Wednesday, May 9, 2012

Money Well Spent: Why Corruption Continues to Pay - May 4th, 2012
It's been a great week for corruption. A great week for exposing it, too, but if, as a major corporation might, you make your calculations, you will find that the benefit continues to exceed the risk.

When the New York Times exposed Walmart's alleged corrupt -- and highly efficient -- campaign to gain control of most of Mexico's retail food market (its subsidiary, Walmex, accounts for 62% of the whole thing), the company's share price dropped by about 5%, wiping roughly $10 billion off the value of the company. That's quite a drop for a mere $24 million reportedly paid in bribes to Mexican officials to accelerate crucial planning decisions. But as I write, the shares are already up a dollar or so, and will probably recover further -- and are in any case trading at several dollars higher than they were a year ago. By the standards of fluctuation for retail stocks, the event has hardly made an impression.

That may seem extraordinary, given how brazen the alleged bribery was and how much attention it's had in the US press (not quite at the level of Leveson and NewsCorp in the UK, though not so far off). But investors will have made their calculations, and will probably by now be feeling more or less comfortable.

The true cost
Breaches of US corruption law tend to result in settlements of around 1% of sales. For Walmart that's a healthy $4 billion, which would make a dent in profits (likely to be $25 billion this year) but hardly leave the company fatally hurt. Then there's the effect that the case will have in other markets, where one can assume that the company will look to slow expansion, if only to appear prudent and responsible. It's possible, too, that its internal investigation will discover that other international success stories have a less than proper foundation, and that the scandal may repeat for a little while. It's difficult to quantify, but let's say that the incident will end up costing Walmart $10 billion, at the very most, over the next three years.

No comments:

Trending Now