Refer to Case 3: Wal-Mart Manages Ethics and Compliance ChallengesInvestors in your company have been complaining because they feel that top executives are taking the company in a bad direction. Investors are calling for new board members. How would you answer these stakeholders?Be sure to address:How Wal-Mart is managing ethics and social responsibilityWal-Mart’s response to ethical issuesWal-Mart’s contribution to improving economic sustainability of society 4:37 PM Fri Jun 9=QAABribery ScandalThe biggest blow to Walmart's reputation in recent years has been the uncovering of a large-scale bribery scandal within its Mexican arm,Walmex. Walmex executives allegedly paid millions in bribes to obtain licensing and zoning permits for store locations. The Mexican approvalprocess for zoning licenses often takes longer than in the United States; therefore, paying bribes to speed up the process is advantageous forWalmart but places competing retailers who do not offer bribes at a disadvantage. Walmex apparently even used bribes to have zoning mapschanged or certain areas re-zoned in order to build stores in more ideal locations, as well as to overcome environmental or other concerns. TheWalmex executives covered their tracks with fraudulent reporting methods.In recent years, bribery has become a hot button issue for the U.S. government, which has levied its largest fines and penalties ever againstfirms found guilty of bribery. It is not unusual for large firms with operations in many countries to face bribery allegations t some pointconsidering the size of their operations and the diversity of cultures they do business with. However, Walmart's bribery scandal in Mexico wasexacerbated by two major considerations. First, the evidence indicated that the top executives at Walmart, not just Walmex, knew about thebribery and turned a blind eye to it. Second, it gave weight to concerns that bribery by Walmart in foreign countries was widespread andaccepted in the company's culture.Walmart first reported to the U.S. Justice Department that it was launching an internal investigation of suspected bribery at its Mexico stores inDecember 2011. However, that report to the U.S. Justice Department was not submitted until after Walmart learned The New York Times wasconducting an independent investigation. The New York Times's final report revealed that top leaders at Walmart had been alerted to thepossibility of bribery as early as 2005. That year, Walmart received an email warning of the bribery from a former Walmex executive whoClannedclaimed he had been involved. The email included cold, hard facts, such as names, dates, bribery amounts, and other information. Walmart sentmonicaivery amounts,investigators to Mexico City, who corroborated much of the informant's allegations and discovered evidence that approximately $24 million inbribes had been paid to public officials to get necessary building permits. Walmex's top executives, including the subsidiary's CEO and generalcounsel, were implicated in the scheme. However, when the investigators reported their preliminary findings to Walmart's top executives,including then-CEO Lee Scott, the executives were reluctant to report the bribery because they knew it would be a serious blow to the firm'sreputation, which was already suffering due to other issues. The prospect of revealing the scandal was especially bitter because Walmart had.been drawing media and investor attention for its explosive growth in Mexico as a shining success story. Admitting that this growth had beensignificantly fueled by bribery would look very bad for the company.Instead, the investigation was turned over to the Walmex general counsel, even though the preliminary report found he had approved of andbeen involved in the scheme. This move was against the advice of one of Walmart's top lawyers, who recommended an independent third-partyinvestigator and later resigned in protest. The Walmex general counsel's final report found no evidence of bribery or wrongdoing by Walmexexecutives. The investigation was closed without anyone being disciplined, and no one external to the company was notified until after the NewYork Times began its investigation.If the top leaders at Walmart did indeed know of the bribery and covered it up, it is a serious ethical and legal violation. The executives thatmay have had knowledge of the scandal include then-CEO Lee Scott and the CEO after him, Mike Duke, who at the time was in charge of WalmartInternational. Under the U.S. Foreign Corrupt Practices Act (FCPA), it is illegal to bribe foreign officials, and all those with knowledge of such acrime are potentially implicated. Walmart could face billions in fines, and its executives could lose their jobs or face prison time if it is foundthey helped cover up knowledge of the bribery. Indeed, many of those that occupied high-level positions when the scandal was unearthed havequietly retired or stepped down since it became public.The scandal's impact on Walmart was significant. Shortly after the New York Times's investigation was published, the stock lost $1 billion invalue, and shareholders began filing lawsuits against the company and its executives. Additionally, Walmart has had to pay for its own internalprobe, not