case study wk 2

412 Case 3 Big-Box Retailer Walmart Manages Big Responsibility

This case was prepared by Kelsey Reddick, Jennifer Sawayda, Sarah Sawayda, and Michelle Urban under the direction of O.C. Ferrell and Linda Ferrell, © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material and the Walmart website.

Introduction Walmart is an icon of American business. With annual revenue of more than $514 billion and more than 2.2 mil- lion employees, the world’s largest retailer must carefully manage many stakeholder relationships. The company’s stated mission is to help people save money and live better. Despite past controversies, Walmart has attempted to restore their image with an emphasis on diversity, charitable giving, support for nutrition, and sustainability. The company, along with the Walmart Foundation, has donated more than $1.4 billion in cash and in-kind contributions. Walmart often tops the list of U.S. donors to charities. In 2019, for example, the company spent $42 million on charitable grants to help with community projects and organizations. Walmart also makes use of in-store cause marketing, such as the “Fight Hunger. Spark Change.” campaign, which has successfully given millions of dollars to Americans struggling with hunger. However, issues such as bribery accusations in Mexico, Brazil, China, and India have created significant ethics and compliance challenges that Walmart is addressing in their quest to become a socially responsible retailer.

This analysis begins by briefly examining the growth of Walmart. Next, it discusses the company’s various relationships with stakeholders, including competitors, suppliers, and employees. The ethical issues concerning these stakeholders include accusations of discrimination, leadership misconduct, bribery, and unsafe working conditions. We discuss how Walmart has dealt with these concerns, as well as some of the company’s endeavors in sustainability and social responsibility. The analysis con- cludes by examining what Walmart is doing to increase their competitive advantage and repair their reputation.

History: The Growth of Walmart The story of Walmart begins in 1962 when founder Sam Walton opened the first Walmart Discount Store in Rogers, Arkansas. Although their growth was initially slow, the company now serves almost 265 million customers weekly at more than 10,000 locations in 27 countries. Much of Walmart’s success can be attributed to the company’s founder. A shrewd businessman, Walton believed in customer satisfaction and hard work. He convinced many of his associates to abide by the “10- foot rule,” whereby employees pledged that whenever a customer came within 10 feet of them, they would look

the customer in the eye, greet him or her, and ask if he or she needed assistance. Walton’s famous mantra, known as the “sundown rule,” was: “Why put off until tomor- row what you can do today?” Due to this staunch work ethic and dedication to customer care, Walmart claimed early on that a formal ethics program was unnecessary because the company had Mr. Walton’s ethics to follow.

In 2002, Walmart officially became the largest gro- cery chain, topping the Fortune 500 list. Fortune named Walmart the “most admired company in America” in 2003 and 2004. Since 2002, Walmart has maintained their position as the largest retailer in the world. In addition to being the largest, the company is the only brick-and-mortar store of the three top retailers. Amazon and Alibaba are the second and third largest retailers, respectively, and are predominantly online stores.

While customers still flock to the physical Walmart locations to buy groceries, clothing, and a variety of household items, establishing a greater online presence to compete with digital retailers has been a major goal for Walmart over the past several years. Walmart and Amazon compete not only on online shopping but also on same- day delivery. To become more competitive with the online retailers, Walmart bought Jet.com in 2016. Walmart is using Jet to expanded grocery delivery into New York City, the company’s first venture in the city. In addition to Jet, Walmart also has their home site, Walmart.com. Both websites have achieved some success, particularly with online grocery shopping. Walmart has partnered with Microsoft to boost their digital transformation, using a range of Microsoft cloud solutions and collaborating on innovative projects. However, Walmart’s current financial losses from digital investments are estimated to be as high as $1 billion. Walmart has achieved so much success as a brick-and-mortar retail chain that it will take time to adjust to the increasingly digital shopping experience that consumers have come to expect. To prevent future losses and continue to hold the number one spot in global retail, Walmart will have to make sound business decisions regarding their online retail.

Competitive Stakeholders Possibly the greatest complaint against Walmart is that they put other companies out of business. With their low prices, Walmart makes it harder for local stores to compete. Walmart is often accused of being responsible for the downward pressure on wages and benefits in

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towns where the company locates. Some businesses have filed lawsuits against Walmart, claiming the company uses unfair predatory pricing to put competing stores out of business. Walmart has countered by defending their pric- ing, asserting that they are competing fairly and that the company’s purpose is to provide quality, low-cost products to the average consumer. Yet, while Walmart has saved consumers millions of dollars and is a popular shopping spot for many, there is no denying that many competing stores go out of business once Walmart comes to town.

To compete against the retail giant, other stores must reduce wages. Studies show that overall payroll wages, including Walmart wages, decline by 5 percent after Walmart enters a new market. The impact of Walmart moving into the neighborhood has been coined the “Walmart Effect,” a negative connotation that represents all the hardship incurred on smaller businesses. As a result, some activist groups and citizens have refused to allow Walmart to take up residence in their areas. This, in turn, brings up another social responsibility issue: What methods of protest may stakeholders reasonably use, and how should Walmart respond to such actions?

