Who’s Minding the Store?
The FCPA fallout continues
In a Securities and Exchange Commission filing late last month, Walmart said it expects to incur a loss as a result of investigations and lawsuits related to the alleged systematic bribery scheme in its Mexican subsidiary. “Given the on-going nature and complexity of the review, inquiries, and investigations,” the company wrote, “we cannot reasonably estimate any loss or range of loss that may arise from these matters.”
The company’s finances and reputation are not the only things hurting because of the scandal; Walmart’s talent pool and growth plans are taking hits as well:
Brain drain – and is anyone ever going to be held accountable?
As the one-year anniversary of the New York Times’ expose of alleged systematic bribery at Walmart in Mexico nears, a series of recent high-profile executive departures from the company suggest that the ongoing FCPA investigation may be taking its toll on Walmart’s ability to retain talent. Since the January retirement of Walmart Latin America CEO Eduardo Solórzano, who led Walmart’s Mexico business at the time of the alleged bribery (and, despite that, was promoted in 2010), the company has lost five additional top executives:
- Leslie Dach, the EVP of Corporate Affairs who was the driving force behind Walmart’s furious efforts to re-invent its image, is resigning in June.
- Sylvia Mathews Burwell, President of the Walmart Foundation, left for the White House.
- Tom Mars, Walmart U.S. Chief Administrative Officer and general counsel at the time the alleged bribery and executive-led cover-up occurred, departed in March.
- Johnnie Dobbs, Walmart U.S. EVP of Logistics, and Ed Kolodzieski, EVP of Walmart Global Sourcing, both left in January.
Meanwhile, despite the company spending $157+ million on internal investigation, nobody has been held publicly accountable for their role in either the alleged bribery or cover-up. Chairman Rob Walton and then-Walmart International chief Mike Duke were reportedly aware of the allegations; Walton remains on as chairman and Duke was promoted to company CEO in 2009. Eduardo Castro-Wright, identified in the Times piece “as the driving force behind years of bribery,” was promoted to vice chairman in 2008. All eyes are on the Board of Directors’ Audit Committee—Aida Alvarez, Jim Cash, Arne Sorenson, and committee chair Christopher Williams—as associates and shareholders look to them to ensure that those involved in any bribery or cover-up face real consequences for their illegal actions.
Weighing down foreign growth
Walmart is starting to feel the consequences of the bribery allegations in its international growth as well, particularly in the key growth markets of Mexico, Brazil, China, and India. In summer 2012, Walmart International cut its FY 2013 new store growth plans by about 30%. FY 2014 growth plans face similar contraction, and in March, Walmart announced it will freeze new store openings in India pending results of the bribery probe. According to the Indian press, Walmart’s Indian joint venture, Bharti Walmart, originally planned to open seven new wholesale stores between November and March, none of which are in operation yet. The internal investigation may also have put the brakes on international acquisitions, which would explain why Walmart has not made an offer for Turkish retailer Migros, despite December reports that Walmart was in talks to buy a controlling stake in the company.
Walmart’s actions in recent months also indicate potential legal problems in India. Shortly after announcing in November 2012 that Walmart’s internal bribery investigation had expanded to India, Bharti Walmart suspended five executives as part of the investigation. Following the suspensions, Bharti Walmart and Bharti Retail cut ties with two dozen “consultants” who assisted the companies in obtaining licenses to open new stores. Walmart also faces two separate Indian governmental probes into whether the company has broken Indian investment and lobbying laws.
Walmart under scrutiny: The scandal’s many moving pieces
[Source: Wal-Mart Stores, Inc. Form 10-K, filed 3/27/2013]
- Internal company investigation into alleged Foreign Corrupt Practices Act (FCPA) violations in Mexico, Brazil, China, India, and possibly other countries;
- “A voluntary global review of [company] policies, practices and internal controls for FCPA compliance”;
- Federal Investigations by the Department of Justice and the Securities and Exchange Commission;
- Investigations by Mexican local and federal officials;
- A securities class action lawsuit, alleging violations of the FCPA and sections of the Securities Act of 1934;
- At least three derivative lawsuits, alleging that FCPA violations represent a failure of company directors and officers to meet their fiduciary duties to shareholders.
More blockbuster investigative articles about the bribery scandal to come? Walmart seems to think so, stating in an SEC filing: “We also expect that there will be ongoing media…interest, including additional news articles from media publications on these matters that could impact the perception of our role as a corporate citizen among certain audiences.”
