05.01.12
Wal-Mart and Risk Management
“If everything seems to be going well, then you’ve overlooked something.”
—From the so-called “Laws of Perversity,” corollaries of Murphy’s Law: ‘If something can go wrong, it will.’
If the reports of investigative journalists prove to be true, Wal-Mart has been pursuing a policy of “See no evil, hear no evil, speak no evil,” with respect to criminal corporate misbehavior in its Mexican subsidiary. As a result, the company is now in big trouble, (and its share price has taken a big dive), because of substantial bribes being paid to facilitate operations in Mexico which senior management first ignored, then attempted to cover up. This is a classic example of why improved governance structures are needed at successful companies, and not only at those which have experienced problems in the recent past. As usual, investors were inclined to cut the company an enormous amount of slack because it had been so successful and apparently well-run.
But corporate governance is mostly about ways to diminish the risk of something going wrong, not about methods to make the day-to-day functioning of a successful company even more efficient and profitable. Here, an essential mechanism—whistle-blowing, and the proper procedures for conducting allegations of corporate misbehavior—was neglected because everyone trusted management to continue to grow the company, and ignored the possibility that some trusted manager would abuse his position, or cut corners. And now shareholders have taken a huge hit. Nor, in all likelihood, have we seen the end of the problem.
In a way, it’s like speed limits: no reasonable observer should doubt that most of the time it is perfectly safe for the alert driver of a modern, high-quality car to go far faster on our public roads than the posted limits. The problem comes when the driver is distracted, or there is something wrong with his car, or with road conditions, or most frequently when there is some unexpected external event: a child dashing out into the road, a stalled vehicle around a bend, an oncoming car which has lost control. Then, suddenly, the magnitude of the mishap is enormously magnified, and a major calamity is more likely to occur. It is to make such calamities less likely that companies should have all those tedious, “unnecessary,” and mind-numbing procedures dictated by the canons of corporate governance best practice: ombudsmen, whistle-blower protections, rigorous internal investigation procedures, use of external investigators when it appears necessary, and the willingness to discipline executives who violate the trust of shareholders.
Reliance on ad hoc procedures has so far cost shareholders $15 bn, and we are nowhere near finished with the fallout from this scandal.