Wal-Mart shares sink on Mexico bribery scandal

Are investors overreacting to bad headlines?

By Jonathan Berr Apr 23, 2012 12:23PM
Walmart Copyright symbol Bloomberg/Getty ImagesShares of Wal-Mart Stores (WMT), the world's largest retailer, fell  Monday in response to a New York Times report alleging the company covered up a whistle-blower's complaints of widespread bribery at its Mexican subsidiary.

The stock was down almost 5% by noon. The stock, which had gained 4.5% this year, will no doubt fall further as more information emerges over the next few days. Though the Times' story has damaged Wal-Mart's reputation, investors shouldn't panic.

For one thing, the money involved -- $24 million, according to the Times -- seems small as Foreign Corrupt Practices Act (FCPA) cases go. For instance, Siemens AG (SI) was fined $800 million in 2008 after investigators uncovered evidence that the German conglomerate paid about $1.4 billion in bribes to foreign governments over a decade. 

That was the largest fine of its kind ever paid. A year later, Kellogg Brown & Root (KBR) and its former corporate parent Halliburton (HAL) pleaded guilty to charges of paying $182 million in bribes to officials in Nigeria. Kellogg Brown & Root agreed to a $402 million fine.

And BAE Systems (BA.L), the U.K. defense contractor, was fined $400 million after investigators found the company made "false statements about its Foreign Corrupt Practices Act compliance program."

If the money involved in the Wal-Mart case proves to be more than reported so far, the company, which has more than $6 billion in cash on its books, could still write a check to the government to pay a fine without breaking a sweat.

Unfortunately, however, it will take more than just money to repair Wal-Mart's tattered reputation.

Probably the most disturbing part of the Times story lies in the allegations involving current Wal-Mart top executives and board members. According to the report, current CEO Mike Duke, who headed Wal-Mart International at the time of the payoffs, did nothing to stop them. Former CEO and current board member H. Lee Scott allegedly "rebuked internal investigators for being overly aggressive." And vice chairman Eduardo Castro-Wright, who at one point was the head of Wal-Mart de Mexico, was described by the Times as the "driving force behind systemic bribery in Mexico." 

Duke could argue that he didn't remember the email he received several years ago from a lawyer saying, "You'll want to read this," referring to detailed allegations of rampant bribery from a former Wal-Mart executive. He is a busy man who reads lots of things. Scott could make a similar argument. Castro-Wright may claim the payoffs were the work of rogue employees going out on their own.

Even if they are in the clear legally, the question of whether the executives met their moral responsibilities is another issue. Wal-Mart faces the dilemma of proving to its more than 2 million workers around the world that everyone has to follow the same rules. The company has said it will "not tolerate noncompliance with FCPA anywhere or at any level of the company."

If Duke, Scott and Castro-Wright are forced to leave Wal-Mart -- a big if -- the retailer will have little difficulty replacing them. The average U.S. Wal-Mart shopper probably could not care less about whether the company bribes foreign governments.

The only winners in this scandal are the shareholders who are buying Wal-Mart stock at a discount.

Jonathan Berr is long Wal-Mart. Follow  him on Twitter @jdberr.

Tags: HALSIWMT
13Comments
Apr 23, 2012 12:48PM
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The consumer doesn't care if Wal Mart bribes a government. Oh yes I do... Bribes are unacceptable actions for a business to engage in'
Apr 23, 2012 1:49PM
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I laughed at the 'in-depth reporting' on Walmart.

 

Bribery at their Mexican Subsidiary.  Oh for shame!  Wait....it is Mexico!  You HAVE to bribe people to do business there.  Be it the cartels to not burn it down, or the police so people don't just steal all your stuff.

Apr 23, 2012 1:24PM
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.If Duke, Scott and Castro-Wright are forced to leave Wal-Mart -- a big if -- the retailer will have little difficulty replacing them. The average U.S. Wal-Mart shopper probably could not care less about whether the company bribes foreign governments.

The only winners in this scandal are the shareholders who are buying Wal-Mart stock at a discount.

Jonathan Berr is long Wal-Mart. Follow  him on Twitter @jdberr

Wow Jonathan - You are showing your true colors! You should be ashamed of yourself! You might want to consider reviewing your personal morals because right now you are showing that you don't have any!
Apr 23, 2012 1:33PM
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If you want to be a part of the Mexican market, be prepared to be the lowest bidder and make sure you've "built in" at leat three different tiers of bribe money.  Been there and done that and if  Wal-Mart truly believes the average U.S. Wal-Mart shopper could not care less about whether the company bribes foreign governments, then Wal-Mart has lost touch with reality. 
Apr 23, 2012 6:34PM
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How can the words, "Mexico, "Bribery" and "Scandal" appear in the same headline? Scandal would indicate that something unusual has occured, while bribery is a way of life in Mexico. No business or individual functions in Mexico without some bribe taking place at some point. The more you make the more bribes you are expected to pay. It would only be a scandal if bribes weren't required and paid.

 

Apr 23, 2012 3:24PM
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So what your saying is corruption pays off, right?
Apr 23, 2012 2:04PM
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Bribery is a way of life in Mexico.

How much does our Government spend on BRIBERY to foreign countries? Billions and Billions! Shouldn't they be indicted for bribery?

Apr 23, 2012 1:32PM
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When a company is this big, things like this happen. Not acceptable but they happen. Hopefully all will be found out and any wrong doing will be punished.
Apr 23, 2012 3:29PM
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Oh, yeah this Wal-Mart customer is concerned about pay off to anyone. No I didn't but any Wal-Mart Stocks!
Apr 25, 2012 1:00PM
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Did you read the dossier on Lev Khasis?
Apr 23, 2012 2:13PM
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This is NOT a scandal, for cripe's sake! Good grief. The Union Thugs have Obama by the gonads. They have a death warrant for Wal-Mart, because they can't get in there and ruin the company. Use a little common sense. Wal-Mart is just fine.
Apr 23, 2012 2:03PM
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WHAT WAS THE BRIBERY , ALL ABOUT EXPLAIN
Apr 23, 2012 1:21PM
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If the jobs were kept in the USA, the only bribes paid would go to the GOP.
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