Corporate Governance of Walmart - Case Study Example

Corporate Governance of Walmart Name Institution Table of Contents Table of Contents 2 Introduction 3 Company Information 4 Bribery Scheme 5 Conclusion and Recommendations 9 References 14 Corporate Governance of Walmart Introduction Corporate governance refers to a system in which the board of directors manages, directs, and controls a company. The shareholders are responsible for the appointment of the board of directors and auditors and they must ensure that there is an appropriate governance structure in place. Corporate governance ensures that a company is managed in the interest of the owners, and that accountability is maintained. Indeed, it comprehends that the structure of the relationships and the corresponding responsibilities given to a group consisting of board members, managers, and shareholders are designed to best foster the corporation’s competitive performance to achieve the primary objectives. Corporate governance developed from the concept of government, which has been present since the early days of social organizations. International organizations, such as the United Nations, employ governance principles and structures in their day-to-day activities. Likewise, organizations that range from national, regional, and local levels, small clubs, down to special interests groups have adopted these principles and structures. Most of these groups have measures that regulate how they conduct affairs and settle disputes. These rules are strictly adhered to (Donaldson, 2003). The charters for business partnerships, commercial voyages, and enterprises started the governance of corporations. Joint stock companies followed it, then limited liability companies, and finally the consortia between airlines. Overtime, the constitutions of many corporations have became more detailed and complex. They now incorporate customs and practices that had grown up during the early basic charters and they are codified into company law and statutes. This has resulted to a multi-layered corporate governance. In the past, frequent frauds characterized corporations and lawsuits were the order of the day. For instance, the Victorian novels and the South Sea Bubble are full of corporate misdemeanors. However, introducing the limited liability company increased incorporation. The value of successful companies was boosted by the ability to trade shares in the stock exchange. This helped to weed out failures. Initially, there was a close link between the shareholder and the board of directors in a limited liability company. The directors were also shareholders and this link facilitated communication between both parties. In addition, it facilitated the rights issues of shares that were needed for expansion purposes (Donaldson, 2003). Corporate governance that is well defined provides a structure that benefits all the parties concerned. It ensures that the organization adheres to ethical standards and practices that are acceptable. In recent years, however, corporate governance has received more attention because of high profile scandals being reported. This involves the abuse of corporate power and in some extreme cases, criminal activities alleged to be committed by corporate officers. An example of abuse of corporate power is the Mexican bribery scandal of Walmart, in which officials of Walmart De Mexico are accused of approving payments to some government officials in exchange of permits and licenses to open and operate new stores across Mexico. It is reported that corporate officers in Arkansas learned of the allegations in 2005 but did not pursue them vigorously and that some of them aided in the cover-up. Walmart committed virtually committed every corporate governance sin in the way it handled the Mexican bribery case (Barstow, 2012). Company Information Wal-Mart Stores Inc., often rebranded as Walmart, is a multinational retail corporation in America. It owns and operates chains of large discount retail stores and warehouses. The company has over two million employees and is thus the biggest private employer. It is family-owned, as the Walton family owns over 50 percent of the company, and is one of the most valuable companies in the world (Jones, 2012). Bribery Scheme In 2005, a Walmart’s senior lawyer received an email from a former Walmart senior executive. The email was an alarming one as it revealed how the company’s subsidiary, Walmart De Mexico engaged in corruption activities to win market dominance. In the email, the former executive described in detail how in it rush to build to expand by building more stores, Walmart De Mexico paid government official bribes in order to obtain construction permits in virtually every city in Mexico. He also provided names, dates and the bribe amounts. The former executive knew so much for years, he had been Walmart De Mexico lawyer who was in charge of obtaining the construction permits (Barstow, 2012). Analysis Walmart dispatched its team of investigators to Mexico, and within a few days, they had unearthed substantial evidence of the widespread bribery scandal. They uncovered paper trails of suspect payments, which totaled to $24 million. In addition, they