to mention hire a number of lawyers to represent itself and its top management as well as advisors and consultants to helprestructure its internal ethics and compliance systems-all of which have already cost it over $612 million. Costs are expected to continue risingas Walmart's internal probe continues. To date investigations by the SEC and the Justice Department are also still ongoing and may end in officialcharges.Walmart's internal probe revealed the likelihood of bribery going on in other countries as well. The company therefore expanded theinvestigation to include its operations in China, India, and Brazil. For example, at its Indian branch, Walmart suspended some key executivesbelieved have engaged in bribery. This investigation halted Walmart's expansion in the country. Indian authorities began investigatingWalmart and its joint venture partner at the time, Bharti Enterprises, to determine if they attempted to circumvent Indian laws on foreigninvestment. Foreign retailers like Walmart are allowed to partner with local businesses and open stores in the country so long as they do notown a majority stake in the venture (less than 51 percent ownership). It is alleged that Walmart offered Bharti an interest-free, $100 million loanthat would later enable it to gain a majority stake in the company. Both companies deny they tried to violate foreign investment rules and havesince broken off their partnership. Such accusations not only have serious consequences for Walmart but also for other foreign retailers inIndia. Many Indian political officials are against allowing foreign retailers to open stores in the country at all. This alleged misconduct has addedfuel for their opposition. Hence, the operation of other foreign retailers may be threatened. This situation demonstrates how the misconduct ofone or two companies can impact entire industries.In the wake of the Mexico scandal, many Walmart shareholders demanded, among other things, disciplinary action and compensation cutsagainst those involved. Shareholders are also demanding that the leaders of Walmart continue to improve transparency and compliancestandards. As part of its compliance overhaul, Walmart announced it would begin tying some executive compensation to compliance efforts.Safety IssuesUsing overseas suppliers has also caused trouble for Walmart. Many of its suppliers, both inside the United States and in other countries, employsubcontractors to manufacture certain products. This makes the supply chain complex, and retailers like Walmart are forced to exert moreQuercight to ensure its cuppliers most compliance standarde Citing cafety concerns or telling a cupplier not to work with a certain subcontractor口414/642415416I:... 4:37 PM Fri Jun 9=QAAEthical Leadership IssuesAside from Sam Walton, other distinguished people have been associated with Walmart. One of them is Hillary Clinton, who served onWalmart's board for six years before her husband assumed the presidency. However, the company has not been immune from scandal at thetop. In March 2005 board vice chair Thomas Coughlin was forced to resign because he stole as much as $500,000 from Walmart in the form ofbogus expenses, reimbursements, and the unauthorized use of gift cards. Coughlin, a protege and hunting buddy of Sam Walton, was a legend atWalmart. He often spent time on the road with Walton expanding the Sam's Club aspect of the business. At one time, he was the second highest-ranking Walmart executive and a candidate for CEO.In January 2006, Coughlin agreed to plead guilty to federal wire-fraud and tax-evasion charges. Although he took home millions of dollars inauthorized compensation, Coughlin secretly used Walmart funds to pay for a range of personal expenses including hunting vacations, a $2,590dog enclosure at his home, and a pair of handmade alligator boots. Coughlin's deceit was discovered when he asked a subordinate to approve$2,000 in expense payments without receipts. Walmart rescinded Coughlin's retirement agreement, worth more than $10 million. For his crimes,he was sentenced to 27 months of home confinement, $440,000 in fines, and 1,500 hours of community service.Despite this setback, confidence in Walmart's governance generally rose under the leadership of Lee Scott, who was CEO from 2000 to 2009However, it suffered another serious blow in 2012 when a bribery scandal in Walmart's Mexico branch was uncovered that directly implicatedmuch of the company's top management (the scandal is explored in detail later in this case). That same year, a significant percentage ofWalmart's non-family shareholders voted against the reelection of then-CEO Mike Duke to the board. They also voted against the reelection ofother board members, including former CEO Lee Scott and board chairman Robson Walton-Sam Walton's eldest son. While these boardmembers still received enough support to be reelected, the votes signaled serious investor disappointment and lack of confidence in theleadership for not preventing the misconduct. Since the scandal, Walmart has invested heavily in demonstrating a renewed commitment towardensuring the company adheres to ethics and compliance standards.Bribery ScandalThe biggest blow to Walmart's reputation in recent years has been