The Day After, Everyone's Talking About Wal-Mart

Brian Glaser

Corporate Counsel

04-24-2012

Over the weekend, The New York Times broke the story of a large-scale campaign of alleged bribery by the Mexican subsidiary of Wal-Mart Stores, along with what appears to be a company-wide cover-up. By Monday morning, the legal and business media had plenty to say about the report of corruption inside the company that topped the Fortune 500 in 2011.

Time’s legal and business reporter Sam Gustin asked the big question: “How Big a Deal is Wal-Mart’s Mexico Bribery Scandal?” His answer is that, in addition to the immediate issues of falling stock prices, executives losing their jobs, and possible prosecution under the Foreign Corrupt Practices Act, Wal-Mart now has a new overarching problem on its hands:

Perhaps more ominously for Wal-Mart, the company will now face questions about its operations in countries beyond Mexico. Is it possible that similar practices to the ones alleged in the Times article existed elsewhere? Wal-Mart employs nearly 800,000 workers in 5,651 stores in 26 countries outside the U.S., according to the company. “Before any resolution with U.S. authorities is possible, the company has to look under every stone for possible corruption,” Richard Cassin, an FCPA lawyer, told Reuters. “Are there any similar issues in China or other countries?”

And then there is the likelihood of criminal charges by the U.S. and/or Mexican governments. The Wall Street Journal Law Blog notes, “If the allegations are true, Wal-Mart begins with a weak bargaining position” in dealing with the U.S. Department of Justice and the Securities and Exchange Commission. And since the company seems to have seriously bungled its initial internal investigation into the bribes, “the Justice Department won’t be content to let the company conduct an internal investigation and report to the government every few months, as is the case in many FCPA matters that start when a company comes to the government early to report potential problems.”

On top of that, Wal-Mart will have some soul-searching to do across its corporate culture. As MarketWatch points out, “Aside from low prices and a laser focus on efficiency, the company has long taken pains to showcase its ethics and its thrift.” In Slate, Rob Cox writes that the contours of the scandal suggest that Wal-Mart has moved away from the ethos framed by founder Sam Walton in 1962. His son, current Wal-Mart chairman S. Robinson Walton, will “need to channel his father’s spirit of integrity” to diagnose the full scope of the problem and right the ship.

(It’s worth noting that Wal-Mart is working on the inevitable reputational hit quickly and thoroughly, posting its official statement as both text and video.)

Forbes broadens the corporate-ethics angle, using these latest bribery allegations to ask, “Does Morality Matter In Business?” Laura Heller writes:

There are a lot of people asking 'so what?' This is the way many parts of the world work, it’s 'pay for play.' I’m from Chicago, where pay for play has been perfected at the city level. Less so among state officials, although they do keep trying; Rod Blagojevich is the fourth Illinois governor to go to prison, and the sixth to be charged with a crime during their tenure. But just because it’s the way to get things done, doesn’t mean it should be.

And if a company as large and powerful as Walmart can’t get it done without resorting to bribery, than how will it ever change?

And, of course, there’s always the bottom line. Certainly, we are too early in the investigative process to fully map out how the bribery scandal will impact Wal-Mart's earnings or what sort of penalties the company might face, so any numbers being tossed around are speculative, at best. But a separate Forbes report ventures to guess that a U.S. government investigation and the diminishment of Wal-Mart’s position in Mexico could cost the company billions of dollars:

An UBS analysis of previous FCPA violations show a typical investigation slogs on for two to six years with little day-to-day impact on the offending company’s operations. Past SEC and Justice Department penalties are usually about 1% to 2% of annual sales. In 2011, this would mean at least a $4.5 billion, or 77 cents per share, penalty for Wal-Mart, the world’s largest retailer and the biggest private employer in Mexico.

The greater impact will be on Wal-Mart’s Mexican growth. A slowdown in new store openings could mean a 5% decrease in growth, a $1.3 billion loss, according to the UBS analysis. Wal-Mart has beaten rivals to the Mexican market. Its store count there has soared 135% in five years, as the market now accounts for 6% of total revenue.

Stay tuned to CorpCounsel.com throughout the week, as our reporters and columnists contiunue to dig into the legal and business implications of the Wal-Mart bribery story.