found documents revealing that top executive officials at Walmart De Mexico not only knew about the bribe payments, but also had taken measures to conceal them from Walmart’s company headquarters in Bentonville (Wohl & Kolker, 2012). The unit found out that the matter warranted a substantial inquiry. In the confidential report he submitted to his superiors, the Walmart’s lead investigator summed up the initial findings by concluding that there was reasonable suspicion that the Mexican and the United States Laws were violated. In addition, he made recommendations for Walmart to expand the investigation. However, Walmart notified neither Mexican nor American authorities. None of the Walmart de Mexico officials were punished or disciplined. Indeed, the Edward Castro-Wright, the then chief executive, became the vice chairperson of Walmart in 2008. Top Walmart officials in the United States referred the matter back to the general counsel of Walmart de Mexico. This was the very lawyer who was alleged to be at the core of the bribery scheme. Unsurprisingly, he promptly closed the matter and suggested no disciplinary action for the leaders at Walmart de Mexico (Barstow, 2012). Walmart is reeling from the massive bribery scheme that has is alleged to have enabled the company to steer its way to the top of the Mexican retail industry. However, the company’s top officials managed to cover up the scheme despite a whistleblower they received in 2005 (Wohl & Kolker, 2012). Some executives who were at the core of the scheme have risen to the top of the corporate ladder at the company and no disciplinary action has been taken against them. This presents delicate situations the company may face at the present, or in the near future. The United States Justice department may decide to treat the Walmart’s bribery scheme as a prominent case that will serve to demonstrate the need for a vigorous enforcement of the United States Foreign Corrupt Practices Act. This Act prohibits all the United States’ corporations from engaging in bribery practices with foreign officials. The American government encourages all the American corporations to disclose possible law violations in their activities. In return, it rewards their honesty through fine reductions and dropping criminal charges. If the Justice Departments finds sufficient evidence there was indeed a cover up, it could decide to come down harder on Walmart. Therefore, the prosecutors can decide to make an example of the Walmart bribery scheme to show that the state will not tolerate foreign bribery cases, even by a top American Company (Wohl & Kolker, 2012). A wide-ranging global investigation would also likely to hamper Walmart’s overseas growth. Walmart faces a huge uphill battle to convince the United States regulators that the problem is confined to Mexico only. Walmart has operations in other countries such as China and Brazil. They are also relying on promising markets in Africa and an emerging Indian market to boost its profits in future. Therefore, investigations could spread to all other countries that Walmart has retail stores. Walmart executives could also face dismissal or imprisonment in the event that the shareholders decide to take action against the company’s officials who did not act appropriately when they learnt of the bribery allegations. Other parties can use this to their advantage. Indeed, cleaning the house could act as a prerequisite for out-of-court settlement with any State authorities. Expects are not ruling out any possibility for potential jail sentence for Walmart executives who were either directly or indirectly involved in the bribery scheme. The United States Congress is also increasingly getting involved in the matter. Reps Henry Waxman and Elijah Cummings once announced that they were launching an investigation into the Walmart’s bribery scheme. They requested face-to-face meeting with Walmart’s executives so that they could question them on the allegation. After examining several internal documents of the company, the Congressmen demanded access to Maritza Munich, the former Walmart International general counsel. Maritza Munich was responsible for hiring outside counsel who conducted the investigations into the bribery allegations. Shortly afterwards, she resigned. In June 2012, they wrote to Walmart’s headquarters stating that they had not cooperated throughout the investigation process and that they had failed to provide access to Ms Maritza Munich. They had also refused to provide key documents to aid the investigation. In addition, the letter notes that the outside counsel Walmart had hired briefed the Congressmen. Although they had few details about FCPA violation by Walmart, they did affirm that Walmart hired them to review their anti-corruption policies in foreign countries that they operated. This included Mexico, China, and Brazil. The lawyer also communicated that they recommended Walmart to expand its review to other countries such as South Africa and India (Wohl & Kolker, 2012). On August the same year, the Congressmen also reiterated that Walmart failed to provide access to key witnesses and documents. It also stated that they had obtained documents that not only showed