Walmart Foundation: A “lever” for the company, but not enough to pry open New York
Walmart gives away millions and millions of dollars a year through the company’s Walmart Foundation. Its motivations aren’t purely philanthropic: As outgoing EVP Leslie Dach told investors in 2010, philanthropy bolsters Walmart’s reputation, and the company then seeks to use that reputation as “a lever” in achieving company goals, such as opening stores in new markets.
When Sylvia Mathews Burwell’s name surfaced as a possible Obama administration nominee back in February, The Nation found how, with Burwell at the helm, the Walmart Foundation “has donated considerable cash to groups that have gone on the record to support Walmart during its most contentious political disputes, including the ongoing effort to open stores in New York City. The foundation also donates directly to municipalities, funds groups tied to powerful elected officials and instructs grantees to publicize Walmart’s generosity.”
The company has given millions of dollars in New York City, which has no Walmart stores and has long been a target for expansion, but apparently the money lever wasn’t strong enough there: According to the New York Times, after failing to open a store in Brooklyn, the company has “all but packed it up and left” the city, ending contracts with its New York-based lobbyists and consultants.
How to solve a problem Walmart-style? Run away from it.
Women’s Wear Daily reports that Walmart is hinting at plans to end or sharply curtail apparel sourcing from Bangladesh, where over 100 workers were killed in a fire last November at a factory that made Walmart-brand clothing. Before the fire, Walmart had played a key role in blocking a proposal for retailers to pay Bangladeshi suppliers slightly more for apparel in order to help factories pay for fire and electrical safety improvements.
Walmart is the second-biggest customer for Bangladeshi apparel factories and has an opportunity to be a hugely positive influence in making the country’s apparel industry safer. (The company is infamous, after all, for keeping its suppliers on a short leash.) But rather than investing in apparel workers and factory safety, the company appears to be on the verge of cutting and running, shirking responsibility.
Is Walmart perhaps planning on making more of its apparel in the U.S., as part of its new “Made in America” initiative? Nope—it’s looking at other “low-cost” countries with marginally better safety records where it can continue to pay workers mere pennies.
Who’s Minding the Store?
Update on Investigation Into Alleged Bribery and Cover-Up at Walmart
Walmart’s earnings release for FY 2013, running from February 2012 to January 2013, revealed that the company spent $157 million last year on matters related to the investigation of the alleged bribery scheme and executive-level cover-up in the company’s Mexican division. Notably, the amount Walmart spent grew each quarter:
These expenses are likely to just be the beginning: as Prof. Mike Koehler, an anti-corruption and FCPA law expert, wrote in White Collar Crime Report last fall, “The facts remain that such scrutiny will result in a gray cloud hanging over the company for several years. Typically, FCPA scrutiny lasts between two and four years from the point of first disclosure to any enforcement action. In some cases…this time period can range from six to eight years.”
Recall that New York Times reports and documents obtained by the House of Representatives’ Committee on Oversight and Reform indicate that CEO Mike Duke, then the head of Walmart’s international division, was fully aware of the scandal as early as October 2005, and that executive chairman Rob Walton had substantial prior knowledge of the alleged illegal activity and was a member of the internal committee that approved the project most clearly linked to the bribery.
Q: “Where are all the customers? And where’s their money?”
A: In the Waltons’ pockets.
Internal Walmart emails obtained by Bloomberg News revealed that Walmart’s January and February sales were significantly lagging, with one executive writing that sales results in the first half of February were “a total disaster” and “the worst start to a month I have seen in my ~7 years with the company.” The company is apparently pinning the blame on delays in tax refunds and the payroll tax increase, alongside the effects of the still-weak economy.
But according to other documents obtained by Bloomberg, Walmart executives recognize that slumping sales also reflect the company’s continuing difficulties in keeping store shelves fully stocked. According to the minutes of an executives’ meeting in February, the issue—identified by Walmart store associates in October 2011, and linked to chronic understaffing of stores—is only “getting worse.”
Even after these documents were released, fourth quarter results from FY 2013, covering last year’s Christmas shopping season, disappointed investors as well: Despite the company’s claims that the shopping season kicked off with “the best Black Friday ever,” customer traffic actually declined for the first time in a year; same store sales, a measure of retail health, were well below Wall Street analyst predictions; and earnings per share figures were boosted by an unusually low tax rate and an increase in share repurchases.
