Wal-Mart Bribery Case Raises Fundamental Governance Issues

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Saturday April 28, 2012 at 8:30 am
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government.

Wal-Mart appeared to commit virtually every governance sin in its handling of the Mexican bribery case, if the long, carefully reported New York Times story is true. The current Wal-Mart board of directors must get to the bottom of the bribery scheme in Mexico and the possible suppression by senior Wal-Mart leaders in Bentonville, Arkansas (the company’s global headquarters) of a full investigation.

In addition, the board must also review – and fix as necessary – the numerous company internal governing systems, processes and procedures that appear to have been non-existent or to have failed. And, most importantly, it must define the CEO’s core role as one which truly fuses high performance with high integrity, and does not exalt performance at the expense of integrity – and possibly discipline or remove the past CEO (still on the board) or the current CEO.

The essential allegations in the Times story are as follows:

For a substantial period before 2005, the CEO of Wal-Mart in Mexico and his chief lieutenants, including the Mexican general counsel and chief auditor, knowingly orchestrated bribes of Mexican officials to obtain building permits, zoning variances and environmental clearances, and also falsified records to hide these payments. When the lawyer in Mexico directly responsible for bribery payments had a change of heart and reported the scheme to Wal-Mart lawyers in the United States, those lawyers hired an independent firm which, after an initial look, recommended a major inquiry.

This was rejected by senior Wal-Mart management, which instead told an internal Wal-Mart investigative unit to look into it. That unit, too, said, in early 2006, that a substantial inquiry was warranted. But top Wal-Mart leaders in the U.S., including the company’s general counsel, referred the matter back to the Wal-Mart general counsel in Mexico – the very lawyer who was allegedly at the center of the bribery scheme. Unsurprisingly, the Mexican general counsel promptly closed the matter, finding no problems and suggesting no disciplinary measures for senior Wal-Mart leaders in Mexico. He remained in his position until relieved of his duties last week, just before the Times story appeared.

Below are some of the most concerning governance issues – using governance to refer not just to relations between board and management but, importantly, to how the CEO governs the company from top to bottom. I will not use the word “alleged” in every sentence, but one should assume that I do because none of these facts have been established by law enforcement authorities and are, at this point, allegations contained in a piece of investigative journalism.

  • Culture of Silence. Most corporate scandals are perpetuated by a culture of silence. Here there appears to have been no integrity hotline or whistleblower system that worked, because the alleged bribery scheme went on for years without anyone reporting it to an independent company ombudsperson (and some employees were clearly aware of it). Moreover, the Mexican business leaders hid the bribery scheme from the global Wal-Mart leadership in the U.S. And, as far as one can tell based on the allegations so far, the Wal-Mart leaders in the U.S., when they learned of the allegations in some detail, hid the matter from the Wal-Mart board of directors. Wal-Mart appears to have operated like a compartmentalized criminal enterprise rather than a lawful global company.
  • General Counsel and Key Finance Officials as Partners, Not Guardians. The general counsel and chief auditor in Mexico appear to have knuckled under to the demands of an ambitious country CEO with no legal and moral compass by helping to direct and hide the bribery scheme. Similarly, when the investigation was returned to Mexico by top Wal-Mart leaders in the U.S., the Mexican general counsel appears to have killed it with a false report after no further inquiry. Likewise, in the U.S., the Wal-Mart general counsel did not support the Wal-Mart international counsel – the heroine of the piece – who received the whistleblower’s initial report and sought to have an independent, thorough investigation. The company’s general counsel instead succumb to the demands of top management in Bentonville who wanted to sweep the problem under the rug. The company’s general counsel sent the investigative files back to the Mexican general counsel who had clearly been named as a central figure in the bribery scheme.

    I have written many times that the hardest part of the GC and CFO jobs (and of inside legal and finance staffs) is to reconcile the tension between being partner to the business leaders and guardians of the corporation. This appears to be one of the most striking cases where top legal and finance officials were oblivious to their fundamental integrity role and “partnered” with business leaders who were complicit at worse and totally obtuse at best.

