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On Sunday, in a 7,800-word, front page story, the New York Times provided an inside look at Walmart’s Mexico division, suggesting that its fast growth over the past decade was fueled by bribes, and that top management was more concerned with details not being revealed and investigations not being allowed to move forward than it was with stopping the systematic corruption and adhering to US law that forbids American companies from bribing foreign officials.

You can read the entire story here. To begin with, here is how the Times frames the story:

“In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.

“The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal- Mart de Mexico.

“Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.

“In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: ‘There is reasonable suspicion to believe that Mexican and USA laws have been violated.’

“The lead investigator recommended that Wal-Mart expand the investigation.

“Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.

“Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008. Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed ... Under fire from labor critics, worried about press leaks and facing a sagging stock price, Wal-Mart’s leaders recognized that the allegations could have devastating consequences, documents and interviews show. Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.) Confronted with evidence of corruption in Mexico, top Wal-Mart executives focused more on damage control than on rooting out wrongdoing.”

In addition to Castro-Wright, the Times reports, the senior executives who knew about the allegations and apparently did little to put an end to the practice of bribery in Mexico included current CEO Mike Duke and then-CEO Lee Scott, as well as “Thomas A. Mars, Wal-Mart’s general counsel and a former director of the Arkansas State Police; Thomas D. Hyde, Wal-Mart’s executive vice president and corporate secretary; Michael Fung, Wal-Mart’s top internal auditor; Craig Herkert, the chief executive for Wal-Mart’s operations in Latin America; and Lee Stucky, a confidant of Lee Scott’s and chief administrative officer of Wal-Mart International.”

Indeed, the story suggests that Walmart’s internal Corporate Investigations unit was understaffed and underfunded, and that top executives routinely prevented it from doing its job.

Responding to the Times story, Walmart officials said they were launching an internal probe and also have referred the case to the US Department of Justice. “‘If these allegations are true, it is not a reflection of who we are or what we stand for,’ the spokesman, David W. Tovar, said. ‘We are deeply concerned by these allegations and are working aggressively to determine what happened.’

“In the meantime, Mr. Tovar said, Wal-Mart is taking steps in Mexico to strengthen compliance with the Foreign Corrupt Practices Act. ‘We do not and will not tolerate noncompliance with F.C.P.A. anywhere or at any level of the company,’ he said.

“The Times laid out this article’s findings to Wal-Mart weeks ago. The company said it shared the findings with many of the executives named here, including Mr. Scott, now on Wal-Mart’s board, and Mr. Castro-Wright, who is retiring in July. Both men declined to comment, Mr. Tovar said.

“The Times obtained hundreds of internal company documents tracing the evolution of Wal-Mart’s 2005 Mexico investigation. The documents show Wal-Mart’s leadership immediately recognized the seriousness of the allegations. Working in secrecy, a small group of executives, including several current members of Wal-Mart’s senior management, kept close tabs on the inquiry.”

Kept close tabs. But, according to the story, they may have fallen short of what company founder Sam Walton once said about ethics: "Personal and moral integrity is one of our basic fundamentals, and it has to start with each of us." And, what the company’s official policy is on the subject: “Never cover up or ignore an ethics problem.”
KC's View:
The Times story is an extraordinary piece of journalism. I have to admit that I had some concerns about it going in, seeing as many of the allegations were being made by one man - Sergio Cicero Zapata, a former executive with Walmart’s Mexico operation. But best I can tell, the story seems to be extensively researched, with enormous documentation to back up the charges, which at least give current and past management an enormous black eye.

I’m sure there will be some who will shrug their shoulders and say that this is just reality, how business gets done in Mexico. That may be true - but it is not how business is supposed to be done. Ethics are not only supposed to guide one’s behavior when it is convenient.

Once again, it proves a truism that goes back to the Nixon administration - it’s always the cover-up that will get you.

Walmart’s current reaction seems disingenuous at best. The company seems to be saying that gosh, we didn’t know about all those horrible things that were happening, but because we are a company with a deep moral center, we’re going to get to the bottom of things now, and besides, all these charges are more than six years old. Which would be a defense except for the fact that most of the article is about how the company ignored investigations bringing them to light six years ago, and so it is little defense at all.

Frankly, it is hard to imagine how these allegations - unless, somehow, leadership in Bentonville is able to pull a rabbit out of its hat - do not lead to a dramatic shakeup in the company’s hierarchy. The charges make what former vice chairman Tom Coughlin’s actions look like petty theft.

I’m not alone in feeling this way. A number of analysts have gone on the record doubting that people like Mike Duke can continue to lead the company if these charges are true. And one has to wonder what impact the article will have on the futures of people like Craig Herkert and John Menzer, who have left Walmart but are mentioned in the article as being less than vigilant about alleged misdeeds.

I hope all the people mentioned in this article have been saving money from their stock options over the years. Because it is at least possible - and maybe even probable - that they may be spending some of that dough on defense attorneys.

Let me reiterate. You can - and should - read the entire story here.