Mexican bribery scandal threatens to undo years of work by Wal-Mart to repair reputation amid accusations of poor worker treatment, undermining neighborhoods, hurting small business, damaging environment, say experts
May 11, 2012
– In business, you're only as good as your last good deed.
Wal-Mart, the world's largest retailer, in recent years has tried to repair a reputation that's been damaged by decades of criticism and legal troubles. Community activists have blamed it for damaging the neighborhoods where it builds its stores. Labor groups have lambasted it for not treating its workers well. And politicians have called it a poor steward of the environment.
Wal-Mart began doing things like offering employees better health care coverage and working with its suppliers to reduce environmental waste. Now, allegations that Wal-Mart paid millions of dollars in bribes to officials in Mexico threaten to derail its efforts.
The accusations highlight how difficult it is for a company as big and powerful as Wal-Mart to dig itself out of pile of bad publicity. The discounter's low-income shoppers looking for deals aren't expected to flee. But the fallout from the accusations could become a distraction for the company at a time when it's battling growing competition.
The U.S. and Mexican governments reportedly are investigating the chain. Wal-Mart's stock is down almost 5 percent since the allegations surfaced. The company and top executives are being sued by angry investors. And some shareholders are planning to vote against the re-election of several board members at its annual meeting next month.
"This is a devastating blow to their reputation," says Jonathan Low, co-founder and partner of Predictiv, LLC, which advises corporations on their image although the firm declines to give examples because of confidentiality agreements. "This undercuts all the initiatives they made in many areas."
Wal-Mart says it has an ongoing investigation into the allegations, and it's cooperating with federal authorities. In the meantime, the retailer says it's conducting business as usual.
"We continue to focus on things customers care about like jobs, healthier foods, sustainability and workforce development," says Steven Restivo, a Wal-Mart spokesman. "Our commitment won't change."
NO STRANGER TO CONTROVERSY
Wal-Mart wasn't always the center of controversy. After it was founded in 1962, the retailer expanded by keeping costs down and selling items for less than competitors. The company now has more than 10,000 stores worldwide — many of which are the size of two football fields. But as Wal-Mart grows, so does its troubles.
Wal-Mart's size has often made it a target. Critics, politicians and activists have portrayed it as a corporate behemoth that puts profits above its workers and the neighborhoods where it builds its stores. Anti-Wal-Mart sentiment reached a fever pitch around the beginning of the century when several groups funded by labor unions formed to oppose the company.
The groups have argued that Wal-Mart, the largest U.S. private employer with 1.4 million workers, doesn't pay fair wages or provide adequate health care. They have said the company's big-box stores are eyesores that crush small businesses and wreak havoc on traffic and commerce in local communities. They have complained that Wal-Mart hasn't taken responsibility for its impact on the environment. And they have complained that the company buys too many goods overseas.
The groups ran ad campaigns, toured around the country holding protests and tried to help organize workers. They attempted to block Wal-Mart from opening new stores in places like New York City even while competitors like Target were greeted with fanfare. Wal-Mart even was cited during the 2008 election by then-Democratic presidential hopefuls Barack Obama and John Edwards as an example of what's wrong with big business.
Then, in 2004, Wal-Mart was hit with what could have been the largest sex discrimination case in U.S. history. A group of 1.6 million female workers argued that Wal-Mart paid female workers less and favored male workers. Last year, the Supreme Court blocked the suit.
"Wal-Mart was battling one image problem after another," says Daniel Diermeier, an expert in corporate crisis management and a professor at Northwestern University's Kellogg School of Management.
At the time, Wal-Mart acknowledged that the bad publicity was beginning to hurt its stock. Its shares fell 20 percent from early 2005 to an eight-year low of $42 two years later.
Wal-Mart decided to try to reinvent itself. The company, based in Bentonville, Ark., tried to soften its image with shoppers by using the Great Recession as a way to bolster its position among its low-income shoppers. In 2007, it created a new slogan, "Save money, live better" to replace its long-time "Always Low Prices."
Wal-Mart, which like many big companies had been criticized for its large carbon footprint, also focused on what it could do to clean up the environment. For example, it worked with its expansive network of suppliers that include big Fortune 500 companies like consumer-products giants Procter & Gamble to reduce packaging.
Additionally, Wal-Mart worked on its image with employees. It improved its health care plan and provided coverage to more workers. It started offering $4 prescription drugs. The company also broke with other big corporations and endorsed a mandate that requires employers to subsidize employee health care — a key part of President Obama's health care overhaul.
When it comes to healthier eating, Wal-Mart announced a plan to lower salts, fats and sugars in thousands of the products it sells. It also agreed to cut produce prices by 2015.
To address its image with women, Wal-Mart last year rolled out sweeping measures that it says will help women around the world, including offering training of 60,000 women working in factories in places like India. It enlisted Secretary of State Hillary Clinton, a former critic, for a project to help up to 55,000 women in Latin America and the Caribbean build businesses.
Experts say the alleged bribery scandal, first reported by The New York Times last month, is stirring up new troubles for Wal-Mart. The paper reported that Wal-Mart failed to notify law enforcement even after its own investigators found evidence of millions of dollars in bribes funneled through its Mexican unit.
If Wal-Mart is found to have violated the Foreign Corrupt Practices Act, which forbids U.S. companies from paying bribes to foreign officials, the company could face fines of hundreds of millions of dollars. Top Wal-Mart executives could lose their jobs or go to jail.
The Washington Post recently reported that the U.S. Department of Justice has been conducting a criminal investigation since December. The Justice Department declined to comment.
Two Democratic congressmen, Elijah Cummings of Maryland and Henry Waxman of California, also have launched an investigation.
"A lot of the goodwill has been jeopardized," says Rep. E. Cummings, (D-Maryland), ranking member of the House Oversight and Government Reform Committee, told The Associated Press.
And Mexico's government says it's looking into the charges. President Felipe Calderon, who previously cited Wal-Mart's growth in the country as one of his administration's successes, says he's "very angry" about the alleged bribery scandal.
Investors are nervous, sending Wal-Mart's shares down to around $59. That's off about five percent from when news of the bribery scandal surfaced, but above the high $40s-range they were trading at during the recession.
The California State Teachers' Retirement System, one of the nation's largest pension plans, filed a lawsuit in Delaware against Wal-Mart, asking that any financial damages as a result of its leaders' actions be returned to the company. It holds more than 5.3 million shares of Wal-Mart, or well under 1 percent of its shares.
And leaders of New York City's pension funds are planning to vote their 4.7 million company shares against five Wal-Mart directors up for re-election next month.
"The bribery allegations are damaging," New York City Comptroller John Liu said in a statement. "But reports of a widespread cover-up, involving Wal-Mart's top executives, could have even more devastating consequences."
It's still unclear how Wal-Mart shoppers will react. Robert Passikoff is president of Brand Keys Inc., a New York customer research firm that measures the image of companies using an index that rates them based on location and value, range of merchandise, store reputation and shopping experience.
He says Wal-Mart consistently scores at about 90 on a scale of 1 to 100 on the index even during periods when its reputation is attacked. A rating of below 70 would mean it's in trouble, he says.
Historically, Passikoff says low-income Wal-Mart shoppers don't care where they shop as long as the prices are low. Still, he says well-heeled Americans who often value corporate reputation have shopped elsewhere when Wal-Mart has had image problems.
"That could happen again," he says.
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