Shares in mega retailer Wal-Mart (WMT) took a serious hit Monday after revelations that the company is embroiled in a bribery scandal involving Mexican officials. The company’s stock was off 4.66 percent after a New York Times article that exposed rampant corruption in Wal Mart de Mexico and an effort by prominent executives to cover the scandal up.
Executives Moves to Cover Up Culture of Corruption
The New York Times article describes a 2005 e-mail to a senior Wal-Mart lawyer from a former executive for Wal-Mart de Mexico, Sergio Cicero Zapata, that detailed payments being made to Mexican officials to accelerate the construction of Wal-Mart stores in Mexico. Executives at Wal-Mart de Mexico had then kept the corruption a secret from Wal-Mart headquarters in Bentonville, AR.
The article alleges that senior Wal-Mart executives dispatched investigators to Mexico City and discovered a clear paper trail detailing over $24 million in payments, with the lead investigator stating that “There is reasonable suspicion to believe that Mexican and USA laws have been violated.” Senior Wal-Mart executives, though, ended the investigation and acted to keep the bribery a secret. Eduardo Castro-Wright, CEO of Wal-Mart de Mexico and the man identified by the initial whistle blower as the driving force behind the bribery, was ultimately promoted to the position of Vice Chairman of Wal-Mart in 2008.
“If these allegations are true, it is not a reflection of who we are or what we stand for,” the spokesman, David W. Tovar, said. “We are deeply concerned by these allegations and are working aggressively to determine what happened.”
Sticky Situation Could Mean Executives Will Get the Axe
The breadth of the scandal could end up bringing down several top executives at Wal-Mart as the New York Times piece cites evidence that many, including current CEO Michael T. Duke, were made aware of the results of the internal investigation in 2005. Wal-Mart, though, appears ready to mount a defense of its chief executive.
“Mike is fully supportive of the independent investigation being conducted in Mexico with oversight by the Audit Committee, including ensuring that all resources necessary are available to pursue the independent investigation aggressively,” Tovar said.
Tovar claimed on Sunday that Michael Duke had instructed the company to do a worldwide compliance review of operations in March of last year, and some believe that Wal-Mart will not lose its CEO.
“I don’t get the sense that Mike Duke’s going to lose his job over this,” said Joseph Feldman, senior retail analyst at Telsey Advisory Group. “I think that they’ll try to put the spin on it that they have been putting on it – that it happened years ago, they rooted it out and it doesn’t happen anymore.”
However loyal to its chief, though, the company may ultimately choose to part ways with those members of management most tainted by the scandal in order to cut a deal with the Department of Justice and avoid a longer, more costly legal defense for potentially violating the Foreign Corrupt Practices Act (FCPA), a law against American companies bribing foreign officials.
“Among the remedial actions is ‘house cleaning’ of anyone involved in illegal conduct,” said FCPA expert Richard Cassin. “If a company can say those involved in the questionable conduct are already gone, the DOJ is likely to look more favorably on the company and current management.”
Consequences to Company Could be Dire
Wal-Mart remains one of the top ten companies in the world in terms of market cap, and while other retailers have been struggling to survive, Wal-Mart has managed to stay vital by aggressively expanding into new global markets. However, the company’s share price has been stubbornly stagnate. Over the last decade, the stock has grown by only 1.04 percent. Now, if the allegations in the Times are true, the company could be facing a tough road ahead. The company could be facing stiff financial penalties, an arduous global probe, and a massive turnover in management that could hamper profitability and earnings for years to come.
“This is very likely to last two to four years for Walmart. These worldwide investigations tend to take two to four years in the normal course of business; it simply takes time,” said Michael Koehler, a Butler University professor and FCPA expert.