Wal-Mart de Mexico

Note: Most of this material is adapted from David Barstow, Vast Mexico Bribery Case Hushed Up by Wal-Mart After
Top-Level Struggle, New York Times, April 22, 2012.

In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former
executive at the companys largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and
follow-up conversations, the former executive described how Wal-Mart de Mexico had
orchestrated a campaign of bribery to win market dominance.
In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually
every corner of the country. The former executive gave names, dates and bribe amounts. He
knew so much, he explained, because for years he had been the lawyer in charge of obtaining
construction permits for Wal-Mart de Mexico.
Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of
widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than
$24 million. They also found documents showing that Wal-Mart de Mexicos top executives not
only knew about the payments, but had taken steps to conceal them from Wal-Marts
headquarters in Bentonville, Ark.
Wal-Mart de Mexico was the companys brightest success story, pitched to investors as a model
for future growth. (Today, one in five Wal-Mart stores is in Mexico. Wal-Mart now employs
209,000 people in Mexico, making it the countrys largest private employer. )
The corporate investigation included more than 15 hours of interviews with the former executive,
Sergio Cicero Zapata, who resigned from Wal-Mart de Mexico in 2004 after nearly a decade in
the companys real estate department.
In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He
described personally dispatching two trusted outside lawyers to deliver envelopes of cash to
government officials. They targeted mayors and city council members, obscure urban planners,
low-level bureaucrats who issued permits anyone with the power to thwart Wal-Marts
growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees
and the allegiance of neighborhood leaders. He called it working the dark side of the moon.
During hours of questioning, Mr. Cicero described how Wal-Mart de Mexico had perfected the
art of bribery, then hidden it all with fraudulent accounting. Mr. Cicero implicated many of WalMart de Mexicos leaders, including its board chairman, its general counsel, its chief auditor and
its top real estate executive.
But the person most responsible was the companys ambitious chief executive, Eduardo CastroWright, a native of Ecuador who was recruited from Honeywell in 2001 to become Wal-Marts
chief operating officer in Mexico. Mr. Cicero said that while bribes were occasionally paid
before Mr. Castro-Wrights arrival, their use soared after Mr. Castro-Wright ascended to the top
job in 2002.

Mr. Cicero described how Wal-Mart de Mexicos leaders had set very aggressive growth goals,
which required opening new stores in record times. Wal-Mart de Mexico executives, he said,
were under pressure to do whatever was necessary to obtain permits.
During this time Walmart build new stores with stunning speed. By the time the bribery
allegations reached executives at the companys Arkansas headquarters in the fall of 2005,
Walmart had more than 750 stores in Mexico and was opening new ones at the rate of almost two
per week.
Meanwhile Mexicos remaining 3 homegrown hypermarkets combined to form a joint
purchasing company, Sinergia, in the hopes of strengthening their purchasing power with
suppliers, allowing them to match Wal-Mart's prices. The three promised to work together to
smooth out supply kinks and develop new products, particularly ones made in Mexico.
As Walmart grew, Mexicos traditional vendors, open-air markets, and independent businesses
declined. Competing supermarket chains, which had combined to meet the Wal-Mart threat-were left in the dust too, unable to match Walmarts speed and financial muscle.
Mr. Cicero said Mr. Castro-Wright had encouraged the payments for a specific strategic purpose.
The idea, he said, was to build hundreds of new stores so fast that competitors would not have
time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They
made environmental objections vanish. Permits that typically took months to process magically
materialized in days. What we were buying was time, he said. Each month, Mr. Castro-Wright
and other top Wal-Mart de Mexico executives received a detailed schedule of all of the
payments performed, he said, according to the lawyers notes. Wal-Mart de Mexico then
purified the bribes in accounting records as simple legal fees.
Wal-Mart de Mexicos stunning growth made Mr. Castro-Wright a rising star in Bentonville. In
early 2005, he had been promoted to a senior position in the United States. Just days before Mr.
Ciceros first debriefing, Mr. Castro-Wright was promoted again. He was put in charge of all
Wal-Mart stores in the United States, one of the most prominent jobs in the company. He also
joined Wal-Marts executive committee, the companys inner sanctum of leadership.
In December 2005, Wal-Marts investigators wrote confidential reports to Wal-Marts top
executives laying out all the evidencethe rewritten audits, the evasive responses from WalMart de Mexico executives, the donations for permits, the evidence bribes were still being used.
They stated that there was reasonable suspicionto believe that Mexican and U.S. laws have
been violated.
By January 2006, the situation had reached a critical juncture. Wal-Marts CEO Lee Scott, Jr.,
had to decide what to do. What should be done about this preliminary investigation, which
indicated wrongdoing on the part of a star executive already being publicly discussed as a
potential successor to Mr. Scott?
Wal-Marts ethics policy offered clear direction. Never cover up or ignore an ethics problem,
the policy states. And some who were involved in the investigation argued that it was time to

