views that can predispose members of this class to engage in CPA. Class cohesion theory views social ties among members of the elite, such as CEOs interacting among themselves, as creating direct and indirect pressures for CPA, as well as providing the opportunities to interact with members of the public policy elite, to exchange information and possibly derive benefits for their firms.

Legal Views on CPA

Legal views on CPA revolve around free speech or First Amendment rights. This first became a major issue in the 1976 Supreme Court decision in Buckley v. Valeo, in which the Federal Election Commission was sued based on the premise that the Federal Election Campaign Act was illegal. The Court mentioned that CPA (among other forms of donations) is a First Amendment right but also maintained some limits on direct contributions to candidates.

In 2010, the Supreme Court decided in Citizens United v. Federal Election Commission that corporations, among others, can make direct electioneering contributions in support of or against candidates running for office, overturning almost a century of previous court decisions and legal interpretations that stated otherwise. These court decisions have cemented the view that CPA reflects such rights and that firms should not be limited in their use of corporate money in support of or against candidates running for election or reelection. Such decisions were highly criticized both by dissenting Supreme Court justices and by legal scholars on the grounds that shareholders of politically active firms have little or no influence on decisions to engage in CPA; these decisions originate from top executives, whose agendas may be personal or opportunistic and not focused on maximizing shareholder values.

Strategic Management Views on CPA

Last, managerial perspectives on CPA, such as the behavioral theory of the firm and business strategy theory, follow the same firm-level focus. The behavioral theory of the firm focuses on firms’ decision-making processes. It argues that a firm’s unique structure, organization, practices, routines, and history affect its decision making and its response to its environment. This view has been applied to firms’ decisions to be politically active and provides evidence that firm structure and characteristics have a direct impact on CPA. In a similar vein, the theory of business strategy suggests that firms develop distinctive competencies that they can exploit in one or more settings, based on a fit between firms’ characteristics and the characteristics of their environment. This approach implies that firms analyze their nonmarket environment and develop specific strategies to deal with the demands of this environment, such as developing long- and short-term approaches to CPA.

The next section discusses different aspects of CPA and their effectiveness.

CPA Types

Firms use a variety of approaches to engage in CPA; these include making political action committee (PAC) contributions, lobbying (via hired hands or internal staff), hiring former politicians to the board of directors or as executives ( a practice known as personal service), and grassroots lobbying and trade organization participation.

PAC Contributions

PAC contributions are one of the most common avenues of CPA and one of the most researched across different scholarly disciplines. Given that legislators need significant amounts of money to get elected or reelected, and given that firms (more so than individuals) have the financial resources to give, firms and legislators (or their staff) interact in the so-called political marketplace. Firms give money to PACs, and these monies help legislators get into, or back into, office. Formally, such an exchange does not represent a quid pro quo, though implicitly it may. While studies have confirmed the obvious link between PAC money and election probabilities, the picture is different for the association between PAC money and legislative action. Numerous studies, especially in the political science field, have looked at this association and overall find little to no direct linkage between PAC contributions to legislators and legislators’ voting behavior. Nonetheless, PAC contributions remain a staple for politically active firms. Nowadays, firms can donate to so-called super PACs, which are PACs that may raise unlimited funds from individuals, corporations, unions, or other entities and can engage in unlimited political spending independently of political campaigns. Super PACs became legal after two Supreme Court decisions in 2010.

Lobbying

Another popular avenue for achieving access is lobbying. Instead of providing money, firms focus on providing information or targeted information on specific policy issues. Firms typically hire an external lobbying firm to represent them on Capitol Hill. The assumption is that such lobbying firms have the necessary social contacts to provide information to convince legislators to view a public policy issue in terms favorable to firm objectives and agendas. Firms can also create their own staff of in-house lobbyists, typically housed in dedicated corporate Washington DC offices. The difference between the two approaches is that the latter allows firms direct control over lobbying activities as well as the ability to better monitor lobbying behavior and outcomes. Theoretically, since lobbying occurs behind closed doors and is about information exchanges, it should be more effective than mere PAC contributions to achieve political access. In terms of efficacy, fewer studies have looked at lobbying, and those that have done so have not arrived at unequivocal evidence as to its effectiveness, one way or another. Lobbying’s effectiveness appears to be context sensitive; the more specific and opaque the public policy issues are, the more likely lobbying is to be effective.

Personal Service

A growing trend among politically active firms is to hire former legislators, legislative staff, or other public policy officials to the board of directors or as executives, a phenomenon referred to as personal service (also derided as the “revolving door” between DC and corporations). Such service creates direct behind-the-scenes linkages between the executive core of firms and public policy officials in ways that may supersede both PAC contributions and traditional lobbying; the direct information flows between firms and public policy officials and creates better access to the public policy sphere that is hard to equal. Studies on the impact of personal service are few and report mixed results as to its ability to advance firm objectives.

Grassroots Lobbying and Trade Organizations

Last, grassroots lobbying and trade organization participation represent indirect ways of affecting public policy. Instead of interacting directly with public policy officials, firms interact with legislators’ constituents, such as voters in the legislator’s district, to inform them about a specific public policy issue in which the firm has an interest. This could be done via any mass media outlet (mail, ads, or commercials). Trade organizations, which can and do interact directly with public policy officials, can also engage the public in a similar manner. Few studies have examined the effectiveness of this approach, mostly because it is very difficult to document; firms are not required to report such activity.

Empirical Findings and Recent Theoretical Debates on CPA

The dominant view of CPA from a strategic management perspective is that such activity should benefit firms’ outcomes. However, recent research questions this assumption. In general, the body of empirical evidence to date provides only qualified support for the notion that CPA benefits firms’ objectives, often measured as firms’ bottom line. Some contextual factors make a difference in this debate. First, a critical distinction should be made between regulated and nonregulated firms. Research indicates that while, in general, CPA may not be effective in enhancing firm outcomes, there is consensus that for regulated firms CPA is consistently effective in helping them improve their performance; interaction with regulatory bodies seems to benefit firms. Second, the specific policy arena matters. To the extent that firms’ CPA is targeted at salient or popular issues, it is less likely to achieve access, and vice versa. Third, the ability of the firm to interact with public policy officials over time, and in a repeated manner, can create long-term relationships among firms and legislators and their staff, and this can help in achieving access to the political sphere.

Recent theoretical debates revolve around the possible agency costs associated with CPA. Specifically, some studies indicate that personal incentives such as increased compensation, personal reputation, or power may push firm executives to pursue CPA. Here, the view is that CPA increases agency costs but not shareholder value. More research is being done on this topic.

Last, theorizing on CPA has mostly assumed that it should complement market-oriented strategies, as addressing needs in the political sphere affects firm operations elsewhere; yet apart from case studies, few systematic studies have explored this issue in depth.

Strategic Implications for Firms’ CPA

Many firms rely on CPA to achieve access to the public policy sphere, yet as noted, the firm-level outcomes associated with CPA are contested. The issue here is that CPA may affect public policy outcomes, which, in turn, are supposed to affect firm-level outcomes; the direct association between CPA, on one end, and firm-level outcomes, on the other, must assume all other pieces are in place—that the firm was able to access the public policy arena, that a favorable policy outcome emerged from this access, and that this outcome has an effect on firm objectives. Nonetheless, there seems to be a widely held belief that firms’ CPA is effective. In general, scholarship has documented that for CPA to be successful, the public policy at hand should be a narrow one, attracting less attention; the number of competing access seekers should be low; and the relationship among firms (or their agents) and public policy officials should be based on long-term interactions that can foster mutual trust. When these conditions are less evident, CPA is less likely to be an effective nonmarket strategy.