Flipping the Benefit-Cost Ratio: HP, Bribery & Shareholders

October 22nd, 2010

Hewlett-Packard, the titanic computer-making company which has been caught up in several recent PR scandals (bribery included), was sued yesterday by their own shareholders for breaking federal anti-corruption laws. Bloomberg reports:

From 2007 to 2009, HP violated the federal anti-kickback law by paying government vendors “influencer fees” to win contracts to design information technology systems, according to the complaint filed in federal court in San Jose, California. The company is also under investigation for possible violations of the U.S. Foreign Corrupt Practices Act.

Current and former directors at HP “consciously condoned HP’s illegal and unethical marketing practices,” according to the Oct. 19 complaint. The misconduct has “put the company at risk of having its U.S. government contracts rescinded,” the shareholders claim, adding that HP sales to U.S. agencies from 2007 to 2009 totaled more than $880 million.

This is fantastic news with the potential to revolutionize how corporations handle bribery.

Heretofore, companies have not had a true economic incentive to avoid paying bribes. Aside from the ethics of the employees working at a company, the only thing dissuading corporations from bribing has been the fear of getting caught, charged with a small fee and facing a little negative publicity. Many companies (i.e. those run by ethically-challenged individuals)—after determining that the economic benefits of paying the bribe out-match the inevitable economic cost of bad publicity and legal settlements—consciously decide to pay bribes.  It has been economically more lucrative to pay the bribe and absorb the consequences.  And, this has gone on forever.

However, this is a significant development with the potential to flip the benefit-cost ratio. Large multinational companies rely on capital from their shareholders; if (as it appears in this case) investors no longer want to own shares of companies that bribe, the financial cost to bribing foreign officials could explode—finally creating a true economic incentive for companies to refrain from paying bribes.

Written by Clark Gascoigne

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