Why Fines Have Negligible Impact On Companies

When companies are fined by the government for violating some laws or regulations the goal is to change their behavior. While the goal is noble, very rarely fines have the desired effect on firms. This is because fines imposed are tiny compared to how much a firm makes in profits or has in the bank. To put it another way, a fine has to be big enough to have a meaningful effect. However in most cases, fines tend to be so small firms generally consider them to be slap in the wrist or a pinch on the side and move on. The recent case of fines imposed by the FTC on Facebook(FB) and Alphabet(GOOG) is one classic example.

From an article on this topic in the journal:

Facebook Inc. and Google parent Alphabet Inc. have been hit with some hefty fines, but a closer look shows that for these tech giants, the penalties aren’t as huge as they seem.

The Federal Trade Commission recently fined Facebook $5 billion to settle allegations that the company violated a 2012 order from the agency by deceiving users about the privacy of their data. The penalty is equivalent to about 16% of the company’s 2018 operating expenses, the day-to-day cost of running the business.

Put another way, it amounts to 59 days of ordinary expenses such as research and development spending, marketing and administrative costs for the social-media giant. Facebook reported holding about $13.9 billion in cash and equivalents at the end of June, plus $34.7 billion in marketable securities.

Here is a quote from the article on the effect on the recent fines:

Financial penalties typically are meant to discourage further misbehavior or make victims whole, said Nell Minow, vice chair of ValueEdge Advisors, a corporate-governance consulting firm for investors.

“That second one is out the window—no one is getting their information back,” Ms. Minow said. “As for the first one, you have to add another zero onto it to make it painful enough.”

Source: For Facebook and Alphabet, Big-Ticket Fines Cause Limited Pain, WSJ, July 30, 2019

In a nutshell, financial fines are not effective to effect changes unless they are painful enough. Though they make big news the actual effect of them are next to nothing. To make any useful changes, regulators and politicians have to think and consider other ways than simply announcing fines.

Disclosure: No Positions

Leave a Reply

Your email address will not be published. Required fields are marked *