While concerns about conflicts of interest regarding President Trump’s business holdings have received a lot of attention, resulting in proposed legislation to end loopholes for the commander in chief, there has been much less discussion of another source of conflicting interests: the investments of members of Congress.
Congresspeople in both political parties have substantial holdings in firms their legislative actions affect — and this number has grown substantially in recent years. While roughly 20% of lawmakers owned stock in 2001, that number had more than doubled by 2013. As of the most recent data (2014 from the Senate and 2016 from the House), over half of Congress owns stock, many with holdings in excess of $100,000 in stocks alone, not to mention mutual funds and other forms of investments. In addition, as of 2014 over half of lawmakers were millionaires.
These financial ties to firms can be problematic. Recently, for example, Reps. Chris Collins (R-N.Y.) and Tom Price (R-Ga.) — the latter is Trump’s nominee to head the U.S. Department of Health and Human Services — received private placement offers for discounted stock in Australian biotech firm Innate Immunotherapeutics. Both Collins and Price sit on House committees with potential to advance the firm’s interests and, at the same time, in theory, their own pocketbooks. Similarly, STAT reports conflicts with Rep. Scott Peters (D-CA). Not only did his wife invest between $610,000 and $1.5 million for stock in drug device companies in 2015 alone (the numbers are estimates, which is all that is legally required), but Peters is a three-time winner of the Biotechnology Innovation Organization legislator of the year award, the only lawmaker so honored, and is noted for leading opposition to the Innovation Act, legislation that pharmaceutical companies opposed because it imposed new restrictions on patent-infringement lawsuits.
Many other examples exist, spanning decades. But there’s still a lot we don’t know about what actually happens at a company level when members of Congress own stock. Our research attempts to address this. We analyzed required public disclosure information about congresspeople’s stock holdings as compiled by the Center for Responsive Politics, a nonpartisan nonprofit, in combination with a sample of S&P 500 performance data from 2005 to 2010. Our main findings are threefold and build on previous research in the field.
First, the average S&P 500 firm in our sample has about seven members of Congress holding its stock. Some companies have closer to 100 members holding stock, and many firms have 50 or more in a given year. In addition, firms where a greater percentage of lawmakers invest have significantly higher performance in the subsequent year — with each percentage of congressional membership owning stock worth about a 1% improvement in ROA or Tobin’s Q — suggesting that politicians may be privy to nonpublic information about future regulatory or legislative actions that may prove helpful to these companies. It’s also possible that members of Congress use their influence to benefit the firms in which they invest.
This finding dovetails with prior research that shows members of the House and Senate generate abnormally higher returns on their investments. This likely occurs because members of Congress have a variety of tools at their disposal — from pushing or stalling legislation and regulation to awarding contracts, subsidies, and tax abatements — any of which can aid the firms in their investment portfolios. For example, the financial institutions in which key committee members owned stock received favorable bailouts in the Emergency Economic Stabilization Act, in 2008.
Second, we show firms are taking note of congressional investments in a couple of ways. It perhaps is not surprising that they’re paying close attention to public disclosure laws that require members of Congress to report their stock holdings annually. But they’re also hiring private companies that specialize in a unique business: identifying who owns firms’ stock (among other political intelligence activities). Firms can use information about which members of Congress own their stock to minimize the intensity of their lobbying activity, as in the case of Apple. According to data we analyzed, a nearly three-quarter increase in members of Congress who held Apple stock from 2007 (22 people) to 2008 (38) was followed by a nearly 50% reduction in lobbying intensity the following year (2009).
Why? Because owning stock aligns the interests of the firms with those of their stock-holding lawmakers. Both the firm and the stockholder benefit when politicians act in ways that benefit their investment portfolio. Thus, companies that have congressional stockholders no longer need to spend as much money on lobbying to influence opinion. Instead, they can cut their lobbying expenses while getting the same general benefit through legislative support or disapproval, among other actions. And, once lobbying is cut, they have more resources to allocate elsewhere, including donating to additional election campaigns and hiring individuals with relationships to current lawmakers.
