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April 25, 2008
The cost of protecting reputation
Steven Pearlstein's column in today's Washington Post is about Cashing In on Corruption. He specifically talks about the rise in internal and external corporate corruption probes. In part, he attributes this to increased enforcement of anti-bribery and other anti-corruption laws in both the US and Europe. But in part it is also defense:
If for no other reason than to protect themselves from legal liability and attacks on their reputations, directors now are quick to order up an outside investigation whenever even the hint of bribery is alleged by customers, employees or competitors.
Protecting both individual and corporate reputations can be costly. Pearlstein estimates the cost of an internal probe to be $1 million to $20 million. And it is providing a lucrative market for Washington law firms (the "cashing in" part of the column's title).
But not protecting one's reputation can be even more costly. Pearlstein notes that in the Siemens bribery case, the company has already spent over $500 million on legal and other fees, been fined $300 million by German courts and is looking at fines that "almost sure to reach into the billions." Siemens stock has also dropped from around $160 per share at the beginning of the year to about $116 today -- but it is unclear whether that is directly due to the bribery scandal or other market and business conditions (see earlier Wall Street Journal story).
In any event, companies are taking their reputations and the anti-corruption probes seriously. We will see if they continue to take a largely defense stance (to the boon of the lawyers paid to come in and clean up the mess) or they will modify their management and control systems to prevent problems from happening in the future. The latter would be a wise move to deal with all sort of threats to companies' reputation and better help them manage their intangibles. But sweeping up the droppings has always been easier than changing management styles.
Posted by Ken Jarboe at April 25, 2008 2:07 PM
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