Corporate Governance in Walmart

In the year 2014, Win Magazine under a column with the heading “Covering Up for Walmart: The Mexico Scandal’, the author indicated that shortly after a lawyer in Walmart Mexico passed for promotion in 2004, he shortly resigned the same year in September for fear of being held accountable for some mischievous company dealings. The lawyer sent an email to the general counsel of Walmart international by the name Maritza Munich following year inviting him for a meeting to discuss the irregularities at the Walmart Mexican subsidiary.

After the meeting, Munich immediately launched an internal investigation into the matter. After a thorough study of the company documents and questioning of the management, the investigators discovered that the subsidiary had spent millions on bribes. The bribes were meant to facilitate a speedy processing of the building permits for the subsidiary stores. The bribery helped in circumventing the laws on zoning and regulations on the environment (Wilson, 2007). The speeding resulted in dramatic growth of the Walmart Mexico subsidiary.

The revelation did not only reveal the violation of the law but also had the potential to a rip off the corporate image created by the Walmart over years. The damage to its image could have an adverse effect in corporate America. With this knowledge, the report was suppressed for six years.

In relation to the same issue, the auditor in his report had indicated suspicious payments for permits. In fear of publicity, the management immediately fired the auditor and continued in denial of the facts to the bribery and the embezzlement of funds by the Walmart Mexico executives.

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To make it worse, they threatened the former employee of their intention of suing him for criminal actions.

In April 2012, the scandal was finally revealed to the public in the New York Times. The reporter on this column clearly explained how the scandal amounting to more than twenty-four million had been conducted under bribery. A further revelation followed through an article which followed the New York Times’. The latter article further explained how the bribes had facilitated the establishment of a store in Teotihuacan archaeological zone which is prohibited for such.

This was not the end of the demise for Walmart. On February 27, 2017, the Fox News through its website published a column that a US judge had dismissed a bribery case involving Walmart Mexico subsidiary. According to the News through the column, Walmart had won the dismissal of a suit accusing it of defrauding its shareholders through a concealment of bribery to the Mexico public officials. In the lawsuit judgment, the judge observed that the American depository shares could not sue the Vega the chairman and the chief executive over claims that the duo knew or was reckless in not having the knowledge of the bribery allegations. The judge also rejected the shareholder’s claims that the two were liable of the México Walmart’s executives’ activities and misled the shareholders (HavardschoolForum, 2017). The judge observed that Walmart Mexico subsidiary operated legally and ethically during the time under the controversy. Further, the judge observed that the audit executive is not liable since a junior worker is likely to conceal their wrongdoings from their superiors.

Importance of Corporate Governance

The introduction of corporate governance was one cause that led to the company failure in early time. The primary purpose of corporate governance includes setting the top tone, which refers to the moral atmosphere created by the organization’s leadership in the workplace (‘Tone at the top’, 2016). Moreover, corporate governance is the creation of corporate rules, process, and practice. In general, a good corporate governance of a company will avoid unnecessary crises in the development of the company. Just like Wal-Mart’s bribery case in Mexico, when the incident was exposed, the top executives did not think about how to make up, but how to cover up. This is a wrong corporate culture.

Principals of Corporate Governance

There are some principals of corporate governance. The first one is to ensure the corporate governance framework. The corporate governance framework includes the roles of each department and some regulatory rules. This framework includes these factors: who are the main regulators, who are the main groups, the main regulatory systems and tools. Additionally, a company should confirm the rights of shareholders and key ownership functions. In addition to enjoying the company’s profits, shareholders also have some of their own responsibilities. When the company has a problem, it is necessary to find a solution together, instead of shirking responsibility or covering up. Moreover, treating shareholders fairly is necessary. Under this principle, although the company is allowed to issue shares with different rights, all shareholders should participate in the profits of their respective entities. Furthermore, the board of directors has the responsibility to monitor the company’s transparency and disclosure, including all shareholding structure, dividend policy, and risk factors.

Issues and Challenges

Some of the issues and challenges in good corporate governance can be divided into several categories, including those experienced at the operational levels, regulators and the stakeholders. Some challenges include the concentration of powers exercised by the board, commitment of it in exercising the best good governance practices, conflict of interest, reporting’s level and transparency (Callister, 2016). Other challenges include the board’s independence levels and also lack enthusiasm and mistrust.

