Posted: June 10th, 2022

case study wk 2

1) Summarize case study 3 in 4 to 5 paragraphs.
2) Give your thoughts on a separate paragraph.
3) Do all three questions on pg 455:
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?
businessmanagement
ATTACHED FILE(S)
1) Summarize case study3 in 4 to 5 paragraphs.
2) Give your thoughts on a separate paragraph.
3) Do all three questions on pg 455:
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?
412 Case 3Big-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
Big-Box Retailer Walmart Manages Big Responsibility
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Case 3Big-Box Retailer Walmart Manages Big Responsibility 413
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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414 Case 3Big-Box Retailer Walmart Manages Big Responsibility
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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Case 3Big-Box Retailer Walmart Manages Big Responsibility 415
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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416 Case 3Big-Box Retailer Walmart Manages Big Responsibility
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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Case 3Big-Box Retailer Walmart Manages Big Responsibility 417
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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418 Case 3Big-Box Retailer Walmart Manages Big Responsibility
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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Case 3Big-Box Retailer Walmart Manages Big Responsibility 419
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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420 Case 3Big-Box Retailer Walmart Manages Big Responsibility
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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Case 3Big-Box Retailer Walmart Manages Big Responsibility 421
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Case 3Big-Box Retailer Walmart Manages Big Responsibility 423
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424 Case 3Big-Box Retailer Walmart Manages Big Responsibility
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Chapter 2
Strategic Management of Stakeholder Relationships
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2-1 Define stakeholders and understand their importance
2-2 Distinguish between primary and secondary stakeholders
2-3 Discuss the global nature of stakeholder relationships
2-4 Consider the impact of reputation and crisis situations on social responsibility performance
2-5 Examine the development of stakeholder relationships
2-6 Explore how stakeholder relationships are integral to social responsibility
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Why do you think stakeholders are important to industries and organizations?
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Customers Employees Investors
Stockholders Suppliers Government
Communities
They not only are influenced by businesses
They have the ability to affect businesses
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Stakeholders
Constituents who have an interest or stake in a company’s products, industry, markets, and outcomes
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Adam Smith (A founder of capitalism)
Created the concept if of the invisible hand and spoke about self-interest
However, went on to explain that this common good is associated with psychological motives and that each individual has to produce for the common good
A notion of capitalism that reemphasizes stakeholder concerns and issues
In the 21st century, Friedman’s form of capitalism is being replaced by Smith’s original concept (now called enlightened capitalism)
Acceptance of enlightened capitalism may occur faster in developed countries
Theodore Levitt wrote that although profit is required for business, profit is not the purpose of business
Norman Bowie noted that focusing on profit alone can create an unfavorable paradox that causes a firm to fail to achieve its objectives
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enlightened capitalism
a theory of capitalism originally proposed by Adam Smith as “promoting the happiness of mankind” that emphasizes stakeholder concerns and issues
What power (if any) do you think stakeholders have over organizations?
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stakeholder engagement
the process of involving stakeholders who may be affected by an organization’s decisions or that may influence the content or implementation of the organization’s decisions
Stakeholder Issues and Interactions
New reforms to improve corporate accountability and transparency also suggest that stakeholders such as suppliers:
Can play a major role in fostering responsible decision making
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Banks
Law
Firms
Public Accounting Firms
Identifying Stakeholders
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Primary Stakeholder
They are fundamental to a company’s operations and survival; these include shareholders & investors, employees, customers, suppliers, and public stakeholders, such as government and the community
Secondary Stakeholder
They do not typically engage in direct transactions with a company and thus are not essential for its survival; these include the media, trade associations, special-interest groups, and competitors
Cannot be ignored
For example, sometimes the media can have more of an impact than a primary stakeholder
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stakeholder orientation
the degree to which a firm understands and addresses stakeholder demands
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Comprises three sets of activities
The organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups
The distributionof this information throughout the firm
The organization’s responsiveness as a whole to this intelligence
stakeholder orientation
the degree to which a firm understands and addresses stakeholder demands
First, relevant stakeholder communities should be analyzed on the basis of:
The power each enjoys
The ties between them
Next, firm should characterize the concerns about the business’s conduct that each relevant stakeholder group shares
Finally, the company should evaluate its impact on the issues that are important to the various stakeholders it has identified
This intelligence should be circulated throughout the firm
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A stakeholder orientation is not complete unless it includes activities that actually address stakeholder issues
Stakeholder orientation can be viewed as a continuum, in that firms are likely to adopt the concept to varying degrees
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A stakeholder has power to the extent that it can gain access to coercive, utilitarian, or symbolic means to impose or communicate its views to an organization.
