There are only two metrics that matter. Fines as a % of revenue and the financial impact of fines. So does it matter if you’re fined a lot for various crimes and misdemeanors? Not really. At least not according to some novel research done by David Silverman. By the way, companies with the worst reputations also do quite well too. What’s going on?
Fines
Here’s some data:
Compliance fines?
- The AML Program That Wasn’t — $1.256 Billion
- The MAN Group’s Poor Trading Oversight — $1.312 Billion
- JPMorgan Chase & the Biggest Ponzi Scheme — $1.7 Billion
- SAC Capital Advisors & Insider Trading — $1.8 Billion
- Credit Suisse & Tax Fraud — $2.5 Billion
- LIBOR Price-Fixing Scandal — $2.5 Billion
- Wells Fargo’s Phantom Accounts — $3 Billion
- Wells Fargo & Rampant Mismanagement — $3.7 Billion
- Credit Suisse’s Toxic Asset Sell-Off — $5.3 Billion
- Goldman Sachs & the Pilfered Malaysian Coffers — $5.4 Billion
- Deutsche Bank & SMC — $7.2 Billion
- BNP Paribas’ Money Laundering — $8.973 Billion
- JPMorgan Chase & SMC — $13 Billion
- Bank of America & SMC — $30.6 Billion
There are others, of course, but these are some of the fines that made the headlines —but were soon forgotten – which is the whole point of this discussion. At the end of the day, no one really cared and the fines barely landed a punch. Stock prices didn’t suffer either. Bad reputations? They don’t matter much.
Reputations
Do fines impact reputations? Harrington lists the companies with the worst reputations and there is some correlation between fines and reputation, such as with the Bank of America. But by and large reputation doesn’t correlate with fines, and bad reputations do not impact revenue or valuation. Examples of companies with bad or even horrible reportions? Comcast/Xfinity, Dollar General, Burger King, Shein, Subway, Wells Fargo, Dollar Tree, Family Dollar, Meta and Fox all have bad reputations. Does their revenue suffer? How badly have they suffered over the years?
Bad Pays
Companies often do really bad things and are occasionally punished for what they do. But beyond the fines, what does it cost them? Does their revenue decline? Do they get crushed in their markets? Does their stock crater?
Fines as a % of revenue is a good metric. If a company gets fined a healthy percentage of its revenue, then the violation costs real money. But if it doesn’t, then the fine is a mosquito bite.
Listen to Silverman’s analyses:
“Ultimately, I was able to line up 154 financial industry related companies with their fines and revenues. I looked at the time period from January 2010 to July 2022. Here’s the punchline: total fines = $262,064,573,883 … total corporate revenue = $46,238,773,345,452 … percent of revenue = 0.57.”
Impact on stock prices?
“The full statistical breakdown is … easy to sum up: nada. Some stocks went up, some went down, on average, nearly zero change in value. This may affect your view of the stock market being rational, or it may influence your view on the impact of regulatory actions on company behavior, or both, I don’t know how jaded you already were.”
These extraordinary (empirical) findings drive the point home. While fines sound impressive when they’re announced, they seldom hurt the companies that receive them. Worse, many of the fines are never paid and many are discounted after negotiations. Insurance also plays a role. Some years ago there were actually provisions that allowed companies to expense their fines.
Conclusion
It turns out that the cost of bad is pretty low. So low that companies barely suffer when they cross ethical or legal lines. They don’t pay that much, their stock doesn’t suffer and their bad reputations don’t seem to matter. Is this counter-intuitive? Or just reality?
Is this reality good? As always, it depends on where you sit. If you’re one of the companies that gets fined, you kind of like the slaps on the wrist. But if you’re handing out the fines, you’ve got to be frustrated about how little financial or reputational impact the fines have on the companies that receive them.
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