In the Wal-Mart C-Suite, it's the PR Battle That Matters

The news hit Sunday morning like a brick through the plate glass of a Wal-Mart storefront.

The largest retailer in the world (and the world’s largest private employer), Wal-Mart is alleged to be have been involved in a brazen pattern of bribery in Mexico in order to reach market dominance in that country. Moreover, when confronted with evidence of this bribery campaign and a recommendation to expand an internal investigation, it is alleged that “Wal-Mart’s leaders shut it down.”

Since the story broke on page one of Sunday’s New York Times, the revelations have dominated legal and business news. Each day brings new allegations, information, and analysis.

As might be expected, behind the legal fight there is a fierce public relations battle. And make no mistake: it is just as intense, just as high-stakes, and ultimately may be more important than anything that will happen in a court of law.

Here’s why. Wal-Mart is not just feeling the pain reputationally, but financially as well. Wal-Mart shares have been hammered: down 3 percent on Tuesday after decline of more than 5 percent on Monday. To put this in context, according to Reuters, just those two days of losses have wiped out more than $10 billion in market value. And that’s not counting the 12 percent loss to the shares of Wal-Mart de Mexico since Monday, which trade separately on Mexico’s IPC index.

And there is another, very important point—a point most general counsel already know, but that is often lost on lawyers outside the corporate context: any punishment that might be levied under the Foreign Corrupt Practices Act, which bars U.S. companies from paying bribes overseas, will likely pale in comparison to the reputational loss and its subsequent impact on Wal-Mart’s market value.

Consider this analysis, from the Wall Street Journal:

In the U.S., legal experts said Wal-Mart could face years of stepped-up regulatory scrutiny, hundreds of millions of dollars in fines, and the appointment of an outside monitor to oversee compliance with foreign bribery laws, if the Department of Justice determines the bribery allegations are true.

Tough stuff, but by no means in the $10 billion range. Hence, the importance of the media and public opinion battle that is already underway.

Wal-Mart’s response is now in full swing, with detailed statements, expressions of innocence and outrage from Wal-Mart spokespeople, and even a video on the Wal-Mart corporate website.

The company also announced on Tuesday that they have created a new global compliance officer position that will oversee five regional compliance directors. The company said it is adding “new protocols” to make sure Foreign Corrupt Practices Act investigations are managed “consistently and independently.”

The irony is that Wal-Mart had been improving its reputation in recent years, after decades of allegations relating to everything from the destruction of Main Street America to low wages, dismal working conditions, employment discrimination, paltry benefits, and environmental issues. Wal-Mart was increasingly being seen as a company that was righting the ship in terms of reputation. These latest allegations and the subsequent media firestorm threaten to undo the gains of recent years and galvanize the once-vibrant anti-Wal-Mart forces nationwide (as detailed in an interesting MSNBC “Market Day” piece).

As readers of this column know, the number one rule in responding to a legal crisis such as the one now facing Wal-Mart is: Be Prepared. As I wrote last month in a column discussing Goldman Sachs’ response to a New York Times Op-ed by a departing employee, there is a tendency to want to respond in a muted manner in corporate crises such as these, in the hopes of downplaying the media coverage and minimizing its impact. And it works . . . sometimes. But go back and read the depth of the reporting in this week’s Times story. Consider the Wal-Mart executives who are implicated (including the company’s current and former CEO) and the depth of the evidence presented (with links to actual memos and emails). There is no way this one is going to go quietly.

And while I have no direct link into the minds and hearts of Wal-Mart executives and their legal and public relations advisors, I suspect “minimize” is a big part of the initial game plan.

So what could Wal-Mart have done? Well, according to the Times article, Wal-Mart knew about the Times’ investigation at least since December 2011—personally, I wouldn’t have let The New York Times get the first bite of this apple. Better to have gotten the story out on the right terms, in the right context, acknowledging mistakes and providing a complete description of the steps being taken to ensure it can never happen again. In addition, I’d have already had the right person ready for that corporate compliance post, a “new Sherriff in town” with the type of reputation that reassures the public, the financial community, and the media that there is a real commitment to change.

Finally, I would have used to the opportunity to start a real debate over the FCPA and whether it handcuffs corporations trying to compete globally. While no one condones bribery, this is a real issue that should be aired publicly as the U.S. tries to rebuild its economic muscle. Engendering such a debate in advance of the Times story would have put the allegations into a more beneficial context.

Can this still be done? Perhaps, but it’s a much harder task now. And from reading the details of the Times piece, it’s an open question as to who in Wal-Mart’s C-suite will still be around to put such a plan into effect.