Coercive power—the use of fear, suppression, punishment or some type of restraint (issue is emotionally charged & somewhat controversial)
Utilitarian power—financial or material control or based on a decision’s utility or usefulness (boycotts & lawsuits)
Symbolic power—the use of symbols that connote social acceptance, prestige, or some other attribute (letter-writing, advertising messages, & websites)
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Legitimacy is the perception or belief that a stakeholder’s actions are proper, desirable, or appropriate within a given context
Gained through the stakeholder’s ability and willingness to explore the issue from a variety of perspectives and then to communicate in an effective and respectful manner on the desire for change
Extremist views are less likely to be considered legitimate because these groups often use covert and inflammatory measures that overshadow the issues and create animosity
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Urgency is the time sensitivity and the importance of the claim to the stakeholder
Stakeholders exercise greater pressures on managers and organizations when they stress the urgency of their claims
Time sensitivity usually heightens the stakeholder’s effort and may compress an organization’s ability to research and react to a claim
How do you think a firm’s reputation relates to its stakeholder relationships?
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Corporate reputation, image, and brands are among the most critical aspects of sustaining relationships with constituents
Investors
Media
Government watchdogs
Customers
Financial analysts
Company’s reputation is affected by every contact with a stakeholder
Companies can take decades to build their reputation and one mistake can cause significant reputational damage
Reputation Management
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Reputation Management
The process of building and sustaining a company’s good name and generating positive feedback from stakeholders
Reputation Management Process
Process of reputation management involves four components that work together:
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Identify how the organization wants to be viewed by stakeholders
Determine how stakeholders evaluate the company and their impressions of its image
Evaluate other’s impressions of organizational performance
Understand the company’s reputation
Most firms will, at one time or another, experience crisis situations
How a company reacts to the situation is indicative of its commitment to and implementation of social responsibility
The acceptance and implementation of reputation management strategies may bring challenges to the marketplace of ideas
An ideas marketplace
assumes that ideas
compete against one
another for truth and
acceptability
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What could a company facing a crisis do to satisfy its stakeholders & protect its reputation?
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Ethical Misconduct Disaster (EMD)
Unexpected organizational crisis that results from:
Employee misconduct
Illegal activities (fraud)
Unethical decisions that significantly disrupts operations and threatens or is perceived to threaten the firm’s continuity of operations
Organizational crises are far-reaching events that can have dramatic effects on both the organization and its stakeholders
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Stressful Uncertain
Emotional Demanding context
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Crisis Management
The process of handling a high-impact event characterized by ambiguity and the need for swift action
Crisis usually leads to both success and failure outcomes for a business and its stakeholders
Provides information for making improvements to future crisis management and social responsibility efforts
Requires a firm’s leadership to communicate in an often:
Crisis Management Process
Fundamental difficulty that a company faces is how to communicate effectively to stakeholders during and after a disaster
Crisis events are often so chaotic that a company’s leadership may not be certain of the cause of the situation before the media and other relevant groups demand a statement
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Crisis Management Process
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First
Leadership should express concern and/or remorse for the event
Second
Organization should delineate guidelines regarding how it intends to address the crisis so that stakeholders can be confident that the situation will not escalate or reoccur
Third
Company should provide explicit criteria to stakeholders regarding how each group will be compensated for any negative effect it experiences as a result of the crisis
Firm’s leadership should try to communicate as much accurate information to stakeholder groups as possible to minimize their uncertainty
When firm fails to do so, its credibility, legitimacy, and reputation in the eyes of stakeholders often suffer
The needs of various stakeholder groups may conflict
Firms have the responsibility to manage the competing interests of stakeholders to ensure that all stakeholder groups are treated fairly in the aftermath of a crisis
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Why do you think that developing strong relationships with stakeholders is so important?
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Instead of just pursuing one-time transactions
Companies are now searching for ways to develop long-term and collaborative relationships with their customers and business partners
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Some investments are tangible, such as buildings, equipment, & other elements dedicated to a particular relationship
Other investments are less tangible, such as the time, effort, trust, and commitment required to develop relationships
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Social Capital
An asset that resides in relationships and is characterized by mutual goals and trust
Like financial and intellectual capital, social capital facilitates internal and external transactions and processes
Unlike financial and intellectual capital, social capital is not tangible or the obvious property of one organization
Why might developing a process for implementing a stakeholder perspective be beneficial for an organization?