  • CEO Failure to Fuse Performance with Integrity. At the time of the bribery scheme, Lee Scott was CEO of Wal-Mart. His apparent governance failures have three dimensions. He did not lead from the top and establish robust systems and processes for preventing, detecting and responding to possible wrongdoing. His crisis management style was to exclude people with relevant expertise and suppress rather than uncover and deal with a serious problem. His view of Wal-Mart’s obligation to follow the law was stunted because, when confronted with detailed reports of rot in Mexico, he did not determine culpability nor did he report to the board or to law enforcement authorities, but choose instead to suppress the matter by deep-sixing it back to Mexico where it died a quick death. Scott still sits on the Wal-Mart board.

    The current CEO, Mike Duke, was at the time the new head of Wal-Mart International with, apparently, all subsidiaries, including Mexico, reporting to him. The investigative story states that he was briefed in detail about the matter (presumably, though the story doesn’t say this) by the international counsel who pushed for a full investigation – the counsel who resigned at the time the top company leaders failed to pursue a major investigation. What Duke did with his knowledge at the time is not clear, but it is certainly a major question whether he acquiesced in the decision to suppress the investigation.

  • Where Was the Board – And Where Will It Be? According to other news stories, the current board has hired outside law firms and outside forensic experts to fully investigate both the alleged Mexican bribery scheme and the possible cover-up at Wal-Mart corporate headquarters. There will have to be a fundamental decision about how far the investigation should extend – clearly the questions in Mexico raise questions in other nations outside the U.S. where Wal-Mart has expanded. Companies like Siemens and Avon, when faced with a problem in a particular nation, have expanded their independent investigations to other nations.

    But, in addition to dealing with the dangerous legal issues facing Wal-Mart, the current board must ask and answer a number of hard questions about how the company was governed and managed. What was the failure of the then board in not overseeing whether the company had adequate compliance systems and processes in such a fundamental area as compliance with the Foreign Corrupt Practices Act? Did the board know anything about the matter then – and did it fail to act properly (as note above, there is no information yet that the board was informed)? What were the fundamental system and process failures, have they been fixed, and what needs to be done to fix them in the future? What kind of discipline and cancellation of benefits is appropriate for those who were involved at the time and still remain at the company – a list which includes the then CEO of Mexico (now a Wal-Mart “consultant” until July), the current and immediate past CEOs of the company, and senior legal and finance staff? And for those Wal-Mart officers or employees implicated in the matter but no longer with the company, what kinds of legal actions by the company are appropriate if they were involved in violations of law, company codes or general fiduciary duties?

    Obviously, how the board communicates about all these matters will have much to do with its reputation in dealing with this multifaceted problem.

Most of the public will be watching to see whether Wal-Mart is legally liable and pays significant damages. But, for those deeply concerned about corporations’ ability to govern themselves, and about the fusion of high performance with high integrity as the core mission of capitalism, the future details on problems and remedies relating to Wal-Mart’s governance, leadership and management hold equal fascination.

  1. The allegations of the “vast bribery case hushed up by Wal*Mart” reported in detail in the New York Times of Sunday, April 22 (article), if they prove true, offer important lessons for senior leaders and directors of enterprises of all types and sizes.
    First, if no one is paying attention to the company’s culture, if no one is willing to act as a “steward” for that culture, it will devolve to the lowest common denominator: Do “whatever (is) necessary” to achieve the commercial objectives. Wal*Mart’s code of conduct as well as their ethics and compliance policies all prohibited bribing public officials (even if they are in Mexico); required those who know of such acts to report it; and suggested that internal investigations be headed by people not associated with the alleged offending organization. Not only were all these regulations ignored, but they were ignored by some of Wal*Mart’s most senior leaders. So much for “tone at the top”! These misjudgments are at serious variance with the ethical principles Sam Walton left behind in the company’s culture. Stewards of Sam’s culture appear to be few and far between, so the Wal*Mart culture has eroded to a “whatever it takes” mentality while no one was paying attention.