While it is acceptable for stakeholder activists to protest the building of a Walmart store in their area, other actions may be questionable, especially when the government gets involved. When Walmart announced plans to open stores in Washington, D.C., for instance, a chairman of the D.C. City Council introduced a law that required non-unionized retail companies with more than $1 billion in total sales and stores that occupy more than 75,000 square feet to pay their employees a minimum of $12.50 per hour—in contrast to the city’s $8.25 an hour minimum wage at the time. The terms of the law made it essentially apply only to Walmart and a few other large chains such as Home Depot and Costco. While supporters of the law argued that it is difficult to live on a wage of $8.25 an hour, critics stated that the proposal gave employees at large retailers an unjustified benefit over those working comparable jobs at small retailers. Perhaps the most scathing criticism was that Walmart and other big-box retailers were being unfairly targeted by a governmental entity. Walmart also responded directly, threatening to cancel their expansion into D.C. if the law passed and emphasizing the economic and development benefits the city would lose out on. The D.C. City Council eventually passed the law, but it was vetoed by the city mayor, and there are now several Walmart stores in D.C. As with most issues, determining the most socially responsible decision that benefits the most stakeholders is a complex issue not easily resolved.

Relationships with Suppliers Walmart achieves their “everyday low prices” (also called EDLPs) by streamlining the company. Well known for operational excellence in their ability to handle, move, and track merchandise, Walmart expects suppliers to

continually improve their systems as well. Walmart typically works with suppliers to reduce packaging and shipping costs, which lowers prices for consumers. The company employs thousands of Walmart trucks to go to the suppliers rather than the suppliers coming to the store, cutting down on cost. Walmart takes supply chain management very seriously, as evidenced by their constant evaluation of how suppliers’ products are doing in stores.

Walmart holds suppliers to high standards, especially when it comes to the delivery of products customers order online. In 2019, Walmart revamped their rules to require suppliers to obtain an 87 percent success rate of delivering full trucks of products over two days. For partially full trucks, the success rate of on-time delivery went from 50 percent to 70 percent in 2019, indicating the more stringent standards for suppliers are working.

Since 2009 the company has worked with The Sustainability Consortium, an association of businesses that helps its members achieve sustainability goals, to develop a measurement and reporting system known as the Walmart Sustainability Index (discussed in further detail later in this case). Among their many goals, Walmart desires to use the Sustainability Index to increase the sustainability of their products and create a more efficient, sustainable supply chain. In 2008, Walmart introduced their “Global Responsible Sourcing Initiative,” a list providing details of the policies and requirements included in new supplier agreements. In 2017, Walmart and the Sustainability Consortium cre- ated Project Gigaton, a sustainability effort to eliminate 1 billion tons of greenhouse gas from Walmart’s global supply chain before 2030. With the help of vendors, Walmart has made great progress toward their goal. Suppliers also receive better ratings from Walmart for providing environmentally-friendly products, an incen- tive that has paid off so far.

Some critics of Walmart’s approach note that pressure to achieve their standards will shift more of the cost burden onto suppliers. When a supplier does not meet Walmart’s demands, the company may cease to carry that supplier’s product or, often, will be able to find another willing supplier of the product at the desired price.

Walmart’s power over their suppliers stems from their size and the volume of products they require. Many companies depend on Walmart for much of their business. This type of relationship allows Walmart to significantly influence terms with their vendors. For example, Walmart generally refuses to sign long-term supply contracts, giv- ing them the power to easily and quickly change suppliers at their own discretion. Despite this, suppliers will invest significantly in long-term strategic and business com- mitments to meet Walmart demands, even without any guarantee that Walmart will continue to buy from them.

There are corresponding benefits to being a Walmart supplier; by having to become more efficient and streamlined for Walmart, companies develop competitive advantages and are able to serve their other customers

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better as well. For example, as Walmart worked with IBM to develop a blockchain solution to food safety, Walmart began requiring all suppliers of green leafy vegetables to use the blockchain database. Though blockchain technology makes Walmart’s supply chain more traceable and transparent, this requirement is a financial and technical burden for many companies. However, as these companies adapt with the help of IBM’s onboarding system, they will be better prepared to use blockchain technology in their own businesses. However, many others find the amount of power Walmart wields to be disconcerting. Suppliers in Mexico have said that they have been penalized by Walmart for working with Amazon, Walmart’s biggest rival. While Walmart denied explicitly telling suppliers to stop partnering with Amazon, there are suspicions that the retailer used coercion to win suppliers’ loyalty from Amazon.

The constant drive by Walmart for lower prices can negatively affect suppliers. Many have been forced to move production from the United States to less expensive locations in Asia. In fact, Walmart is considered to have been one of the major driving forces behind the “offshor- ing” trend of the past several decades. Companies such as Master Lock, Fruit of the Loom, and Levi’s, as well as many other Walmart suppliers, moved production overseas at the expense of U.S. jobs. The challenges and ethical issues associated with managing a vast network of overseas suppliers will be discussed later in this case.