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Implementing a Stakeholder Perspective in Social Responsibility
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Step 1:Assessing the Corporate Culture
Social responsibility program must align with the corporate culture of the organization
Step 2:Identifying Stakeholder Groups
Important to recognize stakeholder needs, wants, and desires
Identify the organizational mission, values, and norms that are likely to have implications for social responsibility
Stakeholders have some level of power over a business because they are in the position to withhold, or threaten to withhold, organizational resources
Implementing a Stakeholder Perspective in Social Responsibility (cont.)
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Step 3:Identifying Stakeholder Issues
Steps 1 & 2 – identify the stakeholders who are both powerful and legitimate, determines the degree of urgency in addressing their issues
Step 4:Assessing the Organization’s Commitment to Social Responsibility
Arrive at an understanding of social responsibility that specifically matches the organization of interest
Step 3 – understanding the nature of the main issues of concern to these stakeholders
Used to evaluate current practices and to select concrete social responsibility initiatives
Implementing a Stakeholder Perspective in Social Responsibility (cont.)
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Step 5:Identifying Resources and Determining Urgency
Levels of financial and organizational investments required by different actions should be determined
Step 6:Gaining Stakeholder Feedback
General assessment obtained through satisfaction or reputation surveys
When prioritizing social responsibility challenges factor in levels of urgency
Stakeholder-generated media can be assessed
Formal research conducted by using focus groups, observations, and surveys
What motivates companies to pursue stakeholder relationships?
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Without a solid understanding of stakeholders and their interests, a firm may miss important trends and changes in its environment and not achieve strategic social responsibility
The Reactive-Defensive-Accommodative-Proactive Scale provides a method for assessing a company’s strategy and performance with each stakeholder
Scale is based on a continuum of strategy options and performance outcomes with respect to stakeholders
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The Reactive-Defensive-Accommodative-Proactive Scale is useful because it:
Evaluates real practice
Allows an organization to see its strengths and weaknesses within each stakeholder relationship
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Social Audit
The process of assessing and reporting a firm’s performance in adopting a strategic focus for fulfilling the economic, legal, ethical, and philanthropic social responsibilities expected of it by its stakeholders
Chapter 3
Corporate Governance
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3-1 Define corporate governance
3-2 Describe the history and practice of corporate governance
3-3 Examine key issues to consider in designing corporate governance systems
3-4 Describe the application of corporate governance principles around the world
3-5 Provide information on the future of corporate governance
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What do you believe is the purpose of corporate governance?
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Governance
Stakeholders demand greater transparency in business.
Motives and actions must be clear, open for discussion, subject to scrutiny
Governance relates to the exercise of oversight, control, and authority
A board of directors should have final authority on decisions, including the ability to:
Approve corporate strategy
Provide financial oversight
Remove the CEO
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board of directors
a group of members who represent shareholders and oversee the firm’s operations and legal and ethical compliance
Oversight relates to a system of checks and balances that limit employees’ and managers’ opportunity to deviate from policies and codes of conduct
Accountability relates to how well of workplace decisions are aligned with a firm’s stated strategic direction
Control involves the process of auditing and improving organizational decisions and actions
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corporate governance
Formal system of oversight, accountability, and control for organizational decisions and resources
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Should be no conflict between maximizing profits and maintaining a stakeholder orientation
Firm’s are moving toward a balanced stakeholder model, see this approach will sustain the relationships necessary for long-term success
Obligations to balance stakeholder interest have been institutionalized in legislation that provides incentives for responsible conduct
shareholder
any person or entity that owns at least one share of a company’s stock
Both directors and officers of corporations
are fiduciaries for the shareholders
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Fiduciaries
Persons placed in positions of trust who use care and loyalty in acting on behalf of the best interests of the organization
There is a duty of care, also called a duty of diligence, to make informed and prudent decisions
Duty of loyalty means that all decisions should be in the interests of the corporations and its stakeholders
Conflicts of interest exist when a person uses their position to obtain personal gain, usually at the expense of the organization
Insider trading is the act of purchasing or selling a public company’s security with access to nonpublic information about the company
Effective corporate governance creates compliance and values so that employees feel that integrity is at the core of competiveness
There should be oversight and authority for:
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Delegating tasks
Making difficult and sometimes controversial decisions
Balancing power throughout the firm
Maintaining social responsibility
How do you believe corporate governance has evolved over time in the U.S.?