    Second, if Wal*Mart, an important corporate leader worldwide, really wants to protect and promote its standing as a principled and ethical business in the face of such a significant reputational threat, their best strategy would be to aggressively and transparently address these issues head on. Rather, they took the decision to hide the allegations behind a wall of bureaucracy and denial. Wal*Mart executives allegedly watered down official reports of the misdeeds, attempted to shift the search for the offender to the whistleblower, kept the investigation inside the corporation and even put the person alleged to have been the mastermind of the program in charge of the investigation. Many of these same errors can be found in the history of the recent Penn State Athletic Department case and the Roman Catholic Church child abuse case. Wal*Mart should have recognized that these stories eventually come out and that they would then have to deal, not only with the fact of the bad behavior, but also with an attempted cover-up. History can be an excellent teacher, but only if one pays attention to it.

    Third, an enterprise’s strategy, risk and ethical behavior are inextricably tied. Especially large and mature enterprises accustomed to high performance growth have a tendency to over-reach when setting their strategic and financial plans. When these plans meet the reality of the market and the risk of failure becomes apparent, executives start looking for tactics that will raise the likelihood of success – “whatever it takes”. When the business strategy is targeted at a market not known for its high ethical standards, the risk that the company will find itself in violation of its own standards as well as the laws of the home and target countries increases dramatically. Wal*Mart was surely aware of these conditions yet continued to encourage its “WalMex” team to pursue aggressive goals without understanding what was going on behind the scenes to drive such exceptional performance. Once more thr ight people were not paying attention.

    So, what should happen next? First, the internal investigation that Wal*Mart has announced should be handled by independent investigators and the results delivered directly to the board of directors and the Justice Department. Second, if the investigation corroborates the allegation in the Times article, the offending executives should be fired immediately. Third, Wal*Mart must cooperate fully and openly with the consequent Justice Department investigation including delivering the accused executives to their day in court. Fourth, even if Mr. Duke is not directly implicated in the bribery allegations, he should resign since these very serious misdeeds happened on his watch (or lack thereof) and he failed to enforce a tone at the top that should have squelched the bad behavior as well as the cover-up. Finally, Mr. Rob Walton should take a serious look at his board of directors, the fiduciary stewards of the Wal*Mart culture, determine how they lost track of Mr. Sam Walton’s principles, and permanently rectify the situation, returning Wal*Mart to the culture Mr. Sam Walton intended.

    Comment by Dan Sweeney — April 29, 2012 @ 7:20 pm

  2. Superb post. You have cut to the heart of the matter, as you did in your book.
    What happened here is contrary to the founding principles Sam Walton established.
    Hopefully, this embarrassment will prod Wal-Mart’s board to permanently address these serious lapses, emerging stronger and better.

    Comment by Bob Vanourek — April 30, 2012 @ 10:10 am

  3. [...] The company “appeared to commit virtually every governance sin in its handling of the Mexican bribery case, if the long, carefully reported New York Times story is true,” Heineman wrote in an article posted Saturday on the Harvard Law School Forum on Corporate Governance. [...]

    Pingback by Wal-Mart’s Four "Most Worrisome" Governance Issues | Law News Online — April 30, 2012 @ 10:02 pm

  4. [...] also wrote “Wal-Mart Bribery Case Raises Fundamental Governance Issues” for the Harvard Law School Forum on Corporate Governance and Financial Regulation on April 28, [...]

    Pingback by Ben Heineman on News Corp’s hacking scandal | Belfer In The News — May 2, 2012 @ 1:13 pm

  5. [...] Although there will be myriad important legal and governance lessons from both the News Corp and Walmart cases, none is more important for business leaders than the imperative to act decisively in the face of demonstrable wrongdoing, and not engage in willful ignorance and indifference with the hope the problem will remain hidden. (See my more detailed analyses of governance issues for News Corp and Walmart.) [...]

