Wal-Mart shareholders refuse to be brushed off

IN SEPTEMBER 2005, three Wal-Mart Stores officials and a handful of prominent shareholders gathered in Manhattan for an unpublicised meeting. The investors renewed their call to name a ‘special committee of independent directors’ to investigate the company’s workplace policies amid a rising tide of employee lawsuits. Wal-Mart deflected the request. Such a panel might “get the issues wrong,” said director Roland Hernandez, according to a colleague’s deposition later introduced in court. Now, some of those same investors — pension funds in New York, Illinois and Connecticut plus London-based F&C Asset Management —are demanding a shareholder vote to force Wal-Mart to review its policies. The reasons quiet diplomacy ended can be found in a string of letters exchanged before and after the 2005 meeting. The details, emerging for the first time, show how the shareholders pressured Wal-Mart — and were rebuffed. F&C fund manager Karina Litvack remains frustrated. “We view the labour issues as a manifestation of the overall weakness of their internal controls,” she says. “We see these governance failures as aggravating the slowdown” in Wal-Mart’s growth. F&C had € 155 billion ($204 billion) under management as of December 31, including $28 million worth of Wal-Mart shares The investors publicly requested the shareholder proposal last December in a letter from New York City comptroller William C Thompson Jr, who had hosted the 2005 meeting in Manhattan. Wal-Mart spokesman John Simley says the company won’t comment on how it will address the shareholder proposal. It may be voted on at the next annual meeting in June, he says. It isn’t uncommon for institutional shareholders to contact senior executives or directors of the companies they invest in, occasionally prodding them to make changes they believe will benefit shareholders and make them better corporate citizens.

Rare Prodding

It’s unusual, though, for a group of pension fund managers representing far-flung interests to band together to prod a single company, says Patricia Edwards, a money manager at Wentworth, Hauser & Violich, which has $9 billion in assets, including Wal-Mart shares. “I’m not thinking of anybody else who’s been hit the way they have,” says Edwards, referring to Wal-Mart. US unions and the politicians who support them may seek to increase that pressure during the 2008 presidential campaign. The friction between the company and the pension funds arose in early 2005 amid mounting lawsuits against Wal-Mart. Company employees have filed more than 250 suits related to labour law and anti-discrimination law in federal courts since January 2005. Since December 2005, juries in Pennsylvania and California have awarded Wal-Mart workers a total of $251 million in pay and damages. The company currently faces more than 70 wage-and-hour lawsuits, including class actions, alleging it failed to pay employees for all hours worked or didn’t compensate them properly for overtime. Some lawsuits also accuse the retailer of prohibiting workers from taking breaks or altering timecards in order to trim store payroll costs. Wal-Mart, which has denied any discrimination or violation of wage-and-hour laws, is fighting all the class-action wage cases. It has settled some employee lawsuits. Wal-Mart is appealing the Pennsylvania and California verdicts. The company paid $125,000 in February to an Idaho worker who claimed racial harassment in a suit brought by the US Equal Employment Opportunity Commission. The shareholder letters, along with the deposition describing the New York meeting, were provided to lawyers in the pre-trial discovery process for claims that Wal-Mart cheated Pennsylvania workers out of pay for overtime and for time spent on breaks. The documents are in court records obtained by agencies. Initially, the shareholder group asked Wal-Mart to investigate its conduct in a May 25, 2005, letter Thompson wrote to Hernandez, chairman of Wal-Mart’s audit committee. The worker lawsuits, accompanying negative publicity and sluggish stock performance prompted the move, according to the correspondence, which was made public at the time. Hernandez, 49, is the former chairman of Telemundo Group, the Spanish-language network now part of NBC. “As shareholders, we are deeply concerned about potential contingent liabilities and negative effects on the company’s stock price and reputation,” the Thompson letter said. The letter was signed by Thompson; Litvack, director & head of governance and socially responsible investment at F&C Asset Management; Edward Smith, chairman, Illinois State Board of Investment; and Jason Fletcher, Americas Equities Manager at Universities Superannuation Scheme, a British pension fund. The group held about 11.5 million shares of Wal-Mart stock worth $545.8 million at the time, according to the letter. Wal-Mart’s market value stands at $194.9 billion. They asked Wal-Mart’s board to create an independent committee to review whether the company's internal controls were adequate to ensure compliance with laws and its own policies prohibiting discrimination against employees. Less than three weeks later, on June 13, California Controller Steve Westly independently wrote a similar public letter to Hernandez. Westly, who left office in January, was a trustee at the time of the California State Public Employee Retirement System(Calpers) and the California State Teachers Retirement System(Calsters). When Westly wrote his letter, Calpers owned more than 21 million Wal-Mart shares and Calsters held 20.6 million shares of Wal-Mart’s US and Mexican units. John Chiang, the current controller, hasn’t taken any action yet on Wal-Mart because he just took office in January, said his spokeswoman, Hallye Jordan. “He has great concern about some of the wage and labour issues,” she says. In July 2005, a private dialogue was opened. Wal-Mart’s Hernandez wrote to Thompson, saying while he appreciated the shareholders’ concerns, “we do not believe it is either necessary or appropriate to form a special committee to review the company’s legal, regulatory, and internal controls.” The company reviews its compliance policies on an ongoing basis, he added. “We were not satisfied with that response,” says Kenneth Sylvester, New York City’s director of pension corporate affairs. A Thompson subordinate, he oversees the city’s five pension funds with assets of $100 billion. A meeting was arranged. On September 14, Hernandez was accompanied at the gathering by Charles Holley, then senior V-P for finance and now the company’s treasurer, and Christopher Williams, a Wal-Mart director on the audit committee, according to a 2006 deposition Holley gave as part of the wage-and-hour lawsuit in Pennsylvania. Williams is chairman of a New York investment bank, Williams Capital Group.

