Wal-Mart regulatory shame gives rise to investors’ fury

Global corporates have been put on notice to be vigilant about corporate governance and compliance or risk the ire of their shareholders after a group of investors in Wal-Mart hit out at the company’s legal and regulatory controls.

Shareholders in the largest retailer in the US last month fired off a letter critical of Wal-Mart’s compliance and calling for the company to establish an independent committee to review the supermarket group’s legal and regulatory controls.

UK institutional investors F&C Asset Management and the UK University Superannuation Scheme (USS) joined forces with the New York City Pension Fund and the pension funds of Illinois to draft the letter. The letter was signed by: F&C’s head of governance Karen Litvack; Americas equity manager at the $36bn (£19.61bn) UK USS Jason Fletcher; William Thompson, who is the investment adviser to the $85bn (£46.29bn) New York City Pension Fund; and Edward Smith, chairman of the $10.8bn (£5.88bn) Illinois State Board of Investment.

Together, as fund managers, the group holds more than 11 million
Wal-Mart shares.

The letter urges Wal-Mart to establish a special committee of independent directors, including legal experts, to conduct a comprehensive review of the US supermarket group’s legal and regulatory controls.

“As long-term investors and shareholders of Wal-Mart, we are deeply concerned that the frequency of reports exposing legal and regulatory non-compliance at the company could be indicative of inadequate internal controls and a lack of board oversight and accountability,” the letter states.

It adds: “As shareholders, we are deeply concerned about potential contingent liabilities and negative effects on the company’s stock price and reputation.”

The move was prompted by the sacking of an alleged whistleblower, who reported abuse of the company expense account by former vice-chairman Thomas Coughlin. It was claimed that the
money, which totalled up to $500,000 (£272,300) over a five-year period, was used for illegal anti-union activities.

Litvack, head of F&C’s 15-person corporate governance team, told The Lawyer: “This is a company with 1.3 million employees who are expected to act at the mere hint of impropriety but who witness someone being fired when he does bring forward information. It creates a culture of fear.”

The letter includes a raft of examples of non-compliance, including concerns over exploitation of illegal immigrants and violations of child labour laws. The supermarket chain has also become embroiled in the largest civil rights action ever brought against a private employer in the US. Last year, a US federal court certified a national class action sex discrimination lawsuit on behalf of over 1.5 million current and former female Wal-Mart employees. The suit alleges that Wal-Mart discriminates against women and retaliates against those who complain about their treatment.

However, according to Litvack, the breaches go beyond a failure to comply with the letter of the law. “We’re concerned with a pattern of legal and ethical breaches. With skirting the edges and violating the spirit, if not the strict letter of the law,” she said.

In this, the shareholders find themselves in an unlikely alliance with the unions, community organisations and environmentalists who have long opposed Wal-Mart’s low-price business model. A group of more than 50 environmental, labour and community groups have banded together under the banner ‘Five Stones’ to press Wal-Mart for reform. They argue that Wal-Mart’s low-price business model relies on low wages, poor working conditions, sprawling development and little regard for the environment. And, they claim, Wal-Mart costs US taxpayers $1.5bn (£820m) annually in government assistance to support many of its 1.2 million workers.

Critics and now shareholders argue that unpopularity of this strategy has seen applications for new stores rejected and the company’s share price remain stagnant for the past two years.
As the letter states: “Compliance breakdowns not only create contingent legal liabilities, but they also harm
Wal-Mart’s corporate image… These headline risks are a significant concern to shareholders, as well as damaging to employee morale. Corporate responsibility is a valuable asset to shareholders and Wal-Mart’s negative corporate reputation has interfered with our company’s growth.”

According to Litvack, the move was aimed at empowering Wal-Mart’s independent directors. “In the US, the danger is that non-executives can become marginalised,” said Litvack. “It’s not our style to dictate the company-specific measures they should take. But this is a signal for Wal-Mart. We thought it was necessary for the board to be empowered to conduct a review.”

The shareholders are calling for Wal-Mart to issue a report by the end of the year. All Wal-Mart would say is: “We’re studying the proposal and will respond appropriately.”