Running a public company is a tough job. There are a million and one things that can go wrong, and often the only thing standing in the way of a potential problem is quality risk controls. PayPal has recently found this out the hard way, after the company was sued by its shareholders over an alleged lack of controls amid an investigation into its affairs by regulatory authorities.
In a class action lawsuit filed in the United States, PayPal is accused of hiding its compliance oversight in annual reports over a number of years. Its shareholders claim that they have suffered losses after the company’s share price declined 6% following disclosures that it had been cooperating with a regulatory probe into its credit and debit card programs.
More specifically, PayPal advised that the Securities and Exchange Commission (SEC) had been looking into whether marketing revenues had been correctly disclosed, and the issuance of branded payment cards complied with regulations governing interchange fees. Interchange fees, which can be more than 2% of each transaction, have drawn much scrutiny as of late.
PayPal’s issues became even more acute after it released an outlook for the remainder of the financial year which was materially lower than expected. The driver of this gap in expectations was predominately the company’s changing relationship with online marketplace, eBay, who has decided to move away from using PayPal as its primary payments processor.
The reporting obligations imposed on public companies are onerous. Nevertheless, the takeaway from PayPal’s experience is clear; shareholders care about the value of their investments, and will go to lengths to protect the integrity of a company’s affairs. Management should aim to communicate failure just as clearly as success, or else expect to be held accountable.