that Walmart had compliance issues relating to bribery, but also had questionable behaviors that included money laundering and tax evasion. On January 2013, the Congressmen responded to allegations that Walmart executives had no prior knowledge of bribery scheme to open a retail store near Elda Pineda alfalfa field. They send attachments that documented that senior Walmart officials, including Mike Duke, knew of bribery allegations (Wohl & Kolker, 2012). The New York Times picked up where the investigation was cut-off. The publisher travelled across several towns and cities in Mexico, gathering documents that related to construction permits issued to Walmart de Mexico. They interviewed both Walmart employees and government officials including the then Walmart counsel, Sergia Cicero Zapata. The New York Times examination reveals that Walmart de Mexico engaged in aggressive corruption practices by offering huge amounts in pay-offs to have what the law otherwise prohibited. It subverted democratic governance by using bribes. They also defied regulatory safeguards that protect the citizens of Mexico from unsafe constructions (Barstow, 2012). Through Walmart’s confidential documents, the New York Times identified other sites in Mexico that were a target of Walmart de Mexico bribe scheme. The publisher then matched the identified information against permit records acquired for each site and clear patterns emerged. For instance, the indicated dates that the bribes were paid coincided with the dates when the permits were issued. Repeatedly, the forbidden miraculously became attainable. Conclusion and Recommendations In recent years, Walmart Stores Inc. has undertaken major reforms in its endeavor to improve its reputation by changing its practices in areas such as environmental protection, supply chain responsibility, and labor relations. Although the events of the bribery scheme allegedly took place during the last decade, an inquiry into the matter may implicate the current executives at Walmart. The allegations of the bribery scheme are likely to be big stories that, for a time, will likely overwhelm Walmart Store Inc.’s citizenship narrative. Companies always face a dilemma in these circumstances: whether to sweep allegations under the rug and face risking cover up charges, or to conduct thorough investigations that may implicate both past and present executives, which can be great embarrassment for the company. Therefore, the question for the company’s board of directors is whether they should now conduct a systemic and independent inquiry about this highly sensitive matter. In the Securities and Exchange filing of December 2011, Walmart claimed that it was conducting a review of its anti-corruption policies to determine whether certain matters such a licensing and inspections, and the manner of obtaining permits were complying with the United State Foreign Corrupt Practices Act. However, the New York Times reported that Walmart approached the United States Justice department about the bribery scandal only after they learnt about the published story. From the allegations reported in the New York Times article, there a number of lessons executives can learn (Barstow, 2012). The first lesson is that intermediary payments can often get a company into FCPA trouble. The bribery payments that Walmart de Mexico allegedly paid were made through intermediaries and not through company’s representatives. These agents, referred to as “gestores”, were the common channels for unlawful payments throughout Mexico. The FCPA asserts that a company is liable for its joint venture partners, advisers, consultants, and even relevant third parties (Barstow, 2012). . Therefore, it is important a company include a policy on appointment, selection, monitoring, and auditing of its agents as part of a compliance program that is effective. Therefore, any third parties that will interact will any foreign government on behalf of Walmart Stores Inc. should be taken through a thorough due diligence process that is comprehensive before a decision to hire or retain them is made. Walmart must also subject the third parties to sign a statement that declares their understanding of the FCPA’s key provisions and that they will abide by them. Both the acknowledgement and the due diligence must be updated after a specified period to remind these agents of their obligations (Rebne, 2005). Secondly, cover-ups results in high penalties. The New York Times allegations are not related to the amounts of bribes that were paid, but to the level of involvement that that were done to cover up the claims after the whistleblower was made (Barstow, 2012). In recent years, a look into FCPA settlements reveals an interesting pattern. The ultimate sizes of FCPA settlements do not appear to correlate directly with the amount of bribery paid. Most cases that make the top ten largest settlements of all time are because senior company officials were involved in the conduct, and did not take appropriate actions the moment they learnt of the conduct (Antony, 2012). They either aided to cover it up or did not cooperate with the government during the investigation process. For example, KBR settled for $579 million