It's Not Just the Crime or the Cover-up, It's the Inaction

We all know the aphorism, “it's not the crime, it's the cover-up.”

Organizations can take this one step further: even simply looking the other way when faced with evidence of a major problem is nearly as bad.

This is especially true for potential violations of the Foreign Corrupt Practices Act. Enforcement officials at the U.S. Justice Department and the Securities and Exchange Commission have shown little patience with companies that didn't do enough to get to the bottom of corruption allegations after concerns bubbled to the surface.

We are learning more about the stunning allegations of rampant bribery by executives of Walmart de Mexico and their go-betweens from meticulous reporting by the New York Times, which first brought the situation to light last April. The latest article, published last month, details a series of bribes and favors alleged to have been paid to Mexican officials to tear through the red tape that goes with opening a large store in the shadow of national cultural landmark, on a site in a designated “archaeological zone,” on property not zoned for commercial use, and in a congested part of town.

Apart from assertions that in their haste to open the store, construction workers may have bull-dozed ruins from an historically significant Aztec site, the most troubling claims—at least from a compliance standpoint—are that Bentonville brass, including current Walmart CEO Mike Duke and former CEO Lee Scott, who still sits on the company's board, should have been aware of the bribery and corruption, but did nothing to stop it, much less get to the bottom of the problem. The article accuses top Walmart executives of inaction—not notifying authorities in the United States or Mexico about potential corruption problems.

“Despite multiple news accounts of possible bribes, Walmart's leaders in the United States took no steps to investigate Walmart de Mexico, records and interviews show,” the Times article states.

Tone Deaf?

“Tone at the top” is one of those business clichés, like “best practices,” that gets thrown around so much it's easy to forget what it really means. Tone at the top really should mean that the CEO, board, and the rest of upper-management do the right thing, every time, to set an example for the whole company to follow. Tone at the top is basically a zero-tolerance policy for the top executives of a company. Why? Because as soon as they don't do the right thing, even once, they lose credibility to set the right tone.

Now Walmart's investigation is ongoing and all the details haven't come out, so it's still too early to tell if Duke, Scott, and others will survive the scandal or if they should survive. (Although winning re-election at last year's annual meeting is a good indicator that they will survive.) And it's also worth noting that Walmart has taken several steps to address the issue over the past several months, including hiring a team of new compliance officers and conducting an exhaustive investigation into the charges and the company's compliance program.

Still, I would say if Duke and company were aware of the bribery allegations and did nothing about it, or worse, as the Time's reporting insinuates that they squashed an investigation into the wrongdoing, that they would have to go. Going forward, it would be impossible for the company to claim that its sets the right tone at the top with those figures still in place if it's clear they stuck their fingers in their ears in response to evidence of corruption.

Walmart's own chairman, Rob Walton, stated at the company's 2012 annual meeting: “From our earliest days, Walmart has had a history of holding itself and every associate to the highest standards of integrity…. Acting with integrity is not a negotiable part of our business…. We will not tolerate violations of the FCPA, or ethical wrongdoing of any kind.” These words should ring in the ears of every Walmart board member when the report from the investigation of the bribery allegations currently being conducted by Walmart's audit committee is released, detailing the actions—and potentially the inactions—of top Walmart executives related to the scandal.

Inaction was a major factor in the Jerry Sandusky situation that ravaged the Penn State community. Coach Joe Paterno and University President Graham Spanier didn't commit the abuse and they didn't try to actively cover up the evidence, but they didn't do enough to bring the allegations into the open and get them addressed, and therefore were rightfully dismissed from their jobs. Now, of course, these are two very different situations and the harm that comes from neglecting sexual abuse of children is far more horrifying than ignoring potential bribery and corruption at a foreign subsidiary. But the principles behind the inaction are similar.

The reflexive response to a potential scandal is to keep things quiet, pursue an internal investigation, and attempt to deal with the situation in-house. A worse response is to look the other way and hope the situation either goes away or corrects itself.

The lesson to be learned from the Walmart case is that taking action, getting to the bottom of the allegations, and perhaps even notifying authorities of a situation before it is splashed on the pages of a major newspaper might not only stave off a global investigation and earn leniency from government agencies, it could also preserve and enhance that all-important tone at the top, a more precious commodity than most companies realize.