With Walmart reporting first quarter sales up 8.6 percent and first quarter profits up 10.1 percent, many institutional investors aren’t worried about the bribery investigations.
On June 1 Walmart will hold its annual shareholder meeting, and already many institutional investors have telegraphed their intentions to vote against some or all of the members of the mega-retailer’s board because of the ongoing investigation into bribery charges at Wal-Mart de Mexico and the board’s lack of aggression in getting to the bottom of the allegations.
CalSTRS became the latest to announce its position, devoting all of its 5.3 million shares to votes against the entire Walmart board. CalSTRS joins the New York City Pension Funds, which intend to vote their combined 5.6 million shares against certain Walmart board members; and proxy advisory firms ISS, Glass Lewis and Egan Jones are recommending votes against several board members.
News reports in April detailing how the $24 million bribery scheme unfolded led CalSTRS to issue a statement concluding ‘former and current Walmart executives and board members breached their fiduciary responsibilities’ and ‘in some cases, Walmart leadership actively suppressed an internal investigation that would have brought these improper actions to light’. Such findings did not move all investors, however; many appear more motivated by profit.
With Walmart reporting first quarter sales up 8.6 percent and first quarter profits up 10.1 percent, many institutional investors aren’t worried about the bribery investigations. In recent days, the stock has recovered all of the 8.2 percent of stock value the company lost when the New York Times initially reported the scandal. Indeed, according to Reuters, Walmart shares traded at $63.95 on Tuesday, their highest level for 12 years.
With evidence of a turnaround in progress at the company, will shareholders reward the board or reprimand it for the scandal and lack of governance? What a dilemma for governance professionals.
Letting these board members stay on could be read as condoning all of the alleged malfeasance, bribery and cover-ups that allowed the company to grow during the period in question. That wouldn’t do much for the future governance of the company; on the contrary, it could be argued it would increase the likelihood of such illegal behavior being repeated.
In practice, removing board members will not be easy, especially if the family of founder Sam Walton wants to keep them on: the family owns nearly 50 percent of the stock. Moreover, many of the board members own shares and they’ve maintained unity through several years of bribery scandal. So don’t expect a major rush to governance at the shareholder meeting.
Institutional investors could save face by mustering up a majority of the public shares not held by the Walton family to vote against board members, which could be seen as a moral victory. It won’t necessarily move the company to change its governance practices, however. In fact, the company is not likely to be pressured to do anything about its governance unless the scandal costs it a tremendous amount in regulatory fines or damages the reputation of the brand so severely that it is forced to change course.
Right now, no one can predict the outcome. But if there are many more situations on boards similar to the one at Walmart, the blueprint for another wave of corruption and fraud that could severely rock the financial markets is already in place.