the uncovering of a large-scale bribery scandal within its Mexican arm,Walmex. Walmex executives allegedly paid millions in bribes to obtain licensing and zoning permits for store locations. The Mexican approvalprocess for zoning licenses often takes longer than in the United States; therefore, paying bribes to speed up the process is advantageous forWalmart but places competing retailers who do not offer bribes at a disadvantage. Walmex apparently even used bribes to have zoning mapschanged certain areas re-zoned in order to build stores in more ideal locations, as well as to overcome environmental or other concerns. TheWalmex executives covered their tracks with fraudulent reporting methods.In recent years, bribery has become a hot button issue for the U.S. government, which has levied its largest fines and penalties ever againstfirms found guilty of bribery. It is not unusual for large firms with operations in many countries to face bribery allegations at some pointconsidering the size of their operations and the diversity of cultures they do business with. However, Walmart's bribery scandal : Mexico wasexacerbated by two major considerations. First, the evidence indicated that the top executives at Walmart, not just Walmex, knew about thebribery and turned a blind eye to it. Second, it gave weight to concerns that bribery by Walmart in foreign countries was widespread andaccepted in the company's culture.Walmart first reported to the U.S. Justice Department that it was launching an internal investigation of suspected bribery at its Mexico stores inDecember 2011. However, that report to the U.S. Justice Department was not submitted until after Walmart learned The New York Times wasconducting an independent investigation. The New York Times's final report revealed that top leaders at Walmart had been alerted to thepossibility of bribery as early as 2005. That year, Walmart received an email warning of the bribery from a former Walmex executive whoclaimed he had been involved. The email included cold, hard facts, such as names, dates, bribery amounts, and other information. Walmart sentinvestigators to Mexico City, who corroborated much of the informant's allegations and discovered evidence that approximately $24 million inbribes had been paid to public officials to get necessary building permits. Walmex's top executives, including the subsidiary's CEO and generalcounsel, were implicated in the scheme. However, when the investigators reported their preliminary findings to Walmart's top executives,including then-CEO Lee Scott, the executives were reluctant to report the bribery because they knew it would be a serious blow to the firm'sreputation, which was already suffering due to other issues. The prospect of revealing the scandal was especially bitter because Walmart had.been drawing media and investor attention for its explosive growth in Mexico as a shining success story. Admitting that this growth had beensignificantly fueled by bribery would look very bad for the company.Instead, the investigation was turned over to the Walmex general counsel, even though the preliminary report found he had approved of andbeen involved in the scheme. This move was against the advice of one of Walmart's top lawyers, who recommended an independent third-partyinvestigator and later resigned in protest. The Walmex general counsel's final report found no evidence of bribery or wrongdoing Walmexexecutives. The investigation was closed without anyone being disciplined, and no one external to the company was notified until after the NewYork Times began its investigation.If the top leaders at Walmart did indeed know of the bribery and covered it up, it is a serious ethical and legal violation. The executives thatmay have had knowledge of the scandal include then-CEO Lee Scott and the CEO after him, Mike Duke, who at the time was in charge of WalmartInternational. Under the U.S. Foreign Corrupt Practices Act (FCPA), it is illegal to bribe foreign officials, and all those with knowledge of such acrime are potentially implicated. Walmart could face billions in fines, and its executives could lose their jobs or face prison time if it is foundthey helped cover up knowledge of the bribery. Indeed, many of those that occupied high-level positions when the scandal was unearthed havequietly retired or stepped down since it became public.The scandal's impact on Walmart was significant. Shortly after the New York Times's investigation was published, the stock lost $1 billion invalue, and shareholders began filing lawsuits against the company and its executives. Additionally, Walmart has had to pay for its own internalprobe, not to mention hire a number of lawyers to represent itself and its top management as well as advisors and consultants to helprestructure its internal ethics and compliance systems-all of which have already cost it over $612 million. Costs are expected to continue risingW413/642...

Walmart has recognized the importance of managing ethics and social responsibility within its…

Answered: Refer to Case 3: Wal-Mart Manages…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

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Problem 1QTC

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