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Why Federal Civil Fines Can't Deter Tech Companies like HP

HP (HPQ) has finally agreed on the principles of a settlement with the Department of Justice over the company allegedly paying kickbacks, along with Sun Microsystems (ORCL) and Accenture (ACN), to secure government contracts.

Denying guilt, HP agreed to a fine that would represent 2 cents on third quarter earnings so it could "resolve the allegations in full," the corporate version of moving on. The DOJ will undoubtedly claim a big win in curbing corporate misbehavior, but this is nonsense. When you look at the numbers, HP clearly came out ahead, as did, possibly, the whistle blowers who had filed suit under the False Claims Act and who would get a big chunk of any payment. So long as government works on a penny ante level, it will never secure any reform.

For the moment, put aside the consideration of whether HP actually did something wrong a few years ago. Instead, let's try some easy analysis and an analogy to look at whether the punishment fits the alleged "crime." HP currently has about 2.33 billion shares of stock outstanding. At 2 cents a share, the company faces about $47 million in settlement costs.

Compare that figure to HP's cash on hand of $14.1 billion, according to last quarter's balance sheet. The fine is a mere 0.3 percent of the total. Or look at last quarter's net change in cash of $852 million, with the penalty representing only 5.5 percent. In the context of the quarter's revenue of $30.7 billion, it's not even worth mentioning the $47 million.

I remember a friend who was a risk management expert talk of how a single breach of confidential information for a large corporation could represent a $50 million loss. However, his firm stopped trying to consult in OPSEC services, the approach used by the U.S. government to identify and protect critical information from enemies. Why? CFOs would say, "Fifty million? That's not a material amount for us." Similarly, although HP is reporting the $47 million, the amount just doesn't matter.

Look at the analogy of a person who has $100,000 in the bank. A hefty traffic fine proportionately equivalent to that facing HP would be ... $300. A trifling, even if paying it would be an annoyance. It's a month's interest at 4 percent on the capital. In other words, pay the fine and a month later, it's all back without having to take any active step.

Perhaps the fines that the government levies to ensure legal compliance were once painful for corporations. If so, that's no longer the case. When the amount is one month of interest on money in the bank, then a company's risk is nonexistent. So, sure, engage in activity that could get you into trouble, because there effectively is no downside.

Again, I'm not addressing whether HP may or may not have done something questionable. But if it had, this type level of fine is meaningless, a feel-good activity by politicians and regulators who want to look as though they're taking real action, even when they aren't. When fines are nothing more than a slap on the wrist for which corporations can budget, why bother pretending that you're cleaning up how business is done?


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