What is the difference between lobbying and buying influence? Since 2002, it has been legal in the United Kingdom for sitting politicians to hold board positions at private companies, and serve on committees or propose legislation that could directly impact those companies. Assistant professor Swarnodeep Homroy looked into just how much a closer professional relationship between politicians and industry can be beneficial for those companies, and the implications of the rule change.

In this episode of Econ 050, Homroy discusses his research into the issue. His paper, ‘Bringing Connections Onboard: The Value of Political Influence’, by Homroy and Colin Green of NTNU, measured the performance of companies with directors who are Members of Parliament (MPs) in the UK, where almost half of the top 50 public firms have connections with a sitting MP.

The reasoning given for these political hires is that familiarity with the inner workings of an industry make them a better informed politician, and that the skills that many politicians develop – strong networks, working together with different shareholders – make them a good fit for corporate board membership. But as Homroy's research reveals, the companies that have a sitting MP on their board are likelier to have higher than average profits, and those that hire ex-politicians don’t experience the same bump.

You can listen to the full episode at Libsyn.com (note: page dos not exist any longer). To read more about Homroy's research, see this blog.

What are the pros and cons of having active or former politicians on a company’s board?

Swarnodeep Homroy: So if I'm a company and I hire politicians who are either active members of parliament or they have been in the past, then I get the benefits of doing that. But the concern that society has is that the cost is that of social welfare. So the interests of the companies might not overlap with the electoral interests. So if the politician serves the paid interest of the companies rather than the electoral interests for which they are elected for, then that becomes a dichotomous situation where social welfare and corporate profit are at odds.

Is there a lobbying industry to speak of in the United Kingdom?

Homroy: Active members of Parliament themselves can have corporate affiliations, so you do not need intermediaries who are the lobbyists as they are in the United States, and therefore there were regulations up until 2002, the regulations that we use for this analysis which prevented members of parliament without corporate affiliations to actively participate in parliamentary legislation which are related to their outside interests, which would seem extremely sensible. But in 2002, that restriction was lifted. The reason was - which is not without some merit - is that if I am a director of Shell and I'm a member of parliament, then I know more about the energy industry than anybody who is sitting in the Parliament who might be a member of agriculture, for example. So the question therefore was posed as that of political influence versus human capital right. And that's the angle that we are trying to trying to disengage in this in this paper.

Do boards benefit more from the skills of former politicians or the access of serving politicians?

Homroy: The human capital of these employees should not have changed in the short event window that we are looking at, where these are mature individuals with generally high levels of education and business skills. So in one or two years’ time, they should not be suddenly more attractive because of the human capital. That we see that they are more attractive should therefore be some consequence of lobbying-type concerns.

Were (ex)politicians from certain political parties likelier to serve on corporate boards?

Homroy: So any research that has been done so far on this in various countries, there are very few on different countries. So in Germany, the United Kingdom and the United States, it always seems that the liberal, market-minded parties, the economically liberal ones, are the ones who are more likely to get involved. So in the case of Britain, it would be the conservatives who are twice as likely - almost – than Labour MPs get involved in corporate affiliations.

Is the practice of current and former Members of Parliament serving on company boards and being able to influence legislation that will impact them inherently corrupt?

Homroy: The thing with corruption as well as with discrimination is it's very hard to define what it is and very hard to pin it down. I mean, it could potentially be that these are the farms which have the resources to hire politicians, and hence the politicians are also on they also want to be involved with this funds because this insures them against the electoral will, which is volatile. So if they're thrown out of office and their political career is over, which it probably will be for very many British politicians after a few years, then they would have something to do lending yes a soft landing and make no mistake: these are trained, educated individuals who might be of some help to these companies in a material difference in certain areas which are not tainted by corruption right. But having said that, it's very hard to do to draw a line under this is corruption and this is not.