All That Glitters / The Sorry Tale of Two Rash Sisters: SOPA and PIPA

The people think they won and the lobbyists lost.

If you have just landed from Mars, you probably missed the drama playing out on the Internet regarding SOPA and her sister, PIPA.

SOPA stands for Stop Online Piracy Act. Sponsored by an American congressman, one Lamar Smith of San Antonio, it is a bill that would allow the authorities to delete from the Internet any website suspected of assisting in illegal downloads ("pirating" ), including of songs, pictures, texts, software and clips or movies to which copyright laws apply.


PIPA is the same thing, with a twist. It stands for Protect IP Act (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011 ).

There is, of course, nothing wrong with protecting copyrights on Internet content; but the entire Internet community feels the bills are too vague and encompassing: The authorities would be able to delete pretty much any site they feel like deleting.

And as a result, the Internet community went to war. Wikipedia protested the two legislative proposals by blacking out its sites last Wednesday, while hackers of all kinds attacked, bringing down government websites.

Even broad-consensus sites like Google showed protest messages against the concept. "Like many businesses, entrepreneurs and Web users, we oppose these bills because there are smart, targeted ways to shut down foreign rogue websites without asking American companies to censor the Internet," a Google representative stated.

An interim summation of the virtual protest gives it the win by a knockout. SOPA and PIPA, which had been aggressively promoted by the Recording Industry Association of America (lobbyists for the music industry ) and by the Motion Picture Association of America, were hastily packed into naphthalene and put on the shelf - for the time being at least. The people won, they think, and the lobbyists lost.

And the winners are:

But while we're discussing lobbyists and pirates, a new academic paper published in the United States bears a second glance. The paper - "Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?" - examines the degree to which lobbyists affect the investing public's welfare. The researcher, Harvard law professor John Coates, looked into the correlation between the money that companies listed on the S&P-500 index spend on lobbying and on political donations, and the stock performance of these companies, i.e., the value they create for shareholders.

His findings may surprise: Political activity by companies is bad for corporate value and bad for shareholders.

As the abstract to the paper says: "In the period 1998-2004, shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings - together with the likelihood that unobservable political activity is even more harmful to shareholder interests - imply that laws that replace the shareholder protections removed by [the new law] Citizens United would be valuable to shareholders."

More simply, the main value created by corporate political activity goes straight to the pockets of the management and controlling shareholders. The general public does badly from the deal.

His results would seem to fly in the face of logic. If a company gets sweetheart terms from the regulator, its profits should increase and all its shareholders should benefit, not only the top. Right?

Alternatively, why should a company engage in lobbying and in supporting political candidates if it isn't good for its shareholders?

This was a key claim in a 2010 U.S. Supreme Court case, when the justices decided to free companies to push political candidates as they pleased, based on the First Amendment to the U.S. Constitution.

So what's going on? Why is political candy giving the shareholders a stomach ache?

The answer Coates et al found is that all the value created, if any, gets swallowed up by the executives and controlling shareholders and never reaches the minority shareholders. Coates and colleagues found a high correlation between political activity and companies with weak corporate governance.

In other words, the same executives and owners who shrug off their own shareholders are the very same people who invest the most in politicians.

The road to Jerusalem

What can we conclude from Coates' work about the situation in Israel, the motivation of corporate leaders to invest in lobbying and to support their pet politicians?

No similar studies have been done in Israel; but one thing is clear: A manager who chooses to maximize the profits of his company based on investment in future political favors, and pressure on regulators, will be liable to neglect other key aspects of building a successful business - competitive spirit, innovation, good management, quality workers, an entrepreneurial culture and triumph in the free market.

One look at the list of companies trading on the Tel Aviv Stock Exchange shows that exporters and companies that cope with competition in the markets aren't on the lists of political donors. The ones with armies of lobbyists plying the corridors of the Knesset and donating heavy money to politicians ahead of elections are the monopolies, the infrastructure companies and the companies dying to defang reforms designed to increase competition.

During the last two years, the companies sending their lawyers and lobbyists to Jerusalem were the gas and oil exploration companies, the big food companies, the banks and telecom companies and cellular firms, and the giant pyramidal holding companies with both finance and non-finance companies under their great roods. Just last week, the managers of the big insurance companies trekked to the office of Finance Minister Yuval Steinitz for a chat the subject of which remains a mystery.

Ultimately, when a business focuses on keeping a government franchise or regulatory tidbit, it's focusing at best on short-term strategy and is neglecting to build the company for the long-term.

A few days remain before the Trajtenberg Committee, headed by economic adviser Manuel Trajtenberg, files its final recommendations on Israel's social ills and what can be done about them. The members of the committee should read Coates' paper before they close the book on their report. If it has been proven in that bastion of capitalism, the United States, that corporate executives and their lobbyists have been looting the public, one shouldn't rule out the hypothesis that something similar is happening here.

Meanwhile, you shareholders from among the general public need to realize this: The fact that a company's executive focuses on political activity and war on regulators doesn't assure it handsome returns. The managers will get their bonuses and other candy, that's for sure; the general public may not.