May 18, 2012

Crime Pays: Walmart Outperforms Dow by 4% Since Bribery Scandal Broke

On April 21, the New York Times’s David Barstow broke a major story about Walmart’s alleged extensive bribery in Mexico to expand its presence there.  Yet, as you can see from the chart above, Walmart’s stock has recovered all of its value since the story, and it has outperformed the Dow by 4%.  The threat of legal action against Walmart executives and the company itself is apparently something investors just don’t care about.  Warren Buffett, no less, says he hasn’t changed his opinion on the stock.  He finds this scandal the result of a few bad apples, and said it could happen to any company.  This is, of course, despite revelations in the story that top executives at Walmart were responsible for covering up the bribery and killing the internal investigation.

But in a sense, Buffett’s point – that this could happen to any company – is right.  Because corporate crime simply does not matter, if you are big enough and politically connected enough.  Professors Frank Yu and Xiaoyun Yu found that lobbying dramatically decreases the chance that fraud will be detected at a company.

Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraud periods than during their non-fraud periods.

This isn’t a case of fraud detection, since bribery isn’t fraud and a reporter rather than the government detected the scandal.  But we can assume that the larger trend – more extensive legal rights for politically connected companies – is at work here.  And as the Republic Report found earlier this year, Walmart is number two among all companies in reported lobbying expenditures for 2012.

Much of Walmart’s story to investors involves its appeal to the global middle class, with Mexico leading the way.  So a scandal in which the company was caught bribing local officials would seem to have teeth.  After all, this is a textbook violation of the Foreign Corrupt Practices Act, the law that prohibits American companies from bribing foreign officials.  It’s a law that Walmart, through the US Chamber of Commerce – has lobbied to weaken.

What’s interesting about this most recent case is that the revelations about what seems like massive and systemic corruption within Walmart haven’t really created any significant problems so far for the company.  The stock market seems to think that Walmart is a pretty good investment, in spite of its alleged corrupt activities, or perhaps because of them.

As we’ve seen, again and again, political corruption through lobbying is one of the best investments you can make.  If you are a well-connected corporate actor, crime pays.

  • Tillotson

    Well, duh! The system is so rigged to reward the 1% for their theft and debauchery. Now, try going to one of their Chinese warehouses and steal a pack of gum and let’s see what happens.

  • Much of Walmart’s story to investors involves its appeal to the global middle class, with Mexico leading the way. So a scandal in which the company was caught bribing local officials would seem to have teeth. After all, this is a textbook violation of the Foreign Corrupt Practices Act, the law that prohibits American companies from bribing foreign officials. It’s a law that Walmart, through the US Chamber of Commerce – has lobbied to weaken.
    What’s interesting about this most recent case is that the revelations about what seems like massive and systemic corruption within Walmart haven’t really created any significant problems so far for the company. The stock market seems to think that Walmart is a pretty good investment, in spite of its alleged corrupt activities, or perhaps because of them.
    As we’ve seen, again and again, political corruption through lobbying is one of the best investments you can make. If you are a well-connected corporate actor, crime pays.

  • CatKinNY

    Quite frankly, it could be that Warren Buffet, and everybody esle, simply realizes that bribery is part of the normal cost of doing business in a country like Mexico. It wasn’t all that long ago that the salaries of police officers in Mexico City were not based on seniority or rank, but on where you were assigned. If you were working in a poor neighborhood, you got paid decently, but if your beat was in the Zona Rosa (one of MC’s ritziest neighborhoods), and it contained a stop sign obscured by foliage, you probably had to pay your boss, since the opportunity to shake down the well heeled was guaranteed to earn you a healthy living.

  • RobertSnodgrass

    Attention folks, BRIBERY IS CORRUPTION, and not only did walmart practice massive bribery and corruption. They had a cover-up that went up to the top officials and CEO Good ethical businesses don’t change thier morals because they are in another country. I know, i have friends who own businesses in foriegn countries where bribery is common. The first most important business advice my friend who own several businesses in Thailand told me was never get involved in bribery and payoffs. Not even so much because its illegal, but because its just bad business, it is unethical, and very imoral. Walmart broke not only international laws that should have their business liscense pulled, But moral and ethical laws, They don’t even care about laws or people or anything really. They just do anything they want and throw lawyers and money at it to cover their tracks.
    Hello, I worked at the walmart in Exton, Pa. for nearly 10-years. I always had great reviews and got many notices of excellent customer service and everything was going fine, Then we got a new store manager who was severely verbally abusive to many employees, myself, and even a mentally handicapped female employee who he would bash until she was hystericaaly crying and couldn’t even continue working. Other employees told me they were afraid they would be fired if they report it, and said that i would also be fired if i report it. I told them, this is America, not some degenerate country. We have rights and laws to protect us from that and we cannot be fired for reporting wrongdoing in the workplace. They said everybody knows that walmart controls the legal system, politicians and everything with its lawyers and money. They break the law all the time and pride themselves on being able to get away with it, They will fire you if you report any wrongdoing. I thought these beliefs to be very sad, shameful,pitiful, and unAmerican. In an attempt to secure a decent, reasonable workplace for my fellow employees and I, I started reporting the abusive manager and sure enough, he began making negative comments to me about reporting him and fired me. At that point i went to the NLRB and they filed a charge on walmart. Walmart obviously knew they were in trouble facing that charge, so they reinstated my job in exchange for dropping the charge, but then when i returned to work i was consistently subjected to much retaliation and fired twice more in a relatively short period of time do to lies being told by the same district manager who was in charge and ignored all my reports about the abusive store manager. The first subsequent firing i was able to prove was completely false and have overturned, and i then i filed another complaint with the NLRB concerning the illegal retaliation i was being subjected to since returning to work. After filing that complaint i was fired again the very next day upon showing up for work. and i am still trying to get some help with this one. I am not a kid trying to get a few extra bucks at walmart. This was my career. I was a very dedicated, loyal, hardworking employee who many people used to ask why i work so hard and care so much about my job. I am 46 years old, i have lost 10-years of my life i had invested in that company which i can never get back, and now i will surely never be able to retire in my lifetime, all due to being the one to do the right thing, put my trust and faith in our once great American system, and stand up for the right of my fellow employees and i to have a decent and reasonable workplace and report the widespread severe verbal abuse that was going on in our store. When i went back to the NLRB to report the obviously retaliatory firing, they seemed like they were going to help me, but then told me that the walmart laywer had contacted them and they no longer want to pursue the case. when i attempted to file a complaint about the obviously retaliatory illegal firing the NLRB very suspiciously dismissed it based on a bunch of false information and even slanderous, defamotory lies told to them by walmart which the NLRB had no problem recklessly printing in a government file. As long as this type of thing is allowed to go on in America we are in a state of deterioration of everything that this country is supposed to stand for. Thank You, God bless You, and God bless America. Sincerely, Robert Snodgrass, 715 Taylor rd, Downingtown Pa.

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