This offshoring trend was not founder Sam Walton’s original intention. In the 1980s, after learning his stores were putting other American companies out of business, Walton started his “Buy American” campaign. In 2013, Walmart launched a “Made in America” initiative, pledging to increase the number of U.S.-made goods they buy by $50 billion over 10 years and developing agreements with many suppliers to move their produc- tion back to the states. Critics argue that Walmart is merely putting a public relations spin on the fact that rising wages in Asian countries and other international economic changes have actually made local production more cost-efficient than outsourcing for many industries. They also point out that $50 billion is a veritable “drop in the bucket” considering Walmart’s size. Still, the symbolic effect of Walmart throwing their considerable influence behind “Made in America” is likely to spur many suppliers to freshly consider or speed up plans to bring production back to the United States.

Ethical Issues Involving Employee Stakeholders Much of the Walmart controversy over the years has focused on the way the company treats their employees or “associates” as Walmart refers to them. Although Walmart is the largest retail employer in the world, they have been roundly criticized for paying low wages and

offering minimal benefits. For example, Walmart has been accused of failing to provide health insurance for more than 60 percent of their employees.

Employee Benefits A 2014 Walmart policy eliminated healthcare coverage for new hires working less than 30 hours a week. Walmart also stated that they reserve the right to cut healthcare coverage of workers whose workweek falls below 30 hours. Some analysts claim that Walmart might be attempting to shift the burden of healthcare coverage onto the federal government, as some employ- ees make so little that they qualify for Medicaid under the Affordable Care Act. It is important to note that Walmart is not alone in this practice; many firms are moving more of their workforces to part time, and cutting benefits to part-time workers, to avoid having to pay healthcare costs. However, as such a large employer, Walmart’s actions are expected to have more of a ripple effect on the economy.

Another criticism levied against Walmart is that they are decreasing their workforce. For example, Walmart is testing staffing fewer midlevel, in-store managers to improve labor costs, increase wages, and attract higher quality employees. Walmart has insisted this is not a cost-saving measure but rather another way to compete with online retailers. Arguably, with fewer employees, it is harder to provide quality customer service. In the 2018 American Customer Satisfaction Index, Walmart was one of the lowest among department and discount stores, ranked only above Sears. Walmart claims the dissatisfaction expressed by some customers is not reflective of the shopping experience of customers as a whole. Additionally, many fear robots and artificial intel- ligence (AI) will eliminate jobs. Walmart has invested in robots to clean the store and scan inventory, among other functions. Despite this move toward robotics, Walmart says their employees are the key to their success and that they will work to re-skill associates to work alongside new technology.

Though the company has received criticism over their employee wages, Walmart pays greater than minimum wage in 47 states, and 75 percent of their managers are promoted from within. In addition to fair wages, Walmart incentivizes employees to stay with the company longer by rewarding them based on years of employment. Bonuses range from $200 to $1,000 depending on how long the employee has worked for Walmart. Also, Walmart extended their maternity and parental leave to a combined 16 weeks for full-time hourly workers.

Walmart’s Stance on Unions Some critics believe Walmart workers’ benefits could improve if workers unionized. Unions have been discouraged since Walmart’s foundation; Sam Walton

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believed they were a divisive force and might render the company uncompetitive. Walmart maintains that they are not against unions in general, but they see no need for unions to come between workers and managers. The company says they support an “open-door policy” in which associates can bring problems to managers without resorting to third parties. Walmart associates have voted against unions in the past.

Although the company’s official position is that they are not opposed to unions, Walmart often seems to fight against them. Critics claim that when the word “union” surfaces at a Walmart location, the top dogs in Bentonville are called in. For example, in 2000, seven of ten Walmart butchers in Jacksonville, Texas, voted to join the United Food Workers Union. Walmart responded by announcing that they would only sell precut meat in their Supercenters, getting rid of their meat-cutting departments entirely. In 2004, employees at a Canada Walmart location voted to unionize; six months later, Walmart closed the store. In 2014, two internal Walmart PowerPoint presentations were leaked. The slides provided reasons why unions would nega- tively impact associates and directed managers to call the Labor Relations Hotline if they spot warning signs of union activity. Although Walmart offers justifications for actions such as these, many see the company as aggres- sively working to prevent unionization in their stores. The U.S. National Labor Relations Board (NLRB) has cited Walmart on multiple occasions for violating labor laws. Past employees of Walmart have said that watching anti-union videos is part of the training.