for $182 million in bribes that they paid. The allegations made against them were that their Chief Executive Officer was involved in their quest to circumvent the FCPA. Therefore, as a reputable company, Walmart must ensure that the board comes up with a set of ethical tone to be strictly followed. When serious allegations are internally investigated and a whistleblower is made, it is critical for top executives to ensure that further investigations into the matter are conducted by external authorities and that should be well documented. Otherwise, both the company and its top executive officers faces the risks of being disproportionately punished (Shrives, 2004). The third lesson is on the consideration on how the FCPA investigation should be conducted in an effective manner. According to the New York Times article, Walmart initially did everything right. They instructed the company’s counsel to look into the allegations. The lawyers then relayed the whistleblower up the chain of command. Consequently, an outside law firm was hired and it recommended a more extensive investigation to be done. However, instead of Walmart giving the outside firm a green light to proceed with the investigation, it surprisingly sent the investigation back down the chain of command. In addition, it instructed one of the executive who was allegedly at the core of the bribery scheme to be in charge of it. Apparently, they did not disclose the matter, in its SEC filing, to the shareholders. This could lead to dire consequences. Commentators speculated that the government could employ gatekeeper provisions, which often requires company attorneys to report any allegations of company wrongdoings to the audit committees (Antony, 2012). Outside counsel are always expensive. However, it is important for the company to engage their services when serious allegations are made against them. This is because the outside lawyers are likely impartial. The company should also clearly state the parties who will be responsible for conducting the investigation and make sure that they are impartial. They also should not have been involved in the misconduct. All documents and investigatory steps should be carefully preserved to ensure that the company retains its legal privilege. Officers found to be responsible for the wrongdoing must face disciplinary action. The company must fire culpable employees. Walmart must also implement or improve its corporate compliance program. On the decision of when to disclose an alleged wrongdoing to the Department of Justice, it should be noted that the FCPA provision does not contain an affirmative disclosure obligation. Self-disclosure by a company and its cooperation with the relevant authorities during investigations often results in a more lenient treatment. The State could reduce the charges. Indeed, a factor that the Department of Justice consider in arriving at the decision to enforce the penalties depends on the company’s timely and voluntary disclosure. It also considers the willingness of the company to cooperate during the investigation process. The lesson learnt here is that if an internal investigation concludes that several millions have been paid in bribes, such as the WalMart’s internal investigation did, there is a sufficient ground to disclose to the government (Daghie, 2011). Finally, it should be recognized that prosecutions against individual executives are on the rise. This is especially where there is evidence that an executive either directly or indirectly got involved in cover-up practices. Considering the high-level involvement of WalMart’s top executives in covering in the Mexican bribery scheme, several of them could face prosecution charges as individuals. The Department of Justice has since made the individual prosecution for FCPA violations a top priority. It is increasingly bringing charges against corrupt corporate executives who have had roles in accounting violations that may have occurred in their respective companies. Therefore, Walmart Stores Inc. should embark on a mission of training its top executives, managers, and all other employees on FCPA issues. The company should also stress that any misconduct will result in personal liability for anyone involved, and not just the collective liability for the organization. References Antony, A. (2012). Corporate Governance. International Journal of Marketing and Technology, 2(6), 286. Barstow, D. (2012, April 21). Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle. The New York Times. Retrieved from http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html Daghie, D. (2011). Corporate Governance. EIRP Proceedings, 6(1), 66 – 71 Donaldson, W. (2003). Corporate governance. Business Economics, 38(3), 16. Jones, L. (2012). Commercial Development: Towns Before and After Wal-Mart. Arkansas Business, 29(27), 24. Rebne, M. (2005). Mourning After Wal-Mart. Dollars & Sense, 261, 4. Shrives, P. (2004). Corporate governance. The British Accounting Review, 36(3), 318 – 319. Wohl, J., & Kolker, C. (2012, April 23). Wal-Mart probe could cost some executives their jobs. Reuters. Retrieved from http://www.reuters.com/article/2012/04/23/us-walmart-idUSBRE83M18E20120423 Read More