So how did Walmart’s Board of Directors respond to the bad news about sales? A week after Bloomberg published excerpts of the leaked emails, they voted to increase dividends by 18 percent, one of the largest increases in the company’s history. So at a time when the company’s top lines are suffering because its core customers have less money in their pockets, the people in charge decided to respond by shoveling more money into their own. The dividend increase works out to a total of $5.2 million more for the 17 Walmart directors and $467 million more for the Walton family, who is already estimated to be worth more than $115 billion.
Meanwhile, many of the people who actually supply the goods to Walmart stores and make Walmart stores run every day—workers along the supply chain and Walmart store associates—continue to live in poverty. In February, Business Insider reported that Walmart was the employer of the most low-wage workers in the U.S.
Growing controversy around guns
Walmart, the country’s biggest gun seller, with more than 400 guns available in its stores and online, has had its role in America’s gun culture come under scrutiny in the wake of December’s elementary school shooting in Connecticut.
As recently as last October, Walmart executives spoke glowingly of the company’s strong gun sales, pointing to a 76% increase in gun sales and a 30% increase in ammunition sales in the previous six months. Said EVP Duncan MacNaughton: “If you had a chance to get in the Supercenter, this [increase] should have come to life. If you didn’t see it, you weren’t looking, right? That’s about hunting accessories. It is about being proud of the merchandise that we have.”
But since the shooting tragedy, with public concern and debate about guns and gun safety continuing, especially in urban areas where Walmart seeks to expand, company executives have been on the defense:
- More than 120,000 people signed an online petition calling on Walmart to stop selling assault weapons.
- The company initially declined Vice President Biden’s invitation to meet about gun violence, saying that no one was available to attend. Yet after a public outcry, Walmart managed to find an executive to meet with the Vice President. “We underestimated the expectation to attend the meeting,” a Walmart spokesman said.
- Rather than boast about sales numbers, executives were entirely silent on gun and ammunition sales in their report on the 4th quarter of FY 2013. (What happened to being proud of the company’s merchandise?)
Labor strife continues
The most recent Harris Interactive “Reputation Quotient Survey,” conducted in November, found that Walmart’s brand suffered a drop in reputation in 2012. The alleged bribery in Walmart’s International division is likely to have contributed to the decline, but are labor problems at Walmart—strikes at stores and deaths in its supply chain—to blame, too? According to Infegy’s Social Radar, a social media monitoring and analytics system, the answer is yes. Early this year, Walmart made promises to hire more veterans and buy more American-made goods—two initiatives widely recognized as a clever PR strategy to clean up its sullied image. But Social Radar found that the PR efforts had significantly less resonance on social media than did the reports of hundreds of Walmart associates striking on Black Friday and the deaths of over 100 Bangladeshi workers in a supplier’s factory making Walmart-brand apparel.
If the company expects that its labor troubles will pass if it just ignores them, it may need to think again: Problems have continued unabated into 2013, with workers in Maryland and Texas striking again in early February against Walmart’s Unfair Labor Practices.
Walmart in 2012:
- Alleged Bribery and Internal Cover-Up
- First-Ever Strikes
- Tragedies Overseas and at Home
Walmart’s Board of Directors: Silent.
Though it is the largest company in the world, Wal-Mart Stores, Inc. has had a long history of labor problems, law-breaking and a related image problem that many would argue is second to none among U.S. and global companies. For example, a Business Week cover story last month stated that Walmart has paid over $1 billion dollars in fines and still has major discrimination and wage theft cases pending.
Yet by any measure, 2012 will be remembered as among the worst years for Walmart, as the company was hit by a scandal that resulted in an on-going federal investigation; lawsuits by workers and investors; strikes by retail workers, suppliers and workers at Walmart-controlled warehouses; and tremendous negative press. A recent Advertising Age article reported that the historic Black Friday strikes had more than five times the resonance on social media than recent Walmart PR initiatives on hiring of veterans.
While the Walton family has been focused on growing its inherited fortune at any cost, political and community leaders are calling on Walmart’s board of directors to intervene. But the Board, including many high-profile business leaders, like Silicon Valley investor Jim Breyer, Yahoo! CEO Marissa Mayer, and Goldman Sachs board member Michele Burns, has remained silent.