However, Walmart’s stance against unions has not always held up to the practical realities of doing business in some foreign countries. In China, for example, Walmart found it necessary to accept a union in order to grow. Only one union is legally permitted to operate in China, the All-China Federation of Trade Unions (ACFTU), which is run by the ruling Communist Party. The Chinese government promotes the ACFTU (although the union has been criticized as pro-business and not necessarily looking out for the best interests of workers) and especially seeks to have foreign companies unionized. The Chinese Labor Federation pushed Walmart to allow employees to unionize in 2006. Walmart initially resisted, and although they eventually complied, critics claimed the company then began making unionization progressively more difficult in practice for their Chinese workers. The ACFTU was able to establish union branches at five separate China Walmart locations. Walmart reacted by stating they would not renew the contracts of unionized workers. However, the pressure mounted, and later that year Walmart signed a memorandum with the ACFTU, allowing unions in stores. Some analysts believe Walmart fought so hard against unionization in China, despite the clear unlikelihood of prevailing against the Chinese government itself, because they feared workers in other countries would use the precedent to redouble their

own unionization demands. Since then, Walmart has permitted or negotiated with unions in several other countries, including Brazil, Chile, Mexico, Argentina, the United Kingdom, and South Africa. When workers in Mexico threatened to strike in 2019, Walmart reached a deal with the union Revolutionary Confederation of Laborers and Farmworkers to improve wages by an average of 5.5 percent.

Workplace Conditions and Discrimination Walmart remains the largest nongovernment employer in the United States, Mexico, and Canada. The retailer provides jobs to millions of people and has been a main- stay of Fortune’s “Most Admired Companies” list since the start of the twenty-first century. However, in 2019, a class-action lawsuit involving nearly 100 women was filed against the company for gender pay discrimination. The women say they were either paid less than their male counterparts or they were pushed into lower paying posi- tions. Along with gender discrimination, Walmart has been accused of disability discrimination. For example, in 2018, the Equal Employment Opportunity Commission (EEOC) sued Walmart when the retailer would not hire an employment candidate based on the fact that she was an amputee. Despite the disability, the candidate was able to perform the job, and, therefore, the EEOC sued Walmart for violation of Americans with Disability Act (ADA) standards. In Illinois, there was suspicion of racial discrimination in one of Walmart’s warehouses. More than 100 black workers were refused employment when Walmart took command of a warehouse, which had been previously run by an outside company, and ran background checks on the existing employees, resulting in legal action from the workers.

In 2010, dissatisfied Walmart employees started the nonprofit United for Respect. Although not a labor union, United for Respect receives much of its funding from the United Food and Commercial Workers International Union (UFCW), which has been trying to unionize U.S. Walmart employees for years. Eventually realizing it needed a different approach, UFCW backed the idea of a non-union advocacy group and hired a market research company to develop United for Respect’s message and activism strategy. Its demands include lowering the number of hours needed for part-time workers to qualify for benefits, removing caps on the wages of some long- term workers, and ending the practice of using work- scheduling systems to decrease hours for employees so they will not qualify for benefits. In 2011, 100 United for Respect members traveled to Walmart’s headquarters and presented a 12-point declaration of their demands to the company’s senior vice president for global labor relations. Since then, United for Respect has arranged a variety of protests and pickets. It has especially targeted the busy holiday season, organizing demonstrations and walkouts at many Walmart stores on every Black Friday

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since 2012. In 2019, Walmart responded to a shooting at a location in El Paso, Texas, by removing violent video game displays. United for Respect released a statement that the decision was “irresponsible and weak.”

Walmart’s position is that United for Respect is a small, fringe movement that does not represent the views of the average associate, most of whom are satisfied with their jobs. The company has repeatedly complained to the National Labor Relations Board, claiming, among other things, that United for Respect uses illegal methods and that it is actually a union in disguise. Walmart has also accused the UFCW of anti-labor practices and filed at least one lawsuit against the UFCW and others who protested around their stores for illegal trespassing and disrupting customers. Walmart may have made a tactical error by choosing to acknowledge United for Respect as a threat. The number of United for Respect members is very small compared to the number of U.S. Walmart employees as a whole, and not as many Walmart employees have participated in protests as anticipated. Although Walmart claims this demonstrates that the movement is not as popular as it tries to appear, the company may have unintentionally granted it legitimacy and a large amount of free publicity by responding so directly and forcefully.

Ethical Leadership Issues Walmart has not been immune from scandal at the top. In March 2005, board vice chairman Thomas Coughlin was forced to resign because he stole as much as $500,000 from Walmart in the form of bogus expenses, reimburse- ments, and the unauthorized use of gift cards. Coughlin, a protégé and hunting buddy of Sam Walton, was a legend at Walmart. 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. Coughlin secretly used Walmart funds to pay for a range of personal expenses, including hunting vacations, a $2,590 dog 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.

Confidence in Walmart’s governance suffered another serious blow in 2012 when a bribery scandal in Walmart’s Mexico branch was uncovered that directly implicated much of the company’s top management (the scandal is explored in detail later in this case). That same year, a sig- nificant percentage of Walmart’s non-family shareholders voted against the reelection of then-CEO Mike Duke to the board. They also voted against the reelection of other board members, including former CEO Lee Scott and

board chairman Robson Walton—Sam Walton’s eldest son. While these board members still received enough support to be reelected, the votes signaled serious investor disappointment and lack of confidence in the leadership for not preventing the misconduct. Since the scandal, Walmart has invested heavily in demonstrating a renewed commitment toward ensuring the company adheres to ethics and compliance standards to reassure investors, governmental investigators, and the public at large. Because of past scandals, Walmart’s board of directors is undoubtedly under close scrutiny. The company has filled their board with reputable leaders such as Sarah Friar, CEO of Nextdoor, Carla A. Harris, senior client advisor at Morgan Stanley, and Timothy P. Flynn, retired chairman and CEO of KPMG International.

