Wal-Mart - Mexican Bribery Scandal

WAL-MART Mexican Bribery Scandal International Business Binghamton Summer 2012

Anne Chen

Final Assignment

1. In your view, what strategies should Wal-Mart apply for the repair of its damaged reputation?

In the wake of its Mexican bribery scandal, Wal-Mart is faced with a host of problems, including the potential dismissal and incarceration of its top executives and a plummeting share price. However, perhaps the biggest issue Wal-Mart must address is how to repair its damaged reputation. A company’s reputation is one of its most important assets – it is a strong determinant of a company’s longevity and sustainability. Public outrage has not erupted merely from allegations of Wal-Mart paying $24 million in bribes to local Mexican officials – the fact that many Wal-Mart executives were aware of the bribery payments and chose to bureaucratically cover them up are also of great concern. It is thus vital for WalMart, if it hopes to rescue its corporate persona, to now proceed differently from its prior strategies of scapegoating and handing the power to those who are under investigation – the facts of the scandal are already out there, and there is no use in denying them and prolonging the battle. Instead, Wal-Mart should strive to establish a clear corporate conduct guideline and reiterate its duties to its shareholders. These actions should be pursued promptly and after the company issues a well-thought public apology.

Firstly, Wal-Mart’s apology should be quickly, accurately, and consistently delivered. According to Sean Cleary and Thierry Malleret, “the longer it takes to respond effectively, the greater the potential for damage” (91). Wal-Mart should have learned that promptness is essential to crisis communication and management – it cannot forget that by delaying a full-scale, independent investigation into the bribery allegations by keeping investigations in-house, it created more problems for itself than it would have had it quickly approved Mr. Halter’s “action plan” for a “deeper investigation” (Barstow, 6). Thus, if WalMart wishes to begin reputational repairs today, it cannot risk being unpunctual with its apology. As to the accuracy and consistency of the apology, three elements of the apology must be addressed: the apology’s spokesperson, the apology’s channels of dissemination, and the apology’s content itself.

According the Cleary and Malleret, the style of the apology’s spokesperson must “be frank and honest”; reflect the company’s recognition of the gravity of communication; and “show empathy, concern, and commitment” (93). The spokesperson should also be an individual who can appropriately represent the company, such that his statement is both trustworthy and genuine – thus, Wal-Mart’s CEO would be ideal. Body language is also essential to delivery – the CEO should have strong eye-contact

with his audience, refrain from stammering or breaking his train of speech, and avoid nervous gestures such as fidgeting. His voice should be firm, confident, and clear, such that it is evident that he strongly supports what he is saying. He should also be prepared to handle any questions following his apology, as phrases such as “no comment” may be interpreted as an indication of guilt or lack of knowledge.

The apology should be delivered through various media communicatory platforms, such as television, radio, newspapers, and the Internet, such that the message can reach as many people as possible, particularly Wal-Mart’s customers and shareholders. This is especially important for a global retail giant like Wal-Mart, who has customers all around the world – it is undeniable that how consumers perceive a company shapes the company’s overall reputation. Moreover, as Cleary and Malleret emphasize, a company has a “duty of care” to both its customers and its shareholders (83) – disseminating the apology through multiple channels of communication will ensure that all interested parties, including employees, will be able to access the information. Most importantly, Wal-Mart’s company Website itself should provide a transcript and audio copy of the apology, along with other relevant press release material. It would also be useful to allow readers to submit comments about the apology and the general scandal itself. The primary benefits of opening such an interactive forum are twofold: it allows Wal-Mart to evaluate the effectiveness of its apology statement, and it shows that WalMart welcomes critiques and is interested in the public’s opinion.

Cleary and Malleret suggest key criteria for the content of an effective message: it should be “simple, brief, and straightforward”; it should, to “avoid speculation”, “stick to the facts”; and finally, it should “respect and address people’s concerns and requests for information” (93). It is thus important for the company to pre-draft the apology and have it reviewed by PR representatives, legal experts, and top management. This ensures that the apology’s content is not only accurate and consistent, but emphasizes the company’s competency and willingness to take full responsibility for the scandal. Specifically, an apology provides Wal-Mart with the opportunity to finally acknowledge its past mistakes. As Lisa Bolton of the Wharton School says, “the general advice [for delivering an apology] is to admit mistakes and try not to be defensive.” Thus, the apology should include a brief disclosure and recognition of past mistakes, a promise to not repeat such mistakes, a summary of how the company will now proceed, and a request for forgiveness from injured parties, such as shareholders.

Concerning the Mexican bribery scandal, Wal-Mart erred in numerous ways. Although Wal-Mart can always argue that the alleged “bribes” were merely “facilitating payments”, which are legal under the FCPA, Wal-Mart cannot deny that its actions during the supposed “bribery” – such as hiding the payments through fraudulent accounting – and after the bribery allegations arose – such as deflecting blame and refusing to pursue a full-scale, independent investigation – display a lack of an overall corporate compliance system and an abuse of power by high-level executives.

