Economy

6 Burning Questions on the Wal-Mart Corruption Scandal

A law professor and compliance consultant examines the scandal as a wake-up call for corruption and corporate culture.

I've worked for many years as a compliance consultant, and no one I know in corporate America was surprised by the recent New York Times allegations that Wal-Mart de Mexico spent over twenty million dollars to bribe Mexican officials to fast track their store openings. Unfortunately, doing in business in Mexico, China, India, Brazil, Russia, Africa and a number of other places means that government officials are going to ask for bribes. Some - but not all - companies pay them as a cost of doing business. If the allegations against Wal-Mart prove to be true, the case is a wake-up call to companies and investors that there are more important things than profits and growth. A company's ethical reputation is priceless.

When I served as a compliance officer for a multinational company a few years ago, I trained a Chinese businessman on the US bribery laws. He asked why the United States focused so much on the small bribes that get things done while allowing American legislators to accept big checks from corporate donors who wanted favorable legislation and tax treatment. I admit that I had no good answer other than the fact that lobbying is not illegal in the US, but bribery is.

As a law professor who uses Wal-Mart as a case study on corporate responsibility, what surprised me was the reported coverup at the highest levels of the organization once executives at Wal-Mart’s headquarters learned of the alleged bribery from one of their own managers in Mexico in 2005. Ironically, on the last day of class last week, I assigned one group of students to propose five priorities out of 50 choices for Wal-Mart’s board to consider. They presciently chose beefing up global regulatory compliance and ensuring that the company had a social media and crisis management plan in place in the event of a corporate scandal.

Not surprisingly, the corporate social responsibility report that the company released this month using a globally accepted set of metrics failed to provide any information at all in the section related to bribery, including the information that wouldn’t necessarily put the company in legal jeopardy such as what percentage of employees have been trained in anticorruption or how many business units had been audited for potential bribery.

In fact, it appears that the company’s significant and laudable efforts at corporate social responsibility and sustainability around the world have not bought it any goodwill with legislators, the press or the public. Wal-Mart’s official response to the New York Times story rang hollow to many.

The appointment of a new global anticorruption officer and infrastructure may be too little too late to satisfy critics. At least three law firms are “investigating” the possibility of suing Wal-Mart and are soliciting “deceived” investors. To date, Wal-Mart has lost over $10 billion in value after its share price dropped. Anti-Wal-Mart crusaders feel vindicated and invigorated, and Congress hasdemanded answers. The company will face extra scrutiny as it tries to expand abroad. Wal-Mart should also expect tough questions from its shareholders at its annual meeting in June.

If past experience is any guide, Wal-Mart will likely pay over $100 million in legal fees to investigate and defend itself and could pay significant amounts in fines to both the Department of Justice and Securities and Exchange Commission. (For an excellent description of Wal-Mart’s potential legal woes, see "Wal-Mart's FCPA Scrutiny Grows.")

In December when Wal-Mart first disclosed its internal investigation to Wall Street after learning of the New York Times story, I compared the company to Massey Energy, which had just settled with the government after willfully violating the law and causing the deaths of 29 miners. I argued that the government should treat companies differently depending on their good-faith efforts to prevent criminal acts. I assumed that Wal-Mart’s alleged bribery was not widespread and involved a few rogue managers around the world who chose to ignore the training, policies and a strong tone at the top.

I predicted that “depending on what they find, the company will do what every good corporate citizen does to avoid indictment -- disclose all factual findings and underlying information of its internal investigation, waive the attorney-client privilege and work product protection, fire employees, replace management, and actively participate in any government investigations of employees, competitors, agents and vendors.”

Perhaps I was naïve. I assumed that because of the government’s well-publicized war on bribery, a company with vast resources and a less-than-stellar public image would have a robust compliance program. I assumed that the world’s largest employer understood the legal ramifications under not only the bribery laws but also Sarbanes-Oxley, which requires the CEO and CFO to sign off on the accuracy of financial statements and adequacy of internal controls under threat of civil and criminal penalties. I assumed a corporate culture that may not have existed when these incidents reportedly occurred.

Despite Wal-Mart’s actions, some members of the press’ zeal for a headline-grabbing story has led to a sensationalist treatment of a serious issue. For example, many are now focusing on the fact that Wal-Mart (and many other companies and former government officials, by the way) have lobbied Congress for a “defense” to bribery. In reality many in the business community have proposed meaningful reform that doesn’t unduly penalize companies for the acts of reprobate employees who violate clearly established and enforced rules without management’s approval or knowledge and who ignore training on ethical and legal practices.

No organization that I am aware of contends that companies that have clearly and repeatedly violated the law with sustained, significant bribes or willful blindness to the possibility of bribes could avail themselves of any proposed defense. Make no mistake, if the allegations against Wal-Mart are true, clearly there would and should be no defense for the executives’ reported refusal to correct the wrongdoing when notified by a credible source and prohibition of an independent spare no expense investigation. If true, the government needs to levy fines that cause the company real pain and needs to prosecute as many people as possible both to deter Wal-Mart and other companies from future criminality. It’s possible, however, unless worse facts are revealed, after the spotlight shifts to the next corporate scandal, the company and government will settle and Wal-Mart won’t face prosecution at all.

Here are the questions that regulators, shareholders and legislators should ask Wal-Mart:

1) Who was fired, not merely reassigned or permitted to resign following the initial cursory internal investigation in 2005? Will Wal-Mart fire any executives if an independent investigation uncovers more facts? Who will fall on the sword, take responsibility and resign even before the investigations end?

2) Did the board fail in its legal duty to oversee the adequacy of the compliance program? Did board members ask the probing questions that may have led to answers they didn’t want to hear but needed to know?

3) What kind of corporate culture did Wal-Mart foster to either engender or minimize respect for compliance? What changed following past high-profile allegations related to the use of child labor overseas, undocumented workers, wage and hour violations and a near miss on a potential sex discrimination class case?

4) Where were the gatekeepers from internal audit, finance, compliance and legal counsel? Other than former international general counsel and the director or corporate investigations, did any of them protest the executives’ actions several years ago to sweep bribery reports under the rug? Did any of them go to the board? Did they feel empowered to do so?

5) Does the company have financial incentives in place that either encourage unlawful or unethical behavior through goals that are impossible to reach or that fail to penalize bad conduct?

6) How does the company know that its training and auditing practices for its employees, agents, suppliers and partners are effective?

Similarly, socially responsible investors should hold the company accountable at the June annual meeting, through shareholders resolutions, substantive meetings with management and detailed progress reports as to the effectiveness of the new compliance structure.

All companies should ensure that their employees know they can and must do business legally in environments in which the local governments demand payment to play. While “facilitating” payments to expedite permits may be legal under US law, in many countries, including Mexico, they’re considered pure bribes even if they are requested and expected. And even if they were legal under US and Mexican law, Wal-Mart would have been required to accurately report these payments in their books.

Instead of pandering to the justifiable public outrage, we need to get to the heart of the scandal -- a corporate culture that reportedly condoned widespread bribery and deliberately suppressed efforts to investigate further.

While none of this may be important to the average Wal-Mart shopper who values convenience for the cheapest price on goods and services, the allegations, if corroborated, are a serious reminder to all companies and investors that there are more important things than profits and growth. Crime should not pay and an ethical reputation is priceless.
 

Marcia L. Narine is a visiting assistant professor at the University of Missouri-Kansas City and a compliance consultant for MDO Partners.