Bribery Scandal The biggest blow to Walmart’s reputation in recent years has been the uncovering of a large-scale bribery scandal within their Mexican arm, Walmex. Walmex executives allegedly paid millions in bribes to obtain licensing and zoning permits for store locations. The Mexican approval process for zoning licenses often takes longer than it would in the United States; therefore, paying bribes to speed up the process is advantageous for Walmart but places competing retailers who do not offer bribes at a disadvantage. Walmex apparently even used bribes to have zoning maps changed or certain areas re-zoned in order to build stores in more ideal locations, as well as to overcome environmental or other concerns. The Walmex 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 sub- stantial fines and penalties against firms found guilty of bribery. It is not unusual for large firms with operations in many countries to face bribery allegations at some point considering the size of their operations and the diversity of cultures of the locations in which they do business. However, Walmart’s bribery scandal in Mexico was exacerbated by two major considerations. First, the evidence indicated that the top executives at Walmart, not just Walmex, knew about the bribery and turned a blind eye to it. Second, the evidence gave weight to concerns that bribery by Walmart in foreign countries was widespread and acceptable in the company’s culture.

Walmart first reported to the U.S. Justice Department that they were launching an internal investigation of sus- pected bribery at their Mexico stores in December 2011. However, that report to the U.S. Justice Department was not submitted until after Walmart learned The New York Times was conducting an independent investigation. The New York Times’ final report revealed that top leaders at Walmart had been alerted to the possibility of bribery as early as 2005. That year, Walmart received an email warning of the bribery from a former Walmex executive

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who claimed he had been involved. The email included cold, hard facts, such as names, dates, bribery amounts, and other information. Walmart sent investigators to Mexico City, who corroborated much of the informant’s allegations and discovered evidence that approximately $24 million in bribes had been paid to public officials to get necessary building permits. Walmex’s top executives, including the subsidiary’s CEO and general counsel, were implicated in the scheme. However, when the investiga- tors 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’s reputation, 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 their explosive growth in Mexico as a shining success story. Admitting that this growth had been significantly fueled by bribery would look very bad for the company.

The scandal’s impact on Walmart was significant. Shortly after the New York Times’ investigation was published, the stock lost $1 billion in value, and share- holders began filing lawsuits against the company and the company’s executives. In addition, Walmart had to pay for their own internal probe, not to mention hire a number of lawyers to represent the company and the company’s top management as well as advisors and consultants to help restructure their internal ethics and compliance systems. Walmart spent approximately $900 million in legal fees and investigations, plus the company will pay millions in fines. Walmart’s internal probe revealed the likelihood of bribery going on in other countries as well. The company, therefore, expanded the investigation to include their operations in China, India, and Brazil. For example, at their Indian branch, Walmart suspended some key execu- tives who were believed to have engaged in bribery. This investigation halted Walmart’s expansion in the country. Indian authorities began investigating Walmart and their joint venture partner at the time, Bharti Enterprises, to determine if they attempted to circumvent Indian laws on foreign investment. Foreign retailers like Walmart are allowed to partner with local businesses and open stores in the country so long as they do not own a majority stake in the venture (less than 51 percent ownership). It is alleged that Walmart offered Bharti an interest-free $100 million loan that would later enable them to gain a majority stake in the company. Both companies deny they tried to violate foreign investment rules and have since broken off their partnership. Such accusations not only have serious consequences for Walmart but also for other foreign retailers in India. Many Indian political officials were against allowing foreign retailers to open stores in the country at all. This alleged misconduct has added fuel for their opposition. Hence, the operation of other foreign retailers may be threatened. This situation demonstrates how the misconduct of one or two companies can impact entire industries.

In Brazil, permits were obtained illegally, and land was obtained illegally in China by bribing landlords and officials. An unidentified individual in Brazil charged about $400,000 to facilitate the process of getting build- ing permits. Walmart took minimal action to address employee tips about bribery occurring in new stores. The Securities and Exchange Commission (SEC) charged the retailer with “…[allowing] subsidiaries in Brazil, China, India, and Mexico to employ third-party intermediaries who made payments to foreign government officials without reasonable assurances that they complied with the FCPA [(Foreign Corruption Practices Act)]”.

In the wake of the scandals, many Walmart share- holders demanded, among other things, disciplinary action and compensation cuts against those involved. Shareholders are also demanding that the leaders of Walmart continue to improve transparency and compli- ance standards. As part of their compliance overhaul, Walmart announced they would begin tying some executive compensation to compliance efforts.