Third, even when lobbying has been cut, there has been no change in how much firms donate to election and reelection campaigns, a finding that confirms and extends prior research. Such donations are still largely seen as quid pro quo, where firms supply members of Congress with cash in their campaign war chests to curry favor later. Unlike lobbying, they affect Congresspeople’s personal interests directly. Reducing those donations would end the quid pro quo arrangement and probably would generate congressional ill will toward those companies.
To all of this, some might ask, so what? Sure, members of Congress are profiting from their positions — with nearly one in eight stock trades by congresspersons intersecting with legislation — but does that necessarily mean they are profiting at the expense of their constituents and society?
We think the answer is a clear yes. For example, one industry that has a direct impact on Americans — and gives a lot of money to elected officials — is big pharma. Prices for prescription drugs have skyrocketed, and researchers argue that this partially stems from the actions of lawmakers. The Senate recently voted on proposed legislation that would allow the importing of prescription medication from Canada, to trim costs. Although it would have benefited Americans struggling to pay for medication, the legislation didn’t pass — and according to an analysis from the Center for Responsive Politics, those who voted no received significantly more in contributions from big pharma than those who voted yes. This was true on both sides of the aisle.
At the same time, as former Rep. Brian Baird (D-Wash.) told The Washington Post, such conflicts undermine public trust. Members of Congress, he said, “Don’t get it, but they need to…. [I]f there is an appearance of an impropriety, there just might be an impropriety. Members need to bend over backwards to show people they are there for the good of the country” — not their own pocketbooks.
Another problem is that it’s extremely difficult to prove conclusively that a congressperson’s actions are guided by their investment portfolio. Bills can be complex, often hundreds of pages in length, and small changes that may not garner much attention can have substantial effects for firms. Holding up a bill in committee or working with others to stall legislation may be difficult to tie to any single person, while other actions can be defended on alternative premises, like coincidence (the idea that conflicts are inevitable among the myriad issues facing Congress) or even that they are based on a stockbroker’s advice.
The latter claim was given in defense of Tom Price and for similar conflicts involving the portfolio, and voting, of Rep. Joseph Kennedy III (D-Mass). In another example, a 60 Minutes report, in 2012, raised questions about allegations that Nancy Pelosi (D-Calif.) did not allow a vote to come up that, if passed, would have materially affected her stock in Visa (not to mention that she and her husband participated in an IPO around the same time the legislation was moving through the House). When asked about this by 60 Minutes, Pelosi pointed out that the bill did eventually pass (although that was two years later). Her spokesperson said Pelosi had voted for a bill known as the Credit Cardholders’ Bill of Rights, as well as for other consumer protection measures. Given that there are many reasons why a bill might fail — and many people who might be able to prevent it from coming to a vote — it is hard to prove that a particular lawmaker is motivated by their investment holdings. As Alan J. Ziobrowski, professor at Georgia State University, Atlanta, said, in 2012, “You can’t get into their heads to know what is motivating them. Are they thinking about their investment, or about what is best for their constituents?”
What can be done? One approach is legislation. The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 was a first step, expanding disclosures and the accessibility of data to ease the detection of conflict of interests and insider trading. Yet subsequent legislation has reversed or undone important aspects of the STOCK Act, effectively taking the teeth out of the regulations.
There are plenty of other ideas out there that could make a big difference. Members of Congress could be required to place their investments into blind trusts, as other government officials do, or recuse themselves from committees or floor votes that may involve conflicts of interest. As with judges, representatives could be forced to recuse themselves from participating in legislative actions in which they have a material conflict. The accuracy and timeliness of reporting on Congresspeople’s stock portfolios could be improved, in addition to increasing the transparency about the maneuvers, such as stalling on a bill, they commonly use.
The bottom line is that companies are good at influencing lawmakers, and our research highlights that they are getting more strategic about it. The new presidential administration arguably has more ties to businesses than any we’ve seen previously. Such conflicts extend to state and local politics throughout the country, too. The effects of corporate money in politics are only going to become more pronounced, and more complex. The question is: Will anyone do anything about it, and if they try, will Congress allow it or undermine it?