Angry Wal-Mart Investors Weighing In at Shareholder Meeting

Wal-Mart Stores Inc.’s June 1 annual meeting in Fayetteville, Arkansas, is shaping up to be a day of reckoning for the retail giant, which in April was hit with allegations of widespread bribery in Mexico. The scandal that was revealed by The New York Times has garnered international attention from law enforcement officials, litigants, and the media. Now, shareholders en masse get their chance to weigh in, as all 16 of the company’s board seats are up for election this year.

Public pension funds from a number of states have already made their verdict clear, announcing that they will vote against all or some of Wal-Mart’s directors. Institutional Shareholder Services Inc., and Glass Lewis & Co.—two influential proxy advisory firms—have also recommended that shareholders vote against members of Wal-Mart’s board, including chief executive officer Michael Duke, former CEO Lee Scott, and board audit committee chair Christopher Williams.

“As fiduciaries, we have to vote shares in the best interest of the plan participants,” Illinois State Board of Investment executive director William Atwood told CorpCounsel.com. “The concern that we at the State Board of Investment have is a demonstrable history on the part of the board of directors at Wal-Mart to fail to provide adequate oversight over compliance on the part of management with Wal-Mart’s own policies and procedures.”

Representatives of pension funds in Massachusetts, New York City, Connecticut, and California have all expressed similar sentiments ahead of the meeting.

Massachusetts state treasurer Steve Grossman told The Patriot Ledger that even though the company’s slate of directors may ultimately win the vote, “I think in the court of public opinion, Wal-Mart will suffer some significant damage.”

Atwood says he’s under no illusions about how the vote will turn out. Wal-Mart’s founding Walton family controls about half of the company’s stock; the Illinois pension fund owns about $7.1 million in shares of Wal-Mart’s $226 billion market capitalization. Nevertheless, Atwood says the Illinois state board is voting against all 16 directors up for election because it would be difficult for him to explain doing otherwise to plan stakeholders.

“We don’t have sufficient confidence in any of the directors that the board as an institution is providing adequate oversight,” Atwood says. He adds that the company needs to evaluate whether what transpired in Mexico was an anomaly or is also occurring elsewhere, “and the fundamental question for the board is: are the systems in place and are the resources at the board’s disposal to prudently evaluate that situation?”

The extensive Times report in April painted a picture of an alleged bribery scheme that had been approved by executives at Wal-Mart’s Mexico subsidiary, and of an internal investigation that was ultimately covered up. The U.S. Department of Justice is conducting a criminal investigation into the allegations, which would in all likelihood constitute a violation of the U.S. Foreign Corrupt Practices Act.

Meanwhile, the California State Teachers’ Retirement has filed its own suit against the company’s executives and directors in an effort to spark governance reform.

For several funds that plan to vote against Wal-Mart directors, this alleged governance lapse harkens back to exchanges they had with the company in 2005, when institutional investors voiced concerns about lack of board oversight regarding the treatment of workers by company contractors; that same year, the retailer began its internal review of the Mexico bribery payment, as documented by the Times.

The New York City Pension Funds, the Illinois State Board of Investment, and two funds in the U.K. jointly told Wal-Mart in a letter [PDF] that they were concerned about “reports of legal and regulatory non-compliance” at Wal-Mart, and requested, at one point, that the board form a special committee to review the company’s internal controls.

In response [PDF], Roland Hernandez, Wal-Mart’s then-chair of the audit committee, said there was no need for such a committee:

In our view, the formation of such a special committee would not benefit the Company or its shareholders and would likely delay the implementation of important compliance and internal control initiatives that have been thoughtfully designed, evaluated and approved and that are now being implemented throughout the Company.

In early May, New York City comptroller John Liu released correspondence [PDF] that spanned 2005 to 2006 between pension funds and Wal-Mart, stating that, “time and again our Pension Funds have approached Wal-Mart’s board with serious concerns about its practices in the U.S. and abroad and received only empty reassurances. This board has failed its shareholders.”

In addition to the New York City and Illinois funds, other U.S. investors voiced discontent with Wal-Mart governance between 2005 and 2006. And in a statement [PDF] released May 15 of this year, Connecticut state treasurer Denise Nappier, who will vote against seven Wal-Mart directors, also referenced the 2005-2006 exchanges between investors and the company:

I believe that these board members provided inadequate oversight of issues surrounding the allegations of systemic bribery at the company’s Mexico subsidiary, which highlights a broader failure of the board’s risk management role. Moreover, it’s not the first time that we had to address this important governance role with the company, which suggests that they’ve taken their focus off a critical business sustainability factor.