Through federal prosecutors and regulators initially sought $600 million in fines, Walmart will pay just $282 million to settle the charges. In addition, Walmart will be monitored and subject to compliance guidelines of both the Department of Justice and the SEC for the next couple of years. One major reason Walmart may have not faced higher fines and more serious consequences is because of the company’s attempts to reform, spending nearly $1 billion to improve prior to the settlement.

Safety Issues Using overseas suppliers has also caused trouble for Walmart. Many of their suppliers, both inside the United States and in other countries, employ subcontractors to manufacture certain products. This makes the supply chain complex, and retailers like Walmart are forced to exert more oversight to ensure their suppliers meet compli- ance standards. Citing safety concerns or telling a supplier not to work with a certain subcontractor is not enough without enforcement. Walmart learned this the hard way after a Bangladeshi factory fire killed 112 workers.

The factory, Tazreen Fashions Ltd., had several assembly lines devoted to Walmart apparel because at least one of Walmart’s suppliers used the factory to subcontract work for Walmart. However, Walmart claims the supplier was unauthorized to do so, as Walmart had removed Tazreen Fashions from their list of approved factories months before the incident. Walmart subsequently terminated their relationship with that supplier. Previous inspections at Tazreen showed many fire hazards, including blocked stairwells and a lack of firefighting equipment. The fire burned down the building and killed 112 employees, some of whom jumped to their deaths.

Many were outraged that Walmart did not do a better job of ensuring the safety of factory workers that

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produce merchandise for them. While Walmart does have auditing and approval mechanisms for subcon- tracted facilities, third parties usually perform the audits. Suppliers often pay for the inspection processes as well. This limits the amount of information that actually gets to the parent company. Critics have also accused Walmart of advocating against equipping factories with better fire protection due to the costs involved. Walmart claims they take fire hazards and worker safety seriously.

Walmart has also faced criticism on the home front, with safety violations being a common complaint. Workers at warehouses in the United States that do business with Walmart have complained about harsh working conditions and violations of labor laws. For example, in 2012, a group of delivery packing workers at a warehouse in Mira Loma, California, went on strike and walked for six days to Los Angeles to draw attention to allegedly miserable and unsafe working conditions and to deliver a petition to the Los Angeles Walmart office. The situation is complex because such warehouse workers are hired and employed by staffing agencies or third-party contractors, making it harder for Walmart to assess working conditions. Walmart has argued that these third-party contractors are responsible for work- ing conditions. Yet, as the firm hiring the contractors, Walmart has the responsibility and generally the power to ensure their contractors and subcontractors obey proper labor laws.

The Bangladeshi fire and ongoing worker complaints have increased the pressure on Walmart to improve their oversight and auditing mechanisms. Previously, Walmart employed a three-strike policy for suppliers and subcontractors who violated their ethical standards. However, after the Bangladeshi fire, Walmart changed their policy to adopt a zero-tolerance approach in which Walmart exerts the right to terminate relationships with suppliers immediately after discovering a violation. Walmart also requires all suppliers to have an independent agency assess the electrical and building safety conditions of their factories. To address domestic complaints, Walmart applies the same monitoring system to U.S. suppliers. Walmart, furthermore, has begun sending independent auditors to make unannounced visits to U.S. third-party-operated warehouses to check whether they adhere to the firm’s ethical standards. Walmart hopes these stricter measures improve compliance by their suppliers as well as reiterate the company’s commitment to ethical sourcing practices. Yet these measures have failed to appease some critics who believe that Walmart cannot truly be held accountable until the results of their factory audits are made public.

The controversy of worker safety in Bangladesh intensified after yet another factory collapsed in 2013, killing 1,127 workers. The tragedy caused Walmart and other retailers to consider new safety plans. A group of European retailers, worker safety groups, and labor unions came together to develop and sign a five-year

legally binding workplace safety agreement to improve worker safety in Bangladesh. The agreement required retailers to pay suppliers more so that factories could afford to make safety improvements, and it also pushed for the development of a standardized worker complaint and risk reporting process. Walmart declined to sign the agreement, however, and instead devised their own safety plan. The plan primarily involved hiring an independent auditor to inspect the more than 200 Bangladeshi facto- ries that produced goods for Walmart and publishing the results publicly, including which factories failed the audit and were no longer allowed to produce for Walmart. The plan also required factories that did not fail but still had some unsafe conditions to improve safety standards. Critics argue that Walmart’s independent plan was insufficient and much less ambitious than the workplace safety agreement they declined to join. A recent survey revealed more than 36 percent of Walmart employees believe Walmart should improve working conditions.

Another concern that has been raised is gun safety. In 2019, there were multiple shootings in Walmart stores that resulted in more than 24 deaths. CEO Doug McMillon addressed Walmart workers by expressing his condolences at the loss of life, highlighting heroic acts during the shootings, and briefly outlining steps that would be taken, such as providing counseling to employees who need it. While Walmart has engaged employees in computer-based active shooter trainings since 2015, employees have expressed fears about their safety. Walmart’s current security efforts are intended to prevent shoplifting, not shootings. Some have even pro- tested Walmart selling guns due to the belief that selling guns is adding to the gun violence in the country. Walmart agreed to limit sales of guns, including discontinuing select types of rifle ammunition. Despite this change, the company may continue to face pressure from concerned employees, as well as the larger public, for stricter policies.

