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CASE 3

Walmart Manages Ethics and Compliance Challenges*

Walmart Stores, Inc., is an icon of American business. With net sales of nearly $500 billion and more than 2 million employees, the world’s largest retailer and one of its largest public corporations must carefully manage many stakeholder relationships. Its stated mission is to help people save money and live better. Despite past controversies, Walmart has attempted to restore its image with an emphasis on diversity, charitable giving, support for nutrition, and sustainability. The company, along with its Walmart Foundation, has donated $1.3 billion in cash and in-kind contributions. Walmart often tops the list of U.S. donors to charities. However, more recent issues such as bribery accusations in Mexico have created significant ethics and compliance challenges that Walmart is addressing in its quest to become a socially responsible retailer.

This analysis begins by briefly examining the growth of Walmart. Next, it discusses the company’s various relationships with stakeholders, including competitors, suppliers, and employees. The ethical issues concerning these stakeholders include accusations of dis- crimination, leadership misconduct, bribery, and unsafe working conditions. We discuss how Walmart has dealt with these concerns, as well as some of its recent endeavors in sustainability and social responsibility. The analysis concludes by examining what Walmart is currently doing to increase its competitive advantage and repair its reputation.

HISTORY: THE GROWTH OF WALMART

The story of Walmart begins in 1962, when founder Sam Walton opened the first Walmart Discount Store in Rogers, Arkansas. Although its growth was initially slow, over the next 40 years the company expanded from a small chain to more than 8,000 facilities in 27 countries. The company now serves more than 200 million customers weekly. Much of Walmart’s success can be attributed to its founder. A shrewd businessman, Walton believed in customer satisfaction and hard work. He convinced many of his associates to abide by the “10-foot rule,” whereby employees pledged that whenever a customer came within 10 feet of them, they would look the customer in the eye, greet him or her, and ask if he or she needed help with anything. Walton’s famous mantra, known as the “sundown rule,” was: “Why put off until tomorrow what you can do today?” Due to this staunch work ethic and dedication to customer care, Walmart claimed early on that a formal ethics program was unnecessary because the company had Mr. Walton’s ethics to follow.

In 2002 Walmart officially became the largest grocery chain, topping the Fortune 500 list for that year. Fortune magazine named Walmart the “most admired company in America” in 2003 and 2004. Although it has slipped since then, it remains within the top 50. In 2015 Fortune ranked Walmart the 38th most admired company in the world.

Effects on Competitive Stakeholders

Possibly the greatest complaint against Walmart is it puts other companies out of business. With its low prices, Walmart makes it harder for local stores to compete. Walmart is often accused of being responsible for the downward pressure on wages and benefits in towns where the company locates. Some businesses have filed lawsuits against Walmart, claiming the company uses unfair predatory pricing to put competing stores out of business. Walmart countered by defending its pricing, asserting that it is competing fairly and its purpose is to provide quality, low-cost products to the average consumer. Yet although Walmart has saved consumers millions of dollars and is a popular shopping spot for many, there is no denying that many competing stores go out of business once Walmart comes to town.

In order to compete against the retail giant, other stores must reduce wages. Studies show that overall payroll wages, including Walmart wages, decline by 5 percent after Walmart enters a new market. As a result, some activist groups and citizens have refused to allow Walmart to take up residence in their areas. This in turn brings up another social responsibility issue: What methods of protest may stakeholders reasonably use, and how should Walmart respond to such actions? While it is acceptable for stakeholder activists to protest the building of a Walmart store in their area, other actions may be questionable, especially when the government gets involved. When Walmart announced plans to open stores in Washington D.C., for instance, a chairman of the D.C. City Council introduced a law that required non-unionized retail companies with over $1 billion in total sales and stores that occupy more than 75,000 square feet to pay their employees a minimum of $12.50 per hour—in contrast to the city’s minimum wage of $8.25 an hour. The terms of the law made it essentially apply only to Walmart and a few other large chains such as Home Depot and Costco. While supporters of the law argued that it is difficult to live on a wage of $8.25 an hour, critics stated that the proposal gave employees at large retailers an unjustified benefit over those working comparable jobs at small retailers. Perhaps the most scathing criticism was that Walmart and other big-box retailers were being unfairly targeted by a governmental entity. Walmart also responded directly, threatening to cancel its expansion into D.C. if the law passed and emphasizing the economic and development benefits the city would lose out on. The D.C. City Council eventually passed the law, but it was vetoed by the city mayor, and there are now several Walmart stores in D.C. As with most issues, determining the most socially responsible decision that benefits the most stakeholders is a complex issue not easily resolved.

