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Walmart Gets Busted: Three Observations About Values, Bribery, & Business Strategy

Walmart Idol

Walmart’s spokesman, David W. Tovar, responded to reports of bribery and a quashed internal investigation in a video posted on Walmart’s website on April 21st.

“If these allegations are true, this is not a reflection of who we are and what we stand for.”

What a crock.  If these allegations are true, they reveal exactly what Walmart stands for – revenue first, people second.  A company that puts revenue in front of people is hardly unique, but Walmart’s blatant disregard for the law is a bit stunning, even for someone like me who busts corporate idols on a regular basis.

As a quick recap, the New York Times reported on April 21st that Walmart spent more than $24 million dollars in a bribery campaign in Mexico to rapidly become a top retailer in the country.  The bribery was exposed in 2005 to Walmart senior management, who quashed the internal investigation and failed to inform law enforcement authorities in Mexico or the US.  The story is detailed and complex, drawing on interviews and hundreds of internal company documents.

Values are not about words; they are revealed by deeds.  By observing  who gets rewarded and who is disciplined, one can get an accurate picture of a company’s value system, and the values of the people who work there.  Here are three of my observations:

Observation 1: People who displayed company-first values were rewarded

Edwardo Castro Wright, who became Chief Executive of Walmart de Mexico (Walmex) in 2002, had a strategy –  “to build hundreds of new stores so fast that competitors would not have time to react.”  Executives were given aggressive revenue growth goals that required the building of new stores, and were required to do whatever it takes to get permits.  And a key tactic was bribery.  Bribes “accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days.” (NY Times April 21, 2012)

Wearing my marketing hat, I can appreciate the beauty of the execution.  A $24 million dollar investment led to a $368 million in revenue this quarter alone. Too bad the strategy was both illegal and immoral.  The Foreign Practices Corruption Act (FPCA) makes it illegal for US executives to bribe foreign officials.  And as I will comment further below, bribery for business is not a victimless crime.

From a business and career standpoint, Mr. Castro Wright’s strategy was spectacularly successful for both Walmart and his career.  Mexico’s revenue growth has repeatedly been cited by the company as a model of Walmart’s successful international strategy, and today Castro Wright is the vice Chairman of Walmart.  In 2005, Michael T. Duke was in charge of Walmart’s international business; today he is CEO.  H Lee Scott, who was CEO of Walmart in 2005 and ultimately made the decision to bury the investigation; today he is  on Walmart’s board of directors.  And yes, Scott knew about the bribery allegations when Castro Wright and Duke were promoted.

Observation 2: People who investigated the bribery charges were punished

Not everyone went along with the decision to hush up the bribery scheme.  There was an ongoing battle over the course of months about how to investigate.  Some people, like Maritza I. Munich General Council of Walmart International, and Ronald Halter, a former FBI agent, diligently pushed the investigation towards a conclusion that would have brought in law enforcement.  However, they were opposed at every step by heads of the business units, who called them naïve about the realities of international business, and accused them of being “overly aggressive” in their investigation.

Values drive priorities and decisions, and when push came to shove, the investigation was taken away from the independent unit and given over to the general council of Walmex (one of those accused of wrongdoing!).  Not surprisingly, the investigation ended quickly, with a report that accused the whistle blower of corruption.  (The Times article shreds this report, citing numerous factual errors, misstatements and omissions.)  To their credit, both Munich and Halter resigned from Walmart and now have fruitful careers elsewhere.  I salute them both for sticking to their values.

Observation 3: Bribery is illegal for a reason

Ok, I admit it, when I first read the story, my reaction was “Corruption in Mexico, and the news is…  I did an informal poll of other business people in the Bay Area, and found a somewhat blasé attitude towards foreign corruption.  Bribery is how business gets done in Mexico and parts of Asia.  (All done through consultants, or in the case of Mexico, “Gestores” – translated as “fixers.”)  But my attitude changed after I read the following comment  from “Richard” after the article in the Times

I live in Mexico. It’s racist to say, “What’s the problem with being corrupt in Mexico? That’s the way they do business there.” A lot of us are breaking our necks to change the part of the business culture here that involves corruption . It affects us negatively, and permissive attitudes towards corruption don’t help our effort.

I bristled when I first saw the charge of racism.  “That doesn’t apply to me.”  Well if not racism, then what is it?  I would not stand for bribery of American officials (No snickering about the current campaign finance system please).  So why is it ok in Mexico?  It isn’t, and I need to acknowledge the shortcomings in my initial reaction.

Richard’s comment went on to describe the departure of a French supermarket chain because they did not wish to participate in the bribery and could not compete with a company that did.  “When they left, it was a loss for us all, because it was one competitor less.”  Less competition means higher prices and fewer choices for consumers.

Corrupt officials in Mexico do far more than simply expedite building permits.  Mexico is a country rife with crime, where an estimated 80% of murders go unpunished, and many rapes go unreported.  More than 50,000 people have been killed in an ongoing drug war, where local police are often linked to the drug gangs. And while business corruption may not directly cause police corruption, it is not unrelated either.  It is not a comfortable thought.  But corruption is not inevitable, and we have choices.

As the case of Walmart shows, paying the bribes can be a good investment from a business standpoint, at least in the short run.  It will be up to the government whether they bring criminal prosecution.  Sadly, the track record of prosecution is not strong, with little jail time for offenders of the FPCA.  (For more, click here.) More and more American’s will be faced with issues of foreign corruption if current trends of globalization continue.  Corruption is a big issue, and there is no middle ground.  If we choose to turn a blind eye in our business practices, we become part of the problem.  If we choose to do the right thing, even if it leads to slower revenue growth, we are part of the solution.

Should we do the right thing to avoid jail, or should we do the right thing because it is the right thing to do?  It is my hope that they throw the book at Walmart, and more importantly the individuals who broke the law.   Making an example of wrongdoers today will make it easier for everyone to do the right thing tomorrow.  And with globalization, that person being asked to “do what it takes” to grow the business in a foreign market may be you.  How will you handle it if and when that day comes?

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Comments

  1. I live in Mexico as well and can provide an example of how corruption and bribery can have significant environmental impacts. I originally moved to Mexico to work in conservation, specifically to increase community involvement in an important marine park’s management and protection. This park was recently touted as the most successful marine park in Mexico, and possibly worldwide. In 2008, a Spanish developer began work on a massive resort development after receiving permits from the environmental protection agency (SEMARNAT). The Environmental Impact Assessment report upon which SEMARNAT based its decision to permit the development to proceed has since been demonstrated to contain serious errors and omissions and a campaign initiated to get the development halted. If the development is allowed to proceed, it will have irreversible impacts on the coral reef and fish populations in the park which borders the development. The director of SEMARNAT recently stood before the Senate to answer charges that he and other officials from his department rubber-stamped the permits for the project in exchange for bribes. The developer has not been the focus of any investigation to my knowledge, however the company did declare bankruptcy in 2011, so it is doubtful they will ever be held accountable.

    Here’s a link to the blog I wrote related to these events: http://baja.com/east-cape/2012/04/26/the-fate-of-cabo-pulmo-national-park-remains-uncertain/

    • Greg Marcus says

      Thanks Dawn for sharing your story. This is obviously a huge problem in Mexico, and it would be a real tragedy if the marine park is lost to development. Maybe between the bankruptcy and the Walmart scandal there will be an opportunity to get the land out of private hands.

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