The first mistake Wal-Mart made was not enacting a zero-tolerance policy for corruption.

Facilitation payments, despite their legality, are still morally questionable – a company cannot sacrifice its ethics for the sake of competitiveness. To err on the safe side, then, Wal-Mart should have adopted a world-wide, corporate strategy that honestly deals with facilitation payments, such as the ones enacted by BP and Shell Oil, in which the two oil companies refuse to make such payments without express approval. Of course, there is substantial evidence that Wal-Mart executives knew of Wal-Mart de Mexico’s payments, or had been notified of the potential misconduct yet chose to hide it or turn a blind eye. For instance, initial bribery allegations arose when Sergio Cicero Zapata came forward and admitted that Wal-Mart de Mexico executives, led by Eduardo Castro-Wright, funneled bribes to Mexican government officials in order to secure permits and licenses ahead of time, such that Wal-Mart’s competitors in the Mexican market had little or no chance to react and were thus pushed out of the country. Yet instead of pursuing a full-scale, independent investigation on the matter, which was what Willkie Farr & Gallagher had highly recommended, Wal-Mart’s leaders kept investigations in-house – quite a counterproductive move, as this allowed the individuals being investigated to do the investigating.

Thus, the second mistake Wal-Mart made was failing to have established a strict protocol for investigative procedures that is uninfluenced by top management – any investigation should be done by an independent firm such that senior management does not have direct control over it. Moreover, investigations were first handled by a small, ill-equipped unit – Corporate Investigations – which could easily bend to the will of executives. Thus, in its apology, Wal-Mart should emphasize that it plans to enact new investigative protocols that are not overseen by executives and that do not exempt executives from examination. To further iterate its commitment to change, the company should promise to strengthen auditing and internal controls – this ensures accurate and full information dissemination throughout the company and offers a check-and-balance system in which all company members are held accountable for his or her actions.

Such an organized, structured hierarchy would prevent a repetition Wal-Mart’s third mistake – a lack of effective communicatory channels between Wal-Mart and its subsidiaries, which further allowed WalMart de Mexico executives to quickly quiet any bribery allegations before they reached company headquarters, and between Wal-Mart and its shareholders, which allowed Michael T. Duke to avoid disclosing to shareholders the details about the bribery investigations.

Of course, a lax investigative protocol, poor internal coordination, and weak communicatory pathways wouldn’t have been as detrimental to Wal-Mart’s reputation had Wal-Mart not put corrupt individuals in power in the first place. It is unfortunate that those of immoral character can obtain such high corporate positions, but one way to combat this is to justly punish such individuals when they’re found guilty of wrongdoing, rather than turning to scapegoating or denial. For instance, when Ronald Halter’s team, after their initial inquiry, presented their disturbing findings to Wal-Mart’s top executives

and recommended to “dig deeper” into the bribery allegations, executives, rather than listen to Halter’s suggestions, instead questioned Cicero’s credibility and accused Halter “of being overbearing, disruptive, and naïve about the moral ambiguities of doing business abroad” (Barstow, 6). The executives, despite the substantial evidence Halter had discovered, chose to use Cicero as a scapegoat – they also insisted that because bribery runs rampant in Mexico, the allegations shouldn’t be taken so seriously. To rescue its reputation, then, Wal-Mart should promise to be more cooperative with investigators in the future and to not ignore preliminary investigative findings. Once those guilty of any illegal conduct are discovered, they should be punished, regardless their position in the company. The Sarbanes-Oxley Act was specifically enacted when the government realized that senior executives should be held accountable for FCPA violations. Executives such as Castro-Wright, who Cicero claimed to be the main person responsible for the bribery scandal, and Wal-Mart de Mexico’s chief auditor, who didn’t disclose to Bentonville the “red flags” of gesture payments hidden in fraudulent accounting and discovered by an auditor, should be held liable for their actions. According to David Welch and Thom Weidlich, Wal-Mart is already facing “pressure from shareholders to take action against any executives who didn’t act on the bribery allegations sooner” (Bloomberg News). Wal-Mart’s CEO himself may face charges, as it is the CEO’s job to certify the accuracy of a company’s financial statements and notify any “red flags” to shareholders. Thus, Wal-Mart’s fourth mistake, in essence, was failing to accept responsibility for the scandal and to quickly punish and/or dismiss wrongdoers – instead, the company tried to alleviate those individuals of fault by blaming others or even rewarded them, as was with the case of Castro-Wright’s promotion. By refusing to immediately hold top executives accountable for their misconduct and instead attempting to “quietly neutralize problems” (Barstow, 6), Wal-Mart prolonged the crisis and consequently placed its moral character and reputation into an unfavorable light.