In relation to the regulators, some of the challenges include the employees’ capacity which can be gauged through their competence and their number, adequacy of information provided by the companies, laid down enforcement mechanism among others (Callister, 2016). The main objective of the regulators in relation to good governance is to oversee the implementation of laws and regulations. If there is any challenge in overseeing this, then the corporate governance practices are at risk.

In relation to the shareholders, some of the key challenges and issues affecting good corporate governance practices include ignorance and lack of awareness of rights, a social culture which might be filled with complacency, availability of information provided by the business entities. Others include insufficient enthusiasm for corporate governance, ignorance of the company’s best practices among others (HavardschoolForum, 2012). In relation to the stakeholders, the biggest challenge is in aligning their interests with corporate governance best practice.

In relation to regulatory issues, the main challenge encountered in relation to corporate governance is the principal-agent problem. The problem is also termed as the cost problem. Separation of ownership and control are the main sources of this problem (WhistleBlowing,2015). Though the directors are in charge of the company’s performance there are some situations which call bring temptation to follow their own interest instead of those of the shareholders. In the same way, some employees may be tempted at times to follow their own interest.

In the Walmart case, one of the situations that forced the executives of the México subsidiary to be involved in the bribery is the need to be seen or be recognized as performing. This managerial need forced these executives to go the extra mile to bribe the authorities so that their expansion can be enhanced faster. When the reporting was done by the former lawyer employee, the executive in the head office concealed to preserve the image of the business and his image in the governing field (Callister, 2016. The management went further to fire the auditor who raised this issue to avoid the leakage of the same to the shareholders. The former staff lawyer could also have been tempted to the dealings in order for him to get a chance to embezzle some funds for his own benefit.

When the interests of an employee conflict with those of the organization, the best treatment would be an independent board of directors. The presence of non-executive board of directors could also be a remedy to this problem. Other remedies could be presence of an independent internal audit department, segregation of duties and frequent reshuffle of staffs.

Regarding culture, corporate governance gets a barrier when an organization has a poor culture that is devoid of staff loyalty. In such situations, the employees can follow their self-centered interests. An appropriate culture makes the employee feel liable for their actions and hold a duty of care and diligence to the stakeholders.

In the Walmart case, the former staff lawyer’s action displays an individual fond of a very inappropriate culture at some points. Such a display is seen where he negotiates the bribes, conceals the negotiation and the only whistle blows after he resigns and ensures that he is safe of any prosecution. When he reports the matter, the executive in the headquarter displays the same culture when he forwards the further investigations recommended to the Mexico subsidiary’s executives who are the accused. The main aim here is possible to give the accused a chance to conceal their dealings (WhistleBlowing,2015). When the governor sues the whistleblower, the act displays a society which is unethical in nature especially in consideration of the fact that a leader is a stakeholder and a reflection of the society at large.

In relation to morals, transparency is a key issue. One way where transparency is concealed is through what is popularly known as creative accounting. This is done through manipulation of accounts specially to indicate an improvement in performance. It is also done to conceal the illegal activities of an organization. It takes appropriate morality and ethics to report correctly and appropriately. One of the reasons for the failure is the competitive pressure from the market. Wal-Mart itself is a successful company with his subsidiaries all over the world. The Mexican branch wanted to have excellent performance, which made him quick and profitable. (Callister, 2016). This forces entities to lie through reports.

In the case of Walmart, Mexican morality is seen as a rotten one. The governor conceals the dubious activities and conceals them when he denies the allegation and goes further to sue the whistleblower (HavardschoolForum, 2012). The ‘whistle-blower’ lawyer also portrays a decayed morality when he negotiates the bribery and goes further to resign which presumably puts him in a safe position. When the reporting is done to the executives in the headquarter, he conceals the report and assigns the further investigation recommended to the accused who in turn conceals the bribery activities. The management immediately fires the auditor who reports on the dubious dealings to avoid the exposure to the stakeholders and the public in general (Wilson, 2014). The dubious negotiation is done by the Mexico Congressmen and denial of the same also displays a leadership full of decayed morality and ethics.

The other challenge in relation to corporate governance is in relation to social responsibility. One of the key requirements for corporate governance is the organization’s social responsibility and the disclosure of the same in the mandatory annual report (Wilson, 2014). Businesses sometimes find it hard to balance the profit interest and the social responsibility requirements. This is because the organization itself is established to make profits while taking care of all the stakeholders.