take a stand against signs of rising corruption in Wal-Marts global operations. Each year the
company received hundreds of internal reports of bribery and fraud, records showed. In Asia
alone, there had been 90 reports of bribery just in the previous 18 months.
The situation was bad enough that Wal-Marts top procurement executives were summoned to
Bentonville that winter for a dressing down. Wal-Marts vice chairman warned them that
corruption was creating an unacceptable risk, particularly given the governments stepped-up
enforcement of the Foreign Corrupt Practices Act (which criminalizes bribing foreign
government officials for business advantage).
Yet at the same time, there were misgivings about the reach and power of the internal
investigation. Some Wal-Mart de Mexico executives accused the investigators of being
disruptive (One person involved in the case said they were overly-aggressive and just never let
up.). Others called the investigators nave about the moral ambiguities of doing business abroad.
They argued that Corporate Investigations should focus more on quietly neutralizing problems
than on turning corrupt employees over to law enforcement. Some executives saw Mexico as a
country where bribery was embedded in the business culture. It would be different if the same
behavior occurred in the U.S., they argued, but it should be different here. Its a Mexican issue;
its better to let it be a Mexican response, one person said, describing the thinking of Wal-Mart
executives.
In Mexico, corruption exists at all levels, from business leaders to street vendors. It seems easier
to get something done with a bribe than to fill out myriad forms and wait in lines to confront
evasive government workers. According to a recent study, companies spend approximately 10
percent of their earnings bribing corrupt officials. In the last 30 years, the Mexican economy has
lost more than $870 billion to corruption, crime and tax evasion.
The consequences of this corruption are clear. When devastating earthquakes hit Mexico City in
1985, an alarming number of shoddily constructed public buildings schools, hospitals and
government offices were destroyed. The school system is controlled by the politically powerful
teachers union, and around 90 percent of the budget is eaten up by teachers salaries, though
many on the payroll work for the union or hold political office instead of teaching. Extortion and
protection rackets flourish alongside drug trafficking. President lvaro Obregn, who was
assassinated in 1928, once said that no general can resist a 50,000-peso cannon blast, a
precursor to todays plata o plomo silver or lead, the drug cartels offer to officials of a
bribe or a bullet.
Clearly, putting an end to corruption to kickbacks and nepotism, to crooked judges and
policemen, to delinquent bureaucrats and drug lords is Mexicos greatest challenge. In 2000,
when the left-of-center Institutional Revolutionary Party lost the presidency and its 71-year grip
on power, there were hopes for reform, but it remains to be seen whether increased
democratization will lead to lessened corruption.
As the report of Wal-Marts investigation of bribery by Wal-Mart de Mexico reached CEO Lee
Scott, there were other challenges facing the company in the United States. The release of the
documentary The High Price of Low Cost, cast Wal-Mart in a very negative light. The movie

made a barrage of charges: that the company didnt pay fair wages, that it offered few jobs with
benefits, forcing workers to rely on Medicaid, that it forced workers to do unpaid overtime,
fought unionizing efforts, failed to promote female employees, and put small local businesses out
of business. Wal-Mart was beginning to expand from its base in rural and suburban areas into
urban America, but labor and citizen activists organized against the company, and protested
noisily. Wall Street analysts began referring to this negative publicity as headline risk. Under
fire from critics, worried about press leaks and facing a sagging stock price, Wal-Mart needed to
do whatever it could to improve its image. At this point CEO Scott made a public argument that
better business practices would help the company.
Mr. Scott and other executives met with activists to improve Wal-Marts labor and health care
records, to outline an aggressive energy conservation plan, to position Wal-Mart as a company
that was bringing fresh, affordable food to underserved areas and to develop initiatives to help
promote female workers.
The companys fiercest critics doubted the efforts, saying they were public-relations moves with
little substance, but at least in some circles, Wal-Mart was seen as a better corporate citizen. And
the company planned to continue its expansion plans in the U.S., moving into cities like Chicago,
Los Angeles and New York.
Wal-Marts leaders recognized that the allegations of a bribery scandal could have devastating
consequences.
It is early 2007. Wal-Mart CEO Lee Scott has called a meeting to discuss what should be done
about the findings of the companys preliminary investigation of Wal-Mart de Mexico. He needs
advice!

Instructions: Lets assume that Scott has identified three decision options:
1. Ignore the problem, assuming that it any harm from legal action and/or bad publicity would
be outweighed by profits from expanding operations in Mexico.
2. Instruct Corporate Investigations to attempt to quietly neutralize the problem doing what
they can to hide the past bribery practices and reduce them in the future, while continuing the
expansion in Mexico.
3. Make the results of the investigation public, and take appropriate action against the executives
involved in the bribery schemes, which will inevitably limit expansion, at least in the short-term.
Tell Scott which of the three would be the most ethical course of action for him to take, and
why. In doing so be sure to conduct a thorough stakeholder analysis, and to support your
recommended course of action with perspectives on ethical decision making from the course.