    Pingback by News Corp, Walmart and CEO Failure to Investigate Wrongdoing | iTAX – tax news — May 4, 2012 @ 9:01 pm

  6. Are you all joking? Does everyone at Harvard similarly buy this spoon fed horse-sh#t? “Failure to Fuse Performance with Integrity?” Sounds like the hallowed halls of your ivy-league corporate interest defending school have a serious reality problem. Wal-mart is a corporation. It is given all the rights of a citizen of the U.S., with little or no responsibility to its externalities, and its only goal is TO MAKE MONEY.

    You guys all have your panties in a bunch because they happen to get caught! “Deeply concerned about corporations’ ability to govern themselves?” Are you kidding? Have you ever contemplated the notion of ‘conflict of interest’? Its like letting your five year old in a room all day with 10 pounds of brownies and being “seriously concerned” when he ends up sick!

    “Reconcile the tension between being partners and guardians?” Do you all believe the stuff that comes out of your mouths? Or is it just a careful way to make sure the Mitt Romneys of the world can buy-gut-and-sell with impunity while you call it brilliant? How can you still pretend that there is anything but the thin veneer of hypocrisy attached to the term ‘business ethics’ after the crash of 2008, when all your ‘self governing’ titans of the financial markets grab-assed the country’s way into a $700billion tax payer bailout!

    Even a cursory search reveals a long history of backdoor settlements for corporate crime including violating child-labor laws, union-breaking, and the largest gender discrimination lawsuit in history. A return to the principles that Sam Walton established? Give me a break. He had a good idea to use globalization to uproot small (higher quality) local businesses across the country and turn us into an overweight, diabetic, hoarding culture based on sweatshop-cheap goods. He was all about making money, who cares what crap product he was putting out and how it affected his employees, local communities, or even the landscape of america in the process.

    He was a hollow shell, contributed nothing but cheap crap, and this story is right in line with the culture of wal-mart that has existed almost since its inception. I’m sorry you need to view corporations as some kind of benevolent, shameful, self-correcting contributors to our society because your job depends on it. But if you really look at your own apologistic stance and the fact that the only value you add is to make corporate leeches feel better about sucking the wealth out of the poor and middle class in this country to feed the rich, I feel like it isn’t too late for you to do something about it. A 10 year old could see how stupid your fake outrage is. And I can tell by your elaborate syntactical ‘scorn’ and manufactured nostalgia for ‘the old Sam Walton’ that you are at least 10. Have a nice day.

    Comment by Alex Nash — May 5, 2012 @ 1:13 am

  7. [...] It is obvious, then, that economic self-interest that in the aggregate can produce societal economic benefit can easily turn into avarice and self-aggrandizement. In the cases of Barclays or GSK, these traits led to fraud in setting interest rates or marketing drugs. And, of course, Barclays and GSK are but the latest in an incessant drumbeat of corporate scandals just since the turn of this century, beginning with Enron (conflicts of interest, misleading public statements) and Worldcom (phony accounting) and leading to News Corp (phone hacking) and Wal-Mart (bribery). (For my take on the the last two, see here and here). [...]

    Pingback by Note to candidates: Men and women are not angels | Power & Policy — July 12, 2012 @ 9:56 am

  8. The United States government puts a premium on corporate cooperation in foreign bribery cases, relying on companies to conduct thorough internal investigations and voluntarily disclose any wrongdoing.

    Indications that Wal-Mart Stores may have taken steps to keep an internal investigation from digging deeper into $24 million in questionable payments — and later promoting an executive who may have been implicated in them — may affect how the government decides to proceed against the giant retailer.

    Wal-Mart first disclosed in December that it had started “a voluntary internal review of its policies, procedures and internal controls pertaining to its global anticorruption compliance program.

    Comment by dui attorney michael — August 22, 2012 @ 3:37 am

  9. While Walmart cheats its employees and the communities they plunder with their predatory pricing, nothing will be done until consumers will overcome their greed. I know people who would spend $5 in gas to save 40 cents, rather than shop at the store within walking distance. Walmart is creating a world of slums as the many fill the pockets of the few. If you don’t like that idea, don’t shop at Walmart.

    Comment by C. Burton Hannum — June 6, 2013 @ 8:08 am

 

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