7.8 Million Shares

They met in the city offices of Comptroller Thompson, who oversees five municipal funds with 7.8 million Wal-Mart shares worth $370 million. Thompson was joined by representatives of state pension plans in Illinois, California, Connecticut and New Jersey, along with fund managers based in the UK and Sweden, some of whom participated by telephone, according to Holley’s deposition. The parties traded cordialities and very little else, says Sylvester, who also attended. The investors repeated their call for Wal-Mart to create an independent committee. Wal-Mart rejected the idea because the audit committee already provided an independent voice, Holley said in his deposition. “It would be redundant to have another committee,” he testified. Hernandez had other reasons to be cautious, according to Holley’s testimony. If independent observers reviewed Wal-Mart, there was a ‘high risk’ they could ‘get the issues wrong,” Holley said, quoting Hernandez. Holley testified from his notes of the discussion. Wal-Mart executives indicated they were willing to discuss the issues further, says Litvack, who had a colleague attend the meeting. Litvack says she was hopeful. “The company responded mostly very positively,” she recalls. Her optimism didn’t last. Looking back, she says, “The dialogue never really got going.” Sylvester gives a similar assessment. “At the end of the day, we walked away from that meeting feeling OK, we had a nice conversation, but our concerns were not addressed,” he says. “It was sort of a feel-good, kind of take-my-word-for-it meeting.” Simley says the board views an independent committee as unnecessary. “It would provide no benefit to the company or its shareholders,” he says. “The board felt that its independent audit committee is well qualified to handle those duties.” He declined to make Hernandez, Holley or Williams available for comment or to discuss details of the New York gathering except to say: “I think we saw it as a constructive meeting.” Two months after the meeting, on November 30, Thompson wrote to directors Hernandez and Williams, according to court filings in the Pennsylvania case. The co-signers expanded to include Westly and Meredith Miller, Connecticut’s assistant treasurer for policy. Wal-Mart’s legal problems “strongly suggest a management culture of indifference,” Thompson wrote. He referred to an internal memo to the board from Susan Chambers, Wal-Mart’s executive vice-president of benefits, that suggested the company might cut health-insurance costs by hiring healthier workers. Contents of the memo had been provided to The New York Times, which published an article on it that October. “This culture originates at the highest levels of management,” Thompson continued. An attachment to the letter requested a detailed account of company policies on whistle blowers and managers who violate company ethics standards. The attachment also asked for information about “the company’s internal controls for ensuring that individual and regional store performance targets and aggressive growth targets are not driving non-compliance throughout the system” and “how the company’s technological capabilities are utilised to prevent the exploitation of workers, such as denial of overtime pay.” Hernandez responded Februrary 8, 2006. He offered a second meeting and assured the investors that Wal-Mart’s board and senior management “are all committed to developing best practices in the areas of internal controls, legal compliance, corporate responsibility, and ethics.” The company is disclosing more to shareholders, Hernandez said, adding that “over the next 14 months, we have committed to make a comprehensive sustainability report available to shareholders.” Simley says the report will be issued around the time of Wal-Mart’s annual meeting in June. The company said last year it would likely outline company policies and actions in such areas as benefits, wages, diversity and the environment. Thompson’s investor group wrote again to Hernandez in May 2006. While accepting the offer to meet again, the investor group wrote, “To date, we do not feel we have received a meaningful response. Rather, you have offered general statements regarding Wal-Mart’s progress over the past three years.” Such assurances, the letter said, “are insufficient.” As publicity mounted over labour issues at Wal-Mart, some investors sold their shares. In June 2006, Norway’s $242 billion global pension fund announced it had sold its Wal-Mart shares, saying the legal troubles showed “serious and systemic violations of human rights and labour rights.” The fund’s holdings in Wal-Mart and Wal-Mart de Mexico were worth $2.5 billion kroner ($398 million) in December 2005. Three months after Norway’s action, a Sweden-based pension fund, Gothenborg-based Andra AP-fonden, sold all its shares, valued at 300 million kronor, or $41 million. New York City isn’t dumping its Wal-Mart shares, Sylvester says. “As long-term shareholders, and given the large size of our investments, divestment is generally not a practical option,” he says. “For this reason, we will continue to pursue reforms at Wal-Mart.”

Global Reputation

Thompson decided to go public again. Last December, he announced a shareholder resolution that asks Wal-Mart’s board to produce a report by September ‘on the negative social and reputational impacts’ of the company’s non-compliance with international labour standards and its internal controls. Thompson says Wal-Mart should work with shareholders to develop policies to protect its workers. “Given the numerous allegations, reports and lawsuits involving violations of workers’ rights, Wal-Mart has established a global reputation that could negatively impact its sustainability and long-term value,” Thompson said in an e-mail explaining his position. Wal-Mart’s vast size makes growth more difficult than smaller rivals and has produced more modest investor expectations, says David Abella, an analyst at Rochdale Investment Management, which has $2.2 billion in assets, including Wal-Mart shares. The retailer has tried carrying more discretionary goods that might ap-peal to higher-income shoppers who visit the store for basic items. The lawsuits and negative publicity “may impede making inroads into the upper-middle-end consumer, who views Wal-Mart negatively,” he says. Litvak, of F&C Asset Management, isn't satisfied with Wal-Mart’s position. “The issues remain exactly as they were a year ago,” she says. Westly, 50, who was an unsuccessful Democratic candidate for governor last year, now runs the Westly Group, a venture capital firm in Menlo Park, California. “Wal-Mart’s reputation continues to struggle,” he says. “Today, the market is demanding responsible companies and products. Wal-Mart has every reason to change its ways.”

Courtesy: EconomicTimes