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 Timesexpose 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.”

What do you think?