After the apology addresses these mistakes and outlines Wal-Mart’s strategies to avoid them in the future, it is time for the company to seek forgiveness from all those affected by the bribery scandal – particularly shareholders – and to promise to adhere to all of the described new protocols. Wal-Mart’s newly proposed corporate compliance guidelines should, in summary, include a zero-tolerance policy for corruption; a strict investigative procedure that’s conducted by an independent firm; full disclosure of all information within the company itself and to all interested outside parties; strong internal coordination and employee training; and a detailed description of the appropriate sanctions for any misconduct. Once clearly established, these principles should be adhered to by all employees, such that everyone is aware of what is expected of them and what the consequences of failing to fulfill these expectations are. By publicly sharing these guidelines and promising to follow them, Wal-Mart can begin to rebuild its damaged reputation. Of course, even with such guidelines in place, a damaged reputation takes time to rebuild, and there is no guarantee that mistakes can be completely avoided – it is important that when a

mistake does occur, to quickly acknowledge its existence and to take full responsibility – hesitation or denial shows weak character and is indicative of guilt.

Other than a public apology, Wal-Mart can repair its damaged reputation by supporting anticorruption campaigns and other anti-bribery causes, in order to place itself in a more favorable position in the public eye. Those who were involved in the bribery scandal should not be reelected to high-level positions – it is in Wal-Mart’s best interest to distance itself from wrongdoers and to reinforce its “good side” to the public. As a well-established global retail giant, there is little chance that this Mexican bribery scandal will completely shutdown Wal-Mart’s business – now is the time for Wal-Mart to bandage its wounds by paying settlement fees and assuring the public that it is truly committed to change.

2. Should these strategies differ for the U.S. market and for its international operations (Mexico in particular?)

The aforementioned strategies which Wal-Mart should apply in order to repair its damaged reputation should not differ for the U.S. market and for the company’s international operations. It is vital for global companies to maintain consistency throughout all of its international operations. Hence, globally-integrated companies often have a single internal, voluntary code of conduct to be followed by all employees – it would be inefficient and inconsistent to provide individual company subsidiaries with separate codes. The same theory should apply when remedying scandal allegations.

Wal-Mart’s main strategy to salvage its damaged reputation should be providing a public apology for the scandal – there should be one apology, which can be viewed by any interested parties around the world. There need not be a separate apology for the company’s operations in Mexico – one clear message that provides accurate information and discloses future plans is enough. Moreover, having more than one apology may result in confusion, especially if the messages are incongruous.

Although the source of the bribery scandal was Wal-Mart’s subsidiary in Mexico, the retail giant also has major operations in other countries, such as Brazil, China, India, and Africa. A rescue of reputation should therefore not focus simply on Wal-Mart de Mexico as the major battleground of reputational crisis – salvation should be a company-wide endeavor, especially in light of the fact that U.S.-based executives had also been aware of the bribery payments in Mexico. Executives in both Mexico and the U.S. should thus be held liable – a company’s subsidiary is not isolated from the rest of the company, and thus any remedial change cannot target the subsidiary alone. It would be wise for Wal-Mart to employ a FCPA compliance officer in Mexico, as well as all of its other subsidiaries. This ensures that Wal-Mart has an official in each country of operation that is knowledgeable of that particular country’s business practices and culture. A global compliance officer should oversee all of these officers, such that

any situation that arises is confronted by an experienced executive who has full access to any relative materials. Such a hierarchy is essential to reputational risk management, as it ensures the accurate exchange of information throughout the company and to any outside parties.

A company’s reputation is a result of an amalgamation of how many different parties – investors, shareholders, customers, employees, etc. – perceive the company. Therefore, a company creates for itself, through both its good deeds and wrongdoings, a single image. Consistency is thus essential, especially for globally operating firms – indeed, the proposed guidelines Wal-Mart should share with the public during its apology speech should be followed by all of its employees, whether they be in the U.S., Mexico, or some far corner of the earth. Perhaps the only way in which Wal-Mart’s reputation-saving strategies should pay special attention to Mexico is to further investigate the particular Mexican stores built through permits and licenses obtained via bribes – these locations probably are still housing immoral employees who were aware of the bribery payments and should thus be removed from their positions.

Works Cited Barstow, David. “Wal-Mart Hushed Up a Vast Mexican Bribery Case.” The New York Times. 12, April 2012. Web. 27, June 2012. <http://www.nytimes.com/2012/04/22/business/at-wal-mart-inmexico-a-bribe-inquiry-silenced.html?_r=1&ref=business> Bolton, Lisa. Wharton marketing professor. Lecture 16 from IBUS 480A & 581A: Globalization and International Management of Binghampton University Continuing Education and Outreach: Summer 2012 Distance Learning. Powerpoint presentation.

Sean Cleary and Thierry Malleret. Global Risk: Business Success in Turbulent Times. Palgrave Macmillan, 2007. Chapter 6. Communicating risk. Pp. 82-95. Print.

The Week’s Editorial Staff. “Walmart’s Mexican bribery scandal: What’s next for the retail giant?” The Week. 24, April 2012. Web. 28, June 2012. <http://news.yahoo.com/walmarts-mexican-briberyscandal-whats-next-retail-giant-121000675.html>