Relationships with Supplier Stakeholders

Walmart achieves its “everyday low prices” (EDLPs) by streamlining the company. Well known for operational excellence in its ability to handle, move, and track merchandise, Walmart expects its suppliers to continually improve their systems as well. Walmart typically works with suppliers to reduce packaging and shipping costs, which lowers prices for consumers. Since 2009, the company has worked with The Sustainability Consortium, an association of businesses that helps its members achieve sustainability goals, to develop a

measurement and reporting system known as the Walmart Sustainability Index (discussed in further detail later in this case). Among its many goals, Walmart desires to use the Sustainability Index to increase the sustainability of its products and create a more efficient, sustainable supply chain.

In 2008 Walmart introduced its “Global Responsible Sourcing Initiative,” a list pro- viding details of the policies and requirements included in new supplier agreements. In 2012 then-CEO Mike Duke expanded upon these initiatives to set improved goals for increasing the sustainability of the company’s supply chain. He highlighted four main sustainability goals: (1) by 2017, purchase 70 percent of merchandise sold in U.S. Walmart stores and Sam’s Clubs from global suppliers that use the Sustainability Index to assess and share information about their products; (2) use the Sustainability Index as a model for U.S. private brands; (3) apply new evaluative criteria for key sourcing merchants to encourage sustainability to become a more important consideration in buyers’ daily jobs; and (4) donate $2 million to fund The Sustainability Consortium.1*If fully achieved, these goals will increase the sustainability of Walmart suppliers significantly. Company leaders stated Walmart was moving into “phase three” of its sustainability plan, which will involve “reshaping] entire systems” toward achieving sustainability goals. Further details have not yet been revealed.

Some critics of Walmart’s approach note that pressure to achieve its standards will shift more of the cost burden onto suppliers. When a supplier does not meet Walmart’s demands, the company may cease to carry that supplier’s product or, often, will be able to find another willing supplier of the product at the desired price.

Walmart’s power over its suppliers stems from its size and the volume of products it requires. Many companies depend on Walmart for much of their business. This type of relationship allows Walmart to significantly influence terms with its vendors. For example, Walmart generally refuses to sign long-term supply contracts, giving it the power to easily and quickly change suppliers at its discretion. Despite this, suppliers will invest significantly into long-term strategic and business commitments to meet Walmart demands, even without any guarantee that Walmart will continue to buy from them. There are cor- responding benefits to being a Walmart supplier; by having to become more efficient and streamlined for Walmart, companies develop competitive advantages and are able to serve their other customers better as well. Numerous companies believe supplying Walmart has been the best thing that has ever happened to their businesses. However, many others find the amount of power Walmart wields to be disconcerting.

The constant drive by Walmart for lower prices can negatively affect suppliers. Many have been forced to move production from the United States to less expensive locations in Asia. In fact, Walmart is considered to have been one of the major driving forces behind the “offshoring” trend of the past several decades. Companies such as Master Lock, Fruit of the Loom, and Levi’s, as well as many other Walmart suppliers, moved production overseas at the expense of U.S. jobs. Some experts now estimate as much as 80 percent of Walmart’s global suppliers are stationed in China. The challenges and ethical issues associated with managing a vast network of overseas suppliers will be discussed later in this case.

This offshoring trend was not founder Sam Walton’s original intention. In the 1980s, after learning his stores were putting other American companies out of business, Walton started his “Buy American” campaign. More recently, Walmart launched a “Made in America” initiative, pledging to increase the amount of U.S.-made goods it buys by $50 billion over the next 10 years and developing agreements with many suppliers to move their pro- duction back to the states. Critics argue Walmart is merely putting a public relations spin on the fact that rising wages in Asian countries and other international economic changes have actually made local production more cost-efficient than outsourcing for many industries. They also point out that $50 billion is a veritable “drop in the bucket” considering Walmart’s size. Still, the symbolic effect of Walmart throwing its considerable influence behind “Made in America” is likely to spur many suppliers to freshly consider or speed up plans to bring production back to the United States.

