Wal-Mart and FCPA

An Executive Perspective on Leadership

Analysis by Firestorm Principal Guy Higgins

Wal-Mart (WMT) Up Against the Wall

Not all events that disrupt businesses or create crises and disasters are the results of accidents or acts of nature.  Sometimes they are the results of catastrophic decisions by company leadership.  Such may be the case with the recently publicized allegations of widespread corruption in the explosive growth of Wal-Mart de Mexico.  These allegations have been detailed in the New York Times and elsewhere.

In 1977, Congress passed the Foreign Corrupt Practices Acts (FCPA).  The FCPA criminalizes, under US law, bribery and similar activities by US companies doing business in foreign countries.  Foreign countries have their own laws against such activities.  An American company engaging in such activity can, therefore, be charged under US law and the law of the nation in which the activity took place.  The FCPA provides for corporate fines and personal fines and prison sentences.  Sentences include fines of up to $25 million and up to 25 years in prison for each count.  Siemens was recently fined in excess of $1 billion.

Violation of the FCPA is a very serious matter and can be disastrous for a company, even a large multinational company.

The most straightforward way to avoid problems with FCPA is to establish a plan and proactively emphasize the importance of exercising integrity in all company business, domestic and international.  Wal-Mart has such a policy in place.

The allegations against Wal-Mart remain only allegations and press reports on April 24^th provided analysis indicating that Wal-Mart’s activities could be in keeping with the FCPA.  The question remains valid – how can any company with a policy of doing business openly and honestly find itself facing charges of having violated the Foreign Corrupt Practices Act?

Companies doing business internationally frequently find that they need the help of local experts or expediters in dealing with their nation’s bureaucracy.  In this case, “gestores” (the name given to those local area expediters in Mexico) are a feature of doing business in Mexico and most of the professional support they provide is completely legitimate.  If the allegations against Wal-Mart are true, the intense pressure to open stores in Mexico at a record pace may have resulted in a decision by Wal-Mart de Mexico to pay for expedited rezoning and building and environmental permits.

President Felipe Calderon (right) meets with Wal-Mart CEO Michael T. Duke in Cartagena, Colombia

If the Wal-Mart de Mexico payments were only for expediting approval timelines, as opposed to paying for ‘approvals’, then there would appear to be no violation of FCPA.  According to the New York Times, when activities in Mexico were reported to Wal-Mart corporate headquarters in Bentonville, Arkansas, the Wal-Mart leadership is alleged to have decided to deal with the situation through a series of, reportedly, under-resourced and ill-led investigations.

In a situation like the one outlined above, there are three leadership failures that may contribute to problems for the company involved:

1. unachievable demands in pursuit of company strategy;
2. an active or passive decision to violate local and US law to influence the host country’s bureaucracy and processes; or
3. a decision to cover up illegal activities.

Unachievable Demands

The first leadership failure, stemming from unachievable demands in pursuit of corporate goals and strategies,  should be addressed through a part of the company’s strategic planning process that considers the resources needed to successfully overcome barriers to success and to execute the strategy.  Such an emphasis on the executability of the strategy should be a part of every company’s regular strategy process.

Active and Passive Decision Making

Under business pressures, leaders can, and repeatedly have, departed from their official codes of ethics or behavior.  Such a decision can be ‘active’, as exemplified by Ken Lay’s request that the Enron Board of Directors explicitly authorize activities that violated Enron’s ethics policies; or ‘passive’, where executives incrementally move in small steps from legitimate to illegal acts under the daily exigencies of business without seriously considering the company’s ethics policy.  This leadership failure may result from a series of incremental decisions, including to use local “expediters” to gain government approvals, and potentially slipping downhill to outright bribery.  It is therefore critical that very careful controls are put in place and are well documented.

Cover-Up

The third leadership failure results from the active decision to bury the investigation and cover up the alleged illegal activities.  Such a cover-up is, itself, illegal. Once exposed, the company’s problems will only be compounded, and irreparable harm to its reputation will likely result. Dealing forthrightly with allegations of wrongdoing, no matter how painful, is the only path to redemption in the eyes of all stakeholders. In addition- tell them why it won’t happen again and give information about the controls that have been implemented to prevent such acts in the future.

How can a company avoid making such mistakes?  It’s all in the strategy.  Every company should have an overall strategy that includes two distinct components: a strategy to achieve company goals as well as a strategy to deal with disruptions, crises and disasters.  This second strategy component- often referred to as ‘the crisis management strategy’ or ‘business continuity strategy’, enables the company to recover and get back on track in the wake of a crisis or disruption.

In developing a business continuity strategy, it is not enough to simply state that it is corporate policy to do business with honesty and integrity. Such a policy needs to be reinforced with  personal commitment.  Research has shown that the simple act of signing a code of conduct significantly enhances adherence to that code. Beyond that personal commitment, company leadership should also engage in tabletop exercises involving fact patterns which trigger ethical dilemmas, as well as other disruptions and crises.  These exercises will give senior leadership the opportunity to think through ethically challenging scenarios, thereby enhancing the likelihood that ethics policies will be adhered to. People will behave the way they were trained to behave.

To borrow the byword from the US armed forces: “Train the way you’re going to fight and you’ll fight the way you trained.”