What went wrong in 2012: Systems failures at Walmart
Failures of Internal Oversight: Massive Scandal Exposed; Federal Investigation Continues
- New York Times publishes damning expose alleging a $24 million bribery scheme and an executive-level cover-up in the company’s Mexican division. A federal investigation is ongoing. Internal Walmart emails obtained by the House of Representatives’ Committee on Oversight and Reform suggest that Walmart executives were fully aware of the scandal as early as October 2005: CEO Mike Duke, then the head of Walmart’s International division, received a detailed report about the allegations—labeled “IMPORTANT”—from Walmart’s top lawyer on October 15, 2005. The NY Times reporting also revealed that Board Chair Rob Walton had substantial prior knowledge of the alleged illegal activity and was a member of the internal committee that approved the project most clearly linked to the bribery.
Current and former members of the Audit Committee, including Directors Aida Alvarez, Michele Burns, Christopher Williams, Arne Sorenson, and James Cash clearly failed in their role to ensure proper internal controls. The company, shareholders, and the public are now paying the price. Ironically, the so-called independent, outside firm hired by the company to conduct Walmart’s own investigation into the scandal is now reporting to the Audit committee itself – the same people implicated in the scandal.
Failures of Domestic Store Management:
- Walmart Store Associates Launch Historic Strikes: Walmart associates across the country have been calling for respect on the job, but have faced management retaliation for speaking up. In response, Walmart workers struck in October. On Black Friday and the days leading up to it, Walmart associates again struck to protest the company’s attempts to silence worker activists. Associates and community allies organized nearly 1,200 actions nationwide in support of striking workers.
Failures of Domestic Monitoring Systems: Workers expose abuses in domestic supply chain
- Warehouse Workers Strike Against Retaliation: Workers in Walmart-controlled warehouses in California and Chicago blew the whistle on dangerous working conditions and wage theft, only to face retaliation from management. Late last year, Walmart was added as a defendantin a lawsuit alleging wage theft from warehouse workers.
Guestworkers in Louisiana Strike Against Forced Labor: Mexican guestworkers at Walmart seafood supplier CJ’s Seafood struck against slavery-like conditions. The New York Times’ editorial entitled “Forced Labor on American Shores” affirmed, “When companies force suppliers to slash costs, corners will be cut and workers will be abused.” After massive public outcry, Walmart suspended CJ’s as a supplier.
Failures of International Monitoring Systems: Human rights disasters in international supply chain
- 117+ Killed in Factory Fire; Walmart’s Responsibility Increasingly Clear: In November, at least 117 workers were killed in a factory fire in Bangladesh. Walmart’s refusal to confirm its connection to the factory was swiftly debunked by photos of Walmart-brand apparel in the ashes of the fire. The New York Times reported that Walmart officials had played a key role in blocking efforts to upgrade fire and electrical safety in the nation.
- Thai Shrimp Workers in “Debt Bondage”: In April, workers at Thai shrimp farms supplying Walmart went on strike, protesting low wages, inadequate toilet access, and substandard housing. Human Rights Watch reported that working conditions were akin to debt bondage: after paying company “fees,” workers struggled to afford food, and management seized workers’ identification documents so that they could not leave. This is proof that Walmart’s own “Ethical Sourcing Audit Process” has proved inadequate in ensuring safe, decent working conditions for workers in the Walmart supply chain.
Walmart Shareholders Raise Concerns about Board’s Lack of Leadership
Following the revelation of the bribery scandal last spring, several large Walmart shareholders voiced concerns about Walmart’s governance. New York City Comptroller John Liu, a trustee for the NYC Pension Funds, announced the Fund’s decision to vote against re-electing Walmart directors who were implicated in the bribery scandal. He stated:
“Wal-Mart’s failure to pursue a timely, independent investigation in fall 2005 has potentially exposed the corporation and its shareowners to even more serious financial and reputational harm. Two current inside directors, CEO Michael Duke and former CEO H. Lee Scott, were aware of the allegations and, in Mr. Scott’s case, took affirmative steps to shut down a thorough independent investigation. The audit committee of Wal-Mart’s board of directors failed to ensure adequate internal controls with respect to Wal-Mart’s legal and regulatory compliance, as evidenced by the company’s failure to respond appropriately when the bribery allegations surfaced in 2005.”
Other funds joining the NYC Pension Funds in voting against all or some incumbent board members include CalSTRS, CalPERS, Massachusetts PRIM, and the Illinois State Board of Investment. Two prominent proxy advisory firms, ISS and Glass Lewis & Co., also advocated against reelection of multiple directors. Final tallies after the company’s annual shareholders meeting showed that votes against incumbent directors had increased tenfold over the previous year.