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Can Walmart escape its Mexican shadow?

Bill Coffin | April 24, 2017

On April 20, Walmart released a host of financial reporting documents, including its 2017 Annual Statement; Proxy Statement; Global Responsibility Report; and Global Ethics and Compliance Program Update. You can find links to all of these documents here, but the 2017 Global Ethics and Compliance Program Update can be found here.

This is only the fourth year that Walmart has issued a global ethics/compliance update; they began the practice in 2013, starting with a global compliance update, and in 2016, expanding that into an ethics and compliance update. The report is fairly simple, but provides some interesting details on the scope and depth of Walmart’s ethics and compliance efforts.

According to the FY2017 update, Walmart has spent more than $141 million on ethics and compliance since 2013, supporting more than 2,300 ethics and compliance professionals worldwide (some 500 of which are in the United States). Walmart has 300 associates dedicated to monitoring and tracking the more than 56,000 licenses and permits the company must secure to operate in its international markets. The effort is run through a centralzed licensing system Walmart built and has deployed over the last four years.

Walmart notes that it has put a lot of effort into supporting employee reporting, with hotline contacts up 67 percent from 2013-2016. It doesn’t mention what that +67 percent is from, though, so the overall usage of the hotlines remains a little murky. An increase of 67 percent from 10 is not even 17, after all. Plus, touting hotline figures is always a bit of a tough sell. You can’t prove greater willingness to listen to employee concerns if you don’t have the hotline stats to back it up. But if you’ve got burgeoning hotline stats, doesn’t that suggest that there are more internal concerns than is optimal?

The report also notes board-level involvement in the company’s ethics and compliance efforts. The Global Ethics, Compliance & Risk Committee meets more than quarterly and has met more than 40 times since 2012. But most notably, the audit committee oversees a raft of ethics and compliance objectives—more than 200 since 2013, including more than 60 specifically involving anti-corruption. Broadly speaking, these objectives include Walmart’s efforts regarding anti-corruption, AML, supply chain risk, food safety, environmental compliance, health and safety compliance, and licensing/permits. The objectives themselves include developing enhanced compliance procedures, hiring and training compliance personnel, monitoring the compliance program, and internal ethics and compliance communication.

If the audit committee feels that insufficient progress has been made on these objectives for the year, it can withhold the senior executive management’s cash incentive payments. It’s worth noting that since this program came into existence, the Audit committee has never felt the need to exercise this power, but it’s nice to see that kind of independent fulcrum to guide executive behavior, and to quantify the results from the company’s ethics and compliance program.

Of course, there is a large, Mexico-shaped shadow looming over all of this good news. All of this reporting began with FY2013, not long after a December 2012, Pulitzer-winning investigative report from the New York Times that uncovered a long history of Walmart committing bribery in Mexico to expand its business there. Walmart’s stock value dropped by some $17 billion in the days following that news, which in turn prompted various shareholder lawsuits (none of which have succeeded thus far) as well as ongoing Justice Department and SEC investigations. Those investigations may yet result in a potentially $600 million FCPA settlement for Walmart, which wouldn’t quite be the largest on record, but it would be close.

Keep in mind, Walmart’s Mexico issues are already costing the company plenty. According to a November 2012 Times article, Walmart had begun its own internal audit, noticed problems with its Mexico operations, and began taking corrective action, by spring 2011. By November 2012, the company had already spent $35 million on improving its compliance program. To date, Walmart has spent at least $837 million in additional investigative and compliance costs since 2011.

Walmart’s year-end earnings call transcripts note that since FY2013, it has spent $469 million on ongoing FCPA-related inquiries and investigations, and another $211 million on its global compliance program (well more than what the FY2017 Global Ethics & Compliance Report admits to) and organizational ethics and compliance enhancements. It spent another $157 million on investigations and compliance in FY2013, but did not break those costs down. Those overall costs are slowly winding down—$126 million in FY2016, $99 million in FY2017, and an expected $65 million to $85 million in FY 2018—but they are still noteworthy, and are well north of whatever FCPA settlement may result.

Still, for a company of Walmart’s size—it has an operating income of $22.7 billion for FY2017—even a $1.5 billion total cost isn’t that terrible. That is 6.6 percent of its FY2017 operating income. It’s a huge amount of money, to be sure, but it almost seems like it is in a Goldilocks zone—big enough to spur Walmart to take sweeping and substantive action to make sure it does not see a repeat of the Mexico situation, but not so big as to destroy the enterprise or give it a substantial lasting wound.

The key here, though, is whether Walmart is making a genuine effort to correct its behavior, and it certainly looks like that it is. Spending $211 million on compliance alone is not chump change. Building a team of 2,300 compliance personnel worldwide is not a token effort. And a 67 percent uptick in employee ethics & compliance hotline calls is not the sign of a company turning a deaf ear. Walmart will likely make fresh headlines whenever its Mexico FCPA investigation comes to a conclusion. But when it does, whatver those results may be, let’s remember the efforts the company is undertaking now to set things right.

Source: Walmart FY2017 Earnings Call Transcript Presentation

 

Correction: This column has been updated to provide a more accurate timeline of events; an earlier version suggested that Walmart began improving compliance efforts after the December 2012 Times story broke, which is not the case. Walmart had begun improving its compliance efforts at least as early as 2011, as noted in a separate November 2012 Times story. We regret the error, and thank Mike Koehler for pointing it out to us.