Ethical Issues Involving Employee Stakeholders

EMPLOYEE BENEFITS Much of the Walmart controversy over the years has focused on the way the company treats its employees, or “associates” as Walmart refers to them. Although Walmart is the largest retail employer in the world, it has been roundly criticized for paying low wages and offering minimal benefits. Walmart has been accused of failing to provide health insurance for more than 60 percent of its employees. In a memo sent to the board of directors by Susan Chambers, Walmart’s executive vice president for benefits, she suggested Walmart could slow the rise of benefits costs by hiring “healthier, more productive employees,” as well as more part-time workers (who are less likely to be eligible for health care benefits). After this bad publicity, between 2000 and 2005 Walmart’s stock decreased 27 percent.

As a result of the deluge of bad press, Walmart took action to improve relations with its employee stakeholders. In 2006 Walmart raised pay tied to performance in about one- third of its stores. The company also improved its health benefits package by offering lower deductibles and implementing a generic prescription plan estimated to save employees $25 million. Walmart estimates over 75 percent of its employees have insurance (though not always through Walmart). Walmart is quick to point out that the company’s health care benefits are competitive in the retail industry.

Despite these improvements, a Walmart policy eliminated health care coverage for new hires working less than 30 hours a week. Walmart also stated that it reserves the right to cut health care coverage of workers whose work week falls below 30 hours. Some analysts claim that Walmart might be attempting to shift the burden of health care coverage onto the federal government, as some employees make so little that they qualify for Medicaid under the new Affordable Care Act. It is important to note that Walmart is not alone in this practice; many firms are moving more of their workforces to part time, and cutting benefits to part-time workers, to avoid having to pay health care costs. However, as such a large employer, Walmart’s actions are expected to have more of a ripple effect on the economy.

Another criticism levied against Walmart is that it decreased its workforce at the same time it expanded. In the United States, Walmart decreased its workforce by 1.4 percent while increasing its number of retail stores by 13 percent. Employee dissatisfaction often translates to customer dissatisfaction. With fewer employees it is harder to provide quality customer service. This led some customers to complain of longer lines and fewer items on shelves. In the 2014 American Customer Satisfaction Index, Walmart tied for lowest among discount stores and department stores. Walmart claims the dissatisfaction expressed by some customers is not reflective of the shopping experience of customers as a whole.

Case 3: Walmart Manages Ethics and Compliance Challenges

Walmart announced it was raising its employee minimum wage rate across the United States to $9 an hour in 2015 and $10 an hour in 2016. The company says this is part of a new employee-oriented initiative that will also include better training and shift scheduling. The wage hike will apply to at least 500,000 employees and is expected to have a noticeable effect on both the industry and the economy as a whole. Whether it is enough to improve Walmart’s reputation as an employer and regain the company some goodwill with dissatisfied employees and advocacy groups remains to be seen—some analysts believe the wage increase may be simply a profit-maximizing response to the realities of a changing labor market (necessary to continue hiring and retaining good employees) rather than an employee-oriented or socially responsible decision. Walmart’s competitors are also watching closely; considering Walmart’s dominance and influence in the sector, other retailers may have to follow suit to remain competitive. Home Depot, T.J. Maxx, Marshalls, and several other companies also announced raises to their lowest- paid workers.

WALMART’S STANCE ON UNIONS Some critics believe Walmart workers’ benefits could improve if they unionized. Unions have been discouraged since Walmart’s foundation; Sam Walton believed they were a divisive force and might render the company uncompetitive. Walmart maintains that it is not against unions in general, but it sees no need for unions to come between workers and managers. The company says it supports an “open-door policy” in which associates can bring problems to managers without resorting to third parties. Walmart associates have at times voted against unions in the past.