In Walmart’s case, the bribery is done to necessitate a “speedy” processing of the requirement. The bribery negates the principal governing the social responsibility to an extent that the entity is allowed to establish a business in the protected archeological zone around the historic first millennium ruins at Teotihuacan (HavardschoolForum, 2012). This portrays an irresponsible business and also a government that allowed such to happen with little consideration of the society who benefit of such sites is reserved for.

The other challenge facing corporate governance is the technological issue. Since the technology is rapidly changing, it is hard to keep in pace with the changes. This may make it difficult and sometimes difficult to perform an exhaustive audit and also to keep a track of the audit trail. This can provide an opportunity for the wrongdoers to conceal dubious activities and conceal them making it hard for the auditor to unearth such activities (WhistleBlowing,2015). The creative accounting can also be done and concealed through such complicated technology.

In regard to the Walmart case, the management has been able to conceal the dealings in their system and escape the discovery by the auditors. This enabled the success and only one auditor reported on the same who was unfortunately fired immediately (HavardschoolForum, 2012). The technology complication enabled the accountants performed creative accounting, window dressing, and other inappropriate and unethical accounting practices to conceal such expenditures.

The case of Walmart Mexico let me think of the New Corp. Case. On the issue of phone hacking, they tried to deny hacking or bribery activities on unsuspecting grounds. They lack responsibilities and supervision. Later, NoW had no choice but to admit its role and apologize for its action. Rupert Murdoch has been silent on this argument since the beginning. One day after Brooks made his statement, he broke the silence. He said that hackers accused ‘unfortunate and unacceptable’ and offered to cooperate with any police investigation. Although NI set up a website for helpers and paid a few compensations to victims involved in the scandal, everything he did was not enough, because the problem still exists.

Recommendations

According to Wilson (2014), to avoid corporate governance failures some of the recommendations include:

1. The regulatory bodies should ensure a successful implementation of corporate governance codes, standards, and principles. This can be done by enacting the appropriate laws, rules, and regulations. In the case of Wal-Mart, bribery is caused by the top management. Therefore, enterprises should strengthen management and supervision of senior management, because the senior management itself has a large executive power. In addition, the provincial and municipal governments should also strengthen the monitoring of large enterprises.
2. Statutory audits should be objective. Since the auditors are the watchdogs of the stakeholders of any organization, protection of their tenure and their independence should be enhanced. In the case of Wal-Mart, the audit was fired by the company. Therefore, when important personnel of the company leave, the company should pay more attention. In addition, the government should also have some provisions to protect auditors, such as reporting systems. When the auditor finds that the company has financial problems, it can report directly to the government and be protected by the government.
3. Strong internal control departments should be established, empowered and protected to enhance their efficiency and effectiveness. The internal control system should be the supervisory system for every employee and senior staff of the company. A strong internal control system and procedures should be encouraged and enhanced. Auditors recommendations should also be implemented. An appropriate technology should also be employed which is hard to corrupt.
4. A strong corporate culture, moral should be established and rolled out to all the staffs. This can be done through seminars, in the induction process and clearly be in the organization’s mission and vision. Firstly, Wal-Mart headquarters should have good corporate governance. Second, when Wal-Mart opens branches in other countries, it is vital to choose employees. Sometimes, the branch uses some illegal means for good performance to gain the attention of the head office. When the head office sees that some branches are developing too fast, they should be concerned. Corporate culture and ethics can be achieved through training, annual assessment, and spot checks. For example, new employees can be trained in corporate culture and ethics in the first two week. Every six months, the company employees are randomly selected to take the test. In addition, the reporting system of the company is a must.
5. It is good to have whistleblowing policy in an organization. This policy can raise concerns about misconduct or misconduct within the company without discrimination. It also aims to encourage and enable employees to cause serious concerns within the company, rather than ignore the issue. There are several ways to implement the reporting policy in the company. First, a complete reporting system should be established. The policy should require that all complaints be recorded. Board committees, such as the board of directors or the audit committee, should keep abreast of complaints and investigations. The chairman of the audit committee or other designated independent director should always be one of the persons that can be disclosed. Secondly, companies should encourage employees to report problems and make the practice acceptable. At the same time, the company should assure its employees that those who report it will not be subjected to retaliation or fired. Third, rewards are a good implementation as well. Management will release incentives to encourage others to do the right thing and report unethical behavior.
6. Finally, the most important point is to strengthen transparency and regain the trust of the people. When the events in Wal-Mart Mexico were reported, the public was disappointed with Wal-Mart. This has also had a serious impact on the future development of Wal-Mart. Although Wal-Mart finally won the lawsuit, the problems within the company still exist.