Lobbying on issues unrelated to customers may have negative effects
Finance and economic theory have long held that lobbying-related expense yields positive results, but research from the College of Business marketing department throws that hypothesis into question.
Rather than simply focusing on bottom-line returns for companies engaged in lobbying activity, College of Business marketing professor Kelly Martin and her coauthors examined customer-focused metrics and found that companies that spend more on lobbying have lower customer satisfaction ratings. The research, “Shedding Light on the Dark Side of Firm Lobbying: A Customer Perspective,” is the first to quantify correlation between a firm’s lobbying efforts and its customer-focused performance measures. Their perspective bucks widely held viewpoints that lobby activity almost universally delivers positive results.
“Nearly all of the economic and finance literature finds positive effects in lobbying,” Martin said. “In fact, when investors see firms lobbying, they view that as a positive signal, because it suggests they’ll obtain particular advantages. They like having some say in their external environment, so this is a good signal to them.”
By examining lobby activity from a marketing point of view rather than through a strictly financial lens, Martin and her coauthors found its impact on a company’s customer satisfaction was much more nuanced. While larger lobbying budgets were associated with declines in customer satisfaction, the effects weren’t the same across the board. Additional analysis revealed that companies that spend more on advertising or research and development as well as those that have a CEO with a marketing background see fewer dissatisfied customers when engaged in lobbying.
“Shedding Light on the Dark Side of Firm Lobbying: A Customer Perspective”
Gautham Vadakkepatt1, Sandeep Arora2, Kelly Martin, Neeru Paharia3
Journal of Marketing
1 George Mason University
2 University of Manitoba
3 Georgetown University
Details from the data
Reaching these conclusions required Martin to find creative connections between disparate data sets. The Lobbying Disclosure Act requires companies to report quarterly lobbying expenses. Martin and her colleagues turned to these disclosures to gauge firms’ lobbying expense each year. From there, the team turned to the University of Michigan’s American Customer Satisfaction Index (ACSI), a database that has surveyed household consumers since 1994, and provides data on more than 400 companies across 47 industries. Compiling these datasets, they discovered the correlation between lobbying expense and a decline in customer satisfaction.
Filings information gave the researchers a glimpse at the broad categories to which companies devoted their lobbying budgets. Looking at this granular information, Martin and her colleagues discovered that what type of lobby activity companies engage in influences its impact on customer satisfaction. Companies that engaged in lobbying around issues that directly impact customers – for example product safety, advertising regulations, consumer privacy – saw smaller dips in consumer satisfaction than companies that focused on topics outside of their products – environmental issues and tax law.
While this insight helped clarify nuance in lobbying activity, it still didn’t fully explain the variance in customer satisfaction among companies. Martin and her team hypothesized that factors inside companies operations were driving the different results. These inner workings, or as researchers termed them, the black box, posed a challenge to drawing further conclusions.
“What’s the black box in between lobbying and negative customer satisfaction?” Martin asked. “We can’t really get inside the firm to see what they are doing.”
To unravel this mystery, Martin and her colleagues turned to transcripts of shareholder earnings calls as a window into firms’ inner workings. These calls offer a more subjective look into management mindsets, as executives present company plans to stakeholders, providing a much deeper look into a company’s priorities. Martin and her coauthors performed text analysis on transcripts and discovered a connection.
“The companies that talk more about the regulatory environment or basically just don’t talk as much about their customers in these earnings calls are the ones that had a breakdown in customer satisfaction,” Martin explained.
The declines in customer satisfaction from companies that focus on the regulatory environment shouldn’t be surprising, argues the paper, which was published in the Journal of Marketing. When a company’s resources, financial and operational, shift to concentrate on regulations, they often lose the bandwidth to pay attention to customers.
There’s also the possibility that companies who successfully lobby for regulatory change achieve such gains that deteriorating relations with customers aren’t noticed or simply viewed as an acceptable tradeoff.
“If you lobby and get a huge tax break or the government put up barriers so that nobody else can enter a market you’re in, that’s a huge benefit that doesn’t rely as much on product quality, service or other customer-focused needs,” Martin said.
A call to reform reporting requirements
Martin and her colleagues gleaned much of their insight about lobbying activity from publicly available disclosure reports but relied on information pulled from earnings calls to gain a clearer picture on what firms were hoping to gain through their lobbying. While those lengths of research and correlation are all in a day’s work for academics, they’re a little more than the average consumer can manage.
“One of the things that we call for in the paper is finer details in terms of the side on which companies are lobbying and what they’re exactly doing on those issues,” Martin said. “Sometimes it’s complex. The whole premise of lobbying is providing information. Are they providing information on all sides of the topic or just one?”
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