Responding to Stakeholder Concerns Walmart has suffered significantly from scandals over- seas. Consumer interest, customer loyalty, and other factors important to a brand’s value have diminished for Walmart’s brand among college-educated adults. The brand has struggled in their battle to gain e-commerce business due to increased competition from online retailers like Amazon. Plus, Walmart has saturated many markets at this point. As discussed, being a large multi- national corporation brings many global risks, including bribery and supplier issues. In response to the allegations of bribery, Walmart quietly replaced many top-level executives in both Mexico and the United States.

At a pep rally held in May 2012, former CEO Mike Duke emphasized integrity in operations and employee behavior at all levels and rewarded 11 employees for “leading with integrity.” In highlighting the actions of these select employees, he reiterated the firm’s ethics

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hotline and open-door policy. He assured employees and other stakeholders that the company was cooperating with the U.S. Department of Justice in order to get to the bottom of the bribery allegations. Mike Duke acknowl- edged that there were ethical issues in some Walmart stores and stated that he planned to slow expansion so the company could focus on improving these issues.

As a form of damage control, Walmart ran an advertising campaign to frame the company as an “American success story.” After market research revealed Walmart’s brand image had lost traction among college- educated adults, Walmart developed a multi-million- dollar advertising campaign called “The Real Walmart.” The advertisements featured customers, truck drivers, and employees sharing their happy experiences with the company. Walmart particularly wanted to target opinion leaders who could then convince others of the company’s value and positive brand image. The ads were first released during the Kentucky Derby and were also featured on Sunday news shows. This advertising campaign was similar to those released by other companies attempting to restore their image, such as Toyota during their recall crisis and BP after the Deepwater Horizon disaster.

Sustainability Leadership Among Walmart’s long-term sustainability goals are to be supplied entirely by renewable energy, create no waste, and sell products that sustain people and the environment. In the short term, Walmart aims to be powered by 50 percent renewable energy, reduce emissions by 18 percent, and achieve zero waste to landfill in the United States, U.K., Japan, and Canada all by 2025. In order to achieve these ambitious goals, Walmart has built relationships with influential people in supplier companies, government, NGOs, and academia. Together they have organized Walmart’s environmental goals into 14 Sustainable Value Networks (SVN), from “Global Greenhouse Gas Strategy” to “Packaging” to “Forest & Paper,” which allow the company to efficiently integrate, implement, and evaluate their sustainability efforts. This approach has served them well. By 2012, Walmart had 115 onsite rooftop solar installations in seven countries providing 71 million annual kilowatt hours of electricity. They had completed 26 fuel cell installations in the United States, providing 65 million kilowatt hours of annual electricity, and were also testing micro-wind and solar water heating projects in various locations. Walmart’s company value of everyday low costs translates to their renewable energy endeavors through the signing of long- term contracts with renewable energy providers. These contracts finance utility-scale projects in renewable sources, allowing these options to be offered at lower cost not only to Walmart but also to other clients of these providers.

By late 2014, Walmart had well over 335 renewable energy projects in operation or under development,

including micro-wind installations in parking lots and biodiesel generator sets. Their solar installations provided 105 megawatts of solar capacity, the most of any company in the world by far and greater than the total solar capac- ity of at least 35 U.S. states. Walmart efficiently manages heating and cooling energy consumption by centrally controlling the temperature of Walmart stores worldwide from the Bentonville headquarters. The company is also opening new stores and retrofitting existing ones with high-efficiency LED and low-mercury fluorescent lighting and is in the process of replacing open freezers with secondary loop refrigeration systems. Walmart is furthermore attempting to reduce fossil fuel use and sell more “green” products. The company has doubled their fuel efficiency for their 6,000 trucks that cross the United States. Since 2007, Walmart has been able to deliver more products while reducing mileage by 300 million.

One of the most unique and well-regarded of Walmart’s sustainability efforts is their Sustainability Index, which it developed with the help of a nonprofit coalition known as The Sustainability Consortium. The Sustainability Index is essentially an attempt to rate and categorize all of Walmart’s products and suppliers on a variety of sustainability-related issues. Between 2009 and 2012, Walmart worked with researchers to develop the basic categories and determine what information would be required for the Index to work. Then, starting in 2012, Walmart began sending out requests for this information to their suppliers. For example, suppliers of products that contain wheat, such as cakes, cookies, and bread, were asked to provide detailed information about the sourcing of that wheat, from fertilizer use tracking to soil fertility monitoring to biodiversity management. Computer and jewelry suppliers were asked about the mining practices used to extract their materials; toy makers about the chemicals used in their manufacturing processes; and so on. Walmart uses this information to rank their suppliers from best to worst on the Sustainability Index, and then gives that informa- tion to those in charge of making Walmart purchasing decisions to use in determining which suppliers to buy from. Presumably, the end result is that more sustainable products end up on Walmart shelves, and suppliers are incentivized to improve their practices to better compete with others on the Index. The initiative is exciting because Walmart’s industry power is so great that a successful implementation could truly drive change throughout entire supplier industries and chains. By 2018, Walmart met their goal of purchasing at least 70 percent of goods from suppliers participating in their Sustainability Index. The index covers more than 125 categories of products and more than 300 buyers.

