Money Well Spent: Why Corruption Continues to Pay

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.

Enough to make a CEO's eyes water, surely? Well, Walmart de Mexico had sales of $29 billion last year, and profits of around $1.5 billion. Since the bribes were allegedly made, in 2003, Walmart de Mexico has made profits of $12 billion. Seen from one perspective, that's ten years of work undone. Seen from another, the growth it helped Walmart achieve bolstered the parent company's stock price, kept the competition uncompetitive, and helped Mike Duke claim his $18 million CEO salary year after year. Ask him whether he regrets the whole incident and I'm sure he'd say that he does; ask him which Walmart he'd rather see in 2012 -- the smaller, less aggressive Walmart that had been honest from the very start, or the behemoth Walmart that reportedly bought up Mexican officials -- and I'm not sure his answer would be so clear.

The status quo resumes

Walmart may nevertheless break the record for a fine, or settlement, paid as the result of breaking corruption laws. The current holder is Siemens AG, the German electronics and electrical company, which paid $1.6 billion in 2008 for paying $1.4 billion in bribes all over the world over many years, in a long, committed campaign of enthusiastic corruption. Four years on, and the company's share price is back where it's been for most of the decade, sales and profit are higher than they've ever been, and the CEO is unchanged. (To be fair to him, he arrived as the whole affair blew up; his predecessor now runs Alcoa, one of the world's largest metals companies). And the scandal rumbles on, no longer very scandalous: last month the company agreed to pay €270 million to settle a suit brought against it by the Greek government, whose people, it claimed, Siemens had been bribing for years. That announcement caused a little slide in the share price, but nothing untoward.

All of which may seem dispiriting, and it should. The victims of these crimes are diffuse, invisible, and often vulnerable: every dollar paid in bribes tilts the scales further against the most unfortunate in societies where fairness frequently goes unprized. The Greek people, of course, understand more acutely than most right now why that sort of unaccountability is wrong -- which is one reason why the prosecution of their former defense minister is proving so tense and so poignant at the moment.

Personal liability

But there is some hope that some real justice might be done. When Siemens settled with the US and German authorities in 2008, it no doubt imagined that the affair was over. But you can't settle a criminal charge, and in December last year eleven executives of the firm were charged with bribery offenses by the Department of Justice. Those cases roll on, and some executives of companies with a US affiliation will be watching their progress, one imagines, nervously.

In the last six years, the DOJ has charged 79 people with similar offenses, at an increasing rate. Given that there is little real deterrent for companies tempted to pay bribes, one can only hope that these personal examples prove more powerful.