Although the company’s official position is that it is not opposed to unions, Walmart often seems to fight against them. Critics claim that when the word “union” surfaces at a Walmart location, the top dogs in Bentonville are called in. In 2000 seven of ten Walmart butchers in Jacksonville, Texas, voted to join the United Food Workers Union. Walmart responded by announcing it would only sell precut meat in its supercenters, getting rid of its meat-cutting departments entirely. In 2004 employees at a Canada Walmart location voted to unionize; six months later, Walmart closed the store. In 2014 two internal Walmart PowerPoint presentations were leaked that provided reasons for why unions would negatively impact associates and directing managers to call the “Labor Relations Hotline” if they spot “warning signs” of union activity. Although Walmart offers justifications for actions such as this, many see the company as aggressively working to prevent unionization in its stores, and the U.S. National Labor Relations Board (NLRB) has cited Walmart on multiple occasions for violating labor laws.

However, Walmart’s stance against unions has not always held up to the practical realities of doing business in some foreign countries. In China, for example, Walmart found it necessary to accept a union in order to grow. Only one union is legally permitted to operate in China: The All-China Federation of Trade Unions (ACFTU), which is run by the ruling Communist Party. The Chinese government promotes the ACFTU (although the union has been criticized as pro-business and not necessarily looking out for the best interests of workers) and especially seeks to have foreign companies unionized. When poor working conditions and low wages generated social unrest, the government attempted to craft a new set of labor laws providing employees greater protection and giving the ACFTU more power. In 2004 the Chinese Labor Federation pushed Walmart to allow employees to unionize. Walmart initially resisted, and although it eventually complied, critics claimed the company then began making unionization progressively more difficult in practice for its Chinese workers. Despite this, within a span of just two weeks in 2006, the ACFTU was able to establish union branches at five separate China Walmart locations.

Walmart reacted by stating it would not renew the contracts of unionized workers. However, the pressure mounted, and later that year Walmart signed a memorandum with the ACFTU allowing unions in stores. Some analysts believe Walmart fought so hard against unionization in China, despite the clear unlikelihood of prevailing against the Chinese government itself, because it feared workers in other countries would use the precedent to redouble their own unionization demands. Since then, Walmart has permitted or negotiated with unions in several other countries as well, including Brazil, Chile, Mexico, Argentina, the United Kingdom, and South Africa.

WORKPLACE CONDITIONS AND DISCRIMINATION Despite accusations of low employee benefits and a strong stance against unions, Walmart remains the largest nongovernment employer in the United States, Mexico, and Canada. It provides jobs to millions of people and has been a mainstay of Fortune’s “Most Admired Companies” list since the start of the twenty-first century. However, in December 2005, Walmart was ordered to pay $172 million to more than 100,000 California employees in a class-action lawsuit claiming that Walmart routinely denied meal breaks. The California employees also alleged they were denied rest breaks and Walmart managers deliberately altered time cards to prevent overtime. Similar accusations began to pop up in other states as well. Walmart denied the allegations and filed an appeal in 2007. In 2008 Walmart agreed to pay up to $640 mil- lion to settle 63 such lawsuits. This is only one example of the many lawsuits filed against Walmart; in 2005, it was estimated that the company was sued at least 5,000 times per year.

Walmart has also been accused by its employees of discrimination. Although women account for more than two-thirds of all Walmart employees, they make up less than 10 percent of store management. Walmart insists it trains and promotes women fairly, but in 2001 an internal study showed the company paid female store managers less than males in the same positions. In 2004 a federal judge in San Francisco granted class-action status to a sex-discrimination lawsuit against Walmart involving 1.6 million current and former female Walmart employees—the largest gender discrimination class action lawsuit in U.S. history. The plaintiffs claimed Walmart discriminated against them in regard to promo- tions, pay, training, and job assignments. Walmart fought the class-action suit, claiming there was no such pattern of discrimination and promotions and other employment decisions were made on an individual basis by the managers of each store. Thus, the company as a whole could not be held liable for any discrimination that might exist. Walmart took the case all the way to the Supreme Court. The Court declined to rule on the merits of the case itself but instead determined that the women in the lawsuit did not have enough in common to qualify for class-action status and would have to re-file as smaller qualifying class-action groups or individually. Although many of the original plaintiffs are now attempting to do so, they have found limited success; even narrower class-action attempts, such as a suit on behalf of 150,000 female employees in the company’s “California region,” have been dismissed as still too broad to qualify, and many civil rights lawyers will not take on individual employment discrimination cases because the likely payout will be too small even to cover the legal fees. Even if some of the women do end up successful in their claims, the impact on the company will be far less than if the nationwide class-action law- suit had been allowed to proceed.