Although Walmart’s environmental overhaul is a step in the right direction, some are skeptical as to whether it can accomplish their goals. Many claim that Walmart’s apparent sustainability gains are overstated, lacking in critical information, or downright misleading;

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in other words, “greenwashing” advertising rather than actual change. Some suppliers are worried about the Sustainability Index, including the amount of increased time and expense it will take to provide the required information and the business implications of products that receive higher “sustainability” rankings being given preferential treatment. Also, the concept of “being green” is subjective, since not everyone agrees on how it is defined or whether one environmentally friendly prac- tice is necessarily more beneficial than another. Despite these obstacles, Walmart seems to have achieved some substantial successes in this area through their dedica- tion to their goals and the strength of their partnerships.

Walmart Today Walmart remains the preferred shopping destination for many consumers. Although Walmart prospered during the recession while other retailers suffered, the company has faced stagnating sales in many established markets. Walmart acknowledged that they strayed from Sam Walton’s original vision of “everyday low prices” in order to court higher-income customers. Several initiatives, such as Walmart’s adoption of organic food and trendy clothes, did not achieve much success with discount shoppers. Walmart also underwent a renovation effort that cut certain products, such as fishing tackle, from their stores. These actions alienated Walmart’s original customer base. Households earning less than $70,000 annually defected to discounters like Dollar Tree and Family Dollar. Analysts believe Walmart’s mistake was trying to be everything to everyone, along with copying their more “chic” rivals like Target. Because of these blunders, in addition to external pressures such as market saturation and strong competition from other retail giants, Walmart faced a sales slump. As a result, Walmart is returning to Sam Walton’s original vision and their previous “everyday low prices” mantra. Walmart is also investing significantly in e-commerce as an untapped area of growth in the hopes of competing more directly with Amazon and other e-commerce retailers that have drawn away some of their customer base. In fact, Walmart outpaced Amazon’s growth in 2019, with shares increas- ing by 21 percent. Though Amazon has attracted many investors as a fast-growing stock, Walmart surprised many with their growth after years of declining sales.

Walmart is known for their ability to adapt quickly to different environments, but even this large-scale retailer has experienced trouble. For instance, they were forced to withdraw completely from Germany and South Korea after failing to interest the local populations. In addition, Walmart sold 80 percent of their Brazilian operations in an effort to pull away focus from poorly performing markets. Walmart has also struggled in India, one of the world’s largest markets, after failing to find a way to navigate the country’s complex regulatory environment for foreign retailers in order to sell directly to the public.

Walmart acquired a majority stake in a massive Indian e-commerce company, Flipkart, to better compete in the country. Flipkart is introducing a streaming service to compete with Amazon Prime and Netflix. The more Walmart expands internationally, the more the company must decide what concessions they are willing to make to enter certain markets.

Despite the difficulties of operating globally, Walmart has a significant presence in many countries such as the U.K., Canada, and Mexico. The company’s focus on expanding their operations in India and further developing their presence in China could also pay off for the retailer. Though the company will likely experience several bumps in the road, several of their international markets appear to offer strong growth potential.

The Future of Walmart Walmart can be viewed through two very different lenses. Some think the company represents all that is wrong with America, while others love the retailer. In response to criticism, and in an attempt to initiate goodwill with consumers, the company has continued to improve stakeholder relationships and made efforts to demonstrate that they are an ethically responsible company. Although they have faced controversy regarding competition, suppliers, employees, and global corruption, among other things, they have also demonstrated concern for sustainability initiatives and social responsibility. Walmart’s goals of decreasing waste and carbon emissions and their Sustainability Index extend to all facets of their operations, including suppliers. These efforts demonstrate Walmart’s desire (whether through genuine concern for the environment or for their own bottom-line profits) to become a more sustainable company.

Similarly, Walmart’s creation of a sophisticated global ethics and compliance program shows that they have come a long way since their beginning, when formal ethics programs were deemed unnecessary. However, without strong monitoring systems and a com- mitment from top management to enforce the company’s ethics policies, such efforts will prove fruitless. Overseas bribery scandals and employee discontent have tarnished Walmart’s reputation. As a result, the company is working to improve internal control mechanisms and supplier auditing. Both critics and supporters of Walmart alike are waiting to see whether Walmart’s efforts will position the company as a large retailer truly dedicated to social responsibility.

Questions for Discussion 1. Do you think Walmart is doing enough to become

more sustainable? 2. What are the ethical issues Walmart has faced? 3. How is Walmart attempting to answer concerns

regarding misconduct?

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424 Case 3 Big-Box Retailer Walmart Manages Big Responsibility

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