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Late 1800s – Early 1900s
Less reason to talk about corporate governance because the owner of the firm was the same individual who made strategic decisions about the business
By the 20th Century
An increasing number of public companies and investors brought about a shift in the separation of ownership and control
Owner primarily bore the consequences (positive or negative) of decisions
History of Corporate Governance
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Since Mid-1900s
The approach to corporate governance has involved a legal discussion of principals and agents to the business relationship
Owners are “principals” who hire “agents,” the executives, to run the business
A key goal is to align the interests of principals and agents so that organizational value and viability are maintained
History of Corporate Governance
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Sarbanes-Oxley Act of 2002
Most significant piece of corporate governance reform at the time since the 1930s
CEOs and CFOs are required to certify that their quarterly and annual reports accurately reflect performance and comply with the requirements of the SEC
More independence of boards of directors
Protected whistle-blowers
Established a Public Company Accounting Oversight Board
History of Corporate Governance
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2000s
Corporate misconduct and the quest for short-term profits led the U.S. financial system to a near collapse during the last recession
Cause was a pervasive use of instruments like:
Credit default swaps
Risky debt like subprime lending
Corruption in major corporations
Government was forced to step in and bail out many financial firms
Board of directors should provide leadership for social responsibility initiatives
Some boards have been assuming greater responsibility for strategic decisions and have decided to focus on building more effective social responsibility
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How are corporate governance and social responsibility interrelated?
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Corporate social responsibility can be a difficult concept to define
Shareholder model–
Interpreted narrowly, a company can consider itself socially responsible if it generates returns for shareholders and provides jobs for employees
Stakeholder model–
A broad definition of social responsibility interprets the corporation as a vehicle for stakeholders and for public policy
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Shareholder Model of Corporate Governance
Focuses on improving the formal system of performance accountability between the top management and the shareholders
Stakeholder Model of Corporate Governance
A model where the business is accountable to all its stakeholders, not just the shareholders
Governance systems that consider stakeholder welfare in tandem with corporate needs and interests characterizes this approach
Has been criticized for its somewhat singular purpose and focus because there are other ways of “investing” in business
Shareholder model focuses on the primary stakeholder (the investor) whereas the stakeholder model incorporates a broader philosophy toward internal and external constituents
Although financial return is an important measure of success for all firms, the legal dimension of social responsibility is also a compulsory consideration
Ethical and philanthropic dimensions have not been traditionally mandated through regulation or contracts
Corporate Governance and Social Responsibility (cont.)
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What do you believe are key issues to consider when designing corporate governance systems?
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Today, board of directors are concerned primarily with monitoring the decisions made by managers on behalf of the company and…
Choosing top executives & assessing performance
Helping set strategic direction
Evaluating company performance
Developing CEO succession plans
Communicating with stakeholders
Maintaining legal and ethical practices
Ensuring that control & accountability mechanisms are in place
Evaluating the board’s own performance
Board of Directors
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Quality
Directors with competence and experiences that reflect some of the firm’s core issues should bring valuable insights to bear on discussions and decisions
Directors without direct industry or comparable executive experience may bring expertise on important issues such as:
Auditing Executive compensation
Succession planning Risk management to improve decision-making
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Performance
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As federal regulations increase and the latitude afforded boards of directors shrinks, boards are going to be faced with greater responsibility & transparency
Directors today are increasingly chosen for their proficiency and ability to bring different perspectives to strategic discussion
Performance
Rules promoted by the Sarbanes-Oxley Act & various stock exchanges now require:
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A majority of independent directors with nomaterial relationship to the firm
Regular meetings between nonmanagement board members
No more than $120,000 in compensation for independent directors/year
Audit, compensation, governance, & nominating committees made up with only or majority of independent directors
A financial expert on the audit committee
Performance
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shareholder lawsuits
lawsuits brought against a key member of a company, like a director or executive, where a shareholder or group of shareholders is suing on behalf of the corporation
Shareholder Activism
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Shareholder Activism
Activism is a broad term that can encompass engaging in dialog with:
Engaging in dialogue with management
Attending annual meetings
Submitting shareholder resolutions
Bringing lawsuits
Other mechanisms designed to communicate shareholder interests to the corporation
Shareholder Activism
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shareholder resolutions
nonbinding, yet important, statements about shareholder concerns
A shareholder that meets certain guidelines may bring one resolution per year to a proxy vote of all shareholders at a corporation’s annual meeting
A proxy is an agent who is legally authorized to act on behalf of another person/party
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Investor Confidence
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Shareholders and other investors must have assurances that their money is being placed in the care of capable and trustworthy organizations
Primary stakeholders are expecting a solid return for their investment and they have additional concerns about social responsibility
Part of this trust relates to the perceived efficacy of corporate governance
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Internal Control & Risk Management
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Controls are used to:
Safeguard corporate assets & resources
Risk Management
Process used to anticipate and shield the organization from unnecessary or overwhelming circumstances
Protect the reliability of organizational information
Ensure compliance with regulations, laws, & contracts
While ensuring that executive leadership is taking the appropriate steps to move the organization and its strategy forward
Internal and External Audits
Auditing is the linchpin between risk and controls and corporate governance
Board of directors must ensure that the internal auditing function of the company is provided with:
Adequate funding
Up-to-date technology
Unrestricted access
Independence
Authority to carry out its audit plan
Board audit committee should be directly responsible for the selection, payment, and supervision of the company’s external audit
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(continued)
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(continued)
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Control Systems
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The area of internal control covers a wide range of company decisions and actions, not just the accuracy of financial statements and accounting records.