In 2010 dissatisfied Walmart employees started the Organization United for Respect at Walmart, or OUR Walmart. Although not a labor union, OUR Walmart receives much of its funding from the United Food and Commercial Workers International Union (UFCW), which has been trying to unionize U.S. Walmart employees for years. Eventually realizing it needed a different approach, UFCW backed the idea of a non-union advocacy group and

hired a market research company to develop OUR Walmart’s brand message and activism strategy. OUR Walmart claims support from at least 5,000 members, all current or former associates, who desire to change working conditions at the company. Their demands include lowering the number of hours needed for part-time workers to qualify for benefits, removing caps on the wages of some long-term workers, and ending the practice of using work-scheduling systems to decrease hours for employees so they will not qualify for benefits. In 2011 100 OUR Walmart members traveled to Walmart’s headquarters and presented a 12-point declaration of their demands to the company’s senior vice president for global labor relations. Since then, OUR Walmart has arranged a variety of protests and pickets. They have especially targeted the busy holiday season, organizing demonstrations and walkouts at many Walmart stores on every Black Friday since 2012.

Walmart’s position is that OUR Walmart is a small, fringe movement that does not represent the views of the average associate, most of which are satisfied with their jobs. The company has repeatedly complained to the National Labor Relations Board, claiming, among other things, that OUR Walmart used illegal methods and that it is actually a union in disguise. Walmart has also accused the UFCW of anti-labor practices and filed at least one lawsuit against the UFCW and others who protested around its stores for illegal trespassing and disrupting customers. Walmart may have made a tactical error by choosing to acknowledge OUR Walmart as a threat. The number of OUR Walmart members is very small compared to the number of U.S. Walmart employees as a whole, and not as many Walmart employees have participated in protests as anticipated. Although Walmart claims this demonstrates that the movement is not as popular as it tries to appear, the company may have unintentionally granted it legitimacy and a large amount of free publicity by responding so directly and forcefully. OUR Walmart has claimed credit for Walmart’s recent minimum wage hike to $10 starting in 2016, labeling it a “victory” and calling for further support to reach their eventual goal of a $15 minimum wage for all U.S. Walmart associates.

Ethical Leadership Issues

Aside from Sam Walton, other distinguished people have been associated with Walmart. One of them is Hillary Clinton, who served on Walmart’s board for six years before her husband assumed the presidency. However, the company has not been immune from scandal at the top. In March 2005 board vice chair Thomas Coughlin was forced to resign because he stole as much as $500,000 from Walmart in the form of bogus expenses, reimbursements, and the unauthorized use of gift cards. Coughlin, a protégé and hunting buddy of Sam Walton, was a legend at Walmart. He often spent time on the road with Walton expanding the Sam’s Club aspect of the business. At one time, he was the second highest-ranking Walmart executive and a candidate for CEO.

In January 2006, Coughlin agreed to plead guilty to federal wire-fraud and tax-evasion charges. Although he took home millions of dollars in authorized compensation, Coughlin secretly used Walmart funds to pay for a range of personal expenses including hunting vacations, a $2,590 dog enclosure at his home, and a pair of handmade alligator boots. Coughlin’s deceit was discovered when he asked a subordinate to approve $2,000 in expense payments without receipts. Walmart rescinded Coughlin’s retirement agreement, worth more than $10 million. For his crimes, he was sentenced to 27 months of home confinement, $440,000 in fines, and 1,500 hours of community service.

Despite this setback, confidence in Walmart’s governance generally rose under the leadership of Lee Scott, who was CEO from 2000 to 2009. However, it suffered another serious blow in 2012 when a bribery scandal in Walmart’s Mexico branch was uncovered that directly implicated much of the company’s top management (the scandal is explored in detail later in this case). That same year, a significant percentage of Walmart’s non-family shareholders voted against the reelection of then-CEO Mike Duke to the board. They also voted against the reelection of other board members, including former CEO Lee Scott and board chairman Robson Walton—Sam Walton’s eldest son. While these board members still received enough support to be reelected, the votes signaled serious investor dis- appointment and lack of confidence in the leadership for not preventing the misconduct. Since the scandal, Walmart has invested heavily in demonstrating a renewed commitment toward ensuring the company adheres to ethics and compliance standards.

Bribery Scandal

The biggest blow to Walmart’s reputation in recent years has been the uncovering of a large- scale bribery scandal within its Mexican arm, Walmex. Walmex executives allegedly paid millions in bribes to obtain licensing and zoning permits for store locations. The Mexican approval process for zoning licenses often takes longer than in the United States; therefore, paying bribes to speed up the process is advantageous for Walmart but places competing retailers who do not offer bribes at a disadvantage. Walmex apparently even used bribes to have zoning maps changed or certain areas re-zoned in order to build stores in more ideal locations, as well as to overcome environmental or other concerns. The Walmex executives covered their tracks with fraudulent reporting methods.

In recent years, bribery has become a hot button issue for the U.S. government, which has levied its largest fines and penalties ever against firms found guilty of bribery. It is not unusual for large firms with operations in many countries to face bribery allegations at some point considering the size of their operations and the diversity of cultures they do business with. However, Walmart’s bribery scandal in Mexico was exacerbated by two major considerations. First, the evidence indicated that the top executives at Walmart, not just Walmex, knew about the bribery and turned a blind eye to it. Second, it gave weight to concerns that bribery by Walmart in foreign countries was widespread and accepted in the company’s culture.

Walmart first reported to the U.S. Justice Department that it was launching an internal investigation of suspected bribery at its Mexico stores in December 2011. However, that report to the U.S. Justice Department was not submitted until after Walmart learned The New York Times was conducting an independent investigation. The New York Times’s final report revealed that top leaders at Walmart had been alerted to the possibility of bribery as early as 2005. That year, Walmart received an email warning of the bribery from a former Walmex executive who claimed he had been involved. The email included cold, hard facts, such as names, dates, bribery amounts, and other information. Walmart sent investigators to Mexico City, who corroborated much of the informant’s allegations and discovered evidence that approximately $24 million in bribes had been paid to public officials to get necessary building permits. Walmex’s top executives, including the subsidiary’s CEO and general counsel, were implicated in the scheme. However, when the investigators reported their preliminary findings to Walmart’s top executives, including then-CEO Lee Scott, the executives were reluctant to report the bribery because they knew it would be a serious blow to the firm’s reputation, which was already suffering due to other issues. The prospect of revealing the scandal was especially bitter because Walmart had been drawing media and investor attention for its explosive growth in Mexico as a shining success story.

Admitting that this growth had been significantly fueled by bribery would look very bad for the company.

Instead, the investigation was turned over to the Walmex general counsel, even though the preliminary report found he had approved of and been involved in the scheme. This move was against the advice of one of Walmart’s top lawyers, who recommended an independent third-party investigator and later resigned in protest. The Walmex general counsel’s final report found no evidence of bribery or wrongdoing by Walmex executives. The investigation was closed without anyone being disciplined, and no one external to the company was notified until after the New York Times began its investigation.

If the top leaders at Walmart did indeed know of the bribery and covered it up, it is a serious ethical and legal violation. The executives that may have had knowledge of the scandal include then-CEO Lee Scott and the CEO after him, Mike Duke, who at the time was in charge of Walmart International. Under the U.S. Foreign Corrupt Practices Act (FCPA), it is illegal to bribe foreign officials, and all those with knowledge of such a crime are potentially implicated. Walmart could face billions in fines, and its executives could lose their jobs or face prison time if it is found they helped cover up knowledge of the bribery. Indeed, many of those that occupied high-level positions when the scandal was unearthed have quietly retired or stepped down since it became public.