The board should have ultimate oversight of the integrity of the internal control system.
Smaller private companies and nonprofit organizations are less likely to have invested in a complete system.
Risk Management
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Most corporate leaders greatest fear is discovering serious misconduct or illegal activity somewhere in their organization
Whole concept of risk management involves recognizing the possibility of a misfortune that could jeopardize or even destroy the corporation
Risk is always present within organizations, so executives must develop processes for remedying or managing its effects
Risk Management
There are at least 3 ways to consider how risk poses either a potential negative or positive concern for organizations:
Risk can be categorized as a hazard
Focused on minimizing negative situations (fraud, injury, or financial loss)
Risk may be considered an uncertainty that needs to be hedged through quantitative plans and models
Type of risk is best associated with the term risk management
Risk also creates the opportunity for innovation and entrepreneurship
Management can be criticized for taking too much risk AND not taking enough risk
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Executive Compensation
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Dodd-Frank Act included measures to rein in overcompensation:
A “say-on-pay” mandate requiring shareholders to vote on their company’s compensation policies
“Compensation committee independence” requiring board members in charge of determining compensation to be independent from the company’s management
Some argue that executives deserve the rewards that follow from strong company performance, because they assume so much risk on behalf of the company
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Executive Compensation
An increasing number of corporation boards are imposing performance targets on the stock and stock options they include in their CEOs’ pay package
Corporate plans that base compensation on the achievement of several performance goals, including profit and revenue, are intended to align the interests of owners with management
Overall, CEOs’ compensation is decreasing, indicating a possible change in the ways executives are compensated
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As globalization continues to increase, how do you think it is affecting corporate governance?
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Increased globalization
Enhanced electronic communications
Economic agreements and zones
Reduction of trade barriers
Created opportunities for firms around the world to conduct business with both international consumers and industrial partners
Propel the need for greater homogenization in corporate governance principles
As financial, human, and intellectual capital cross borders, business, social, and cultural concerns arise
Corporate Governance
Around the World
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The Organization for Economic Electronic Co-operation and Development (OECD)
Forum for governments to discuss, develop, and enhance economic and social policy, issued a set of principles intended to serve as a global model for corporate governance
Purpose of OECD Corporate Governance Principles if to formulate minimum standards of:
Fairness
Transparency
Accountability
Disclosure
Responsibility for business practice
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The OECD Corporate Governance Principles cover many specific best practices, include:
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Ensuring the basis for an effective corporate governance framework
Rights of shareholders to vote and influence corporate strategy
Greater number of skilled, independent members on boards of directors
Fewer techniques to protect failing management & strategy
Wider use of international accounting standards
Better disclosure of executive pay and remuneration
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Best practices may vary slightly from country to country because of unique factors such as:
Market structure
Government control
Role of banks and lending institutions
Labor unions
Other economic, legal, and historical factors
What do you believe the future of corporate governance holds for firms, managers, boards, & governments?
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Future of Corporate Governance
To pursue social responsibility, organizations must consider issues of control and accountability
The cost of governance
The benefits of a strong approach to corporate governance outweigh its cost
Positive return benefits the industrial competitiveness of entire nation
Lack of good governance can lead to insular and selfish motives
As nations with large economies embrace responsible governance principles, it becomes more difficult for nations and firms that do not abide by such principles to compete in these lucrative markets
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Future of Corporate Governance
The future of corporate governance is directly linked to the future of social responsibility:
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Business leaders & managers will need to embrace governance as an essential part of effective performance
Governments have a key role to play in corporate governance
Other stakeholders may become more willing to use governance mechanisms to influence corporate strategy or decision-making
Future of Corporate Governance
Key issue going forward will be the board’s ability to align corporate decisions with various stakeholder interests
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Future will require that business leaders have a different set of skills & attitudes, including the ability to:
Balance multiple interests
Handle ambiguity
Manage complex systems & networks
Create trust among stakeholders
Improve processes so that leadership is pervasive throughout the organization

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