Illustration by Nicholas Weltyk
Illustration by Nicholas Weltyk

Amid the investigations into alleged bribery at Wal-Mart Stores Inc.’s Mexico unit, some shareholders are demanding the company show whether it is holding senior management accountable.

That’s why a number of global investment and pension funds led by the United Auto Workers Retiree Medical Benefits Trust have filed a proposal asking Wal-Mart to disclose whether the company has reclaimed the pay of executives found responsible for serious and costly misconduct. The proposal, which has received the backing of the proxy advisory firms Institutional Shareholder Services and Glass Lewis & Co., will go to a vote at the company’s shareholder meeting on June 7.

For large companies with far-flung operations, some misconduct is inevitable. There is simply no way to police the actions of hundreds of thousands (in Wal-Mart’s case, millions) of employees. Wal-Mart isn’t immune to this problem. The important thing is that those responsible are held to account -- and that such efforts are made transparent, so that the misdeeds don’t become larger or systemic.

Predictable Response

Wal-Mart’s response to the proposal has been predictable. The company says it has strong policies to claw back pay from executives who engaged in wrongdoing. But it hasn’t said whether these policies have ever been invoked, despite having some of them in place for more than a decade.

Policies to recover or cancel compensation to an executive found to have engaged in misconduct play a much larger role in corporate governance today than they did before the financial crisis of 2008, when bankers reaped large short-term profits on trades that later pushed the companies they worked for to the verge of insolvency, requiring government bailouts. Most big companies now have these policies in place, with the idea being that employees won’t aim for short-term gains that prove to be illusory if some of their past pay can be reclaimed by their employer.

Pending controversies aside, Wal-Mart in fact has one of the most rigorous clawback policies in the corporate world, which allows for both forfeiture of compensation for any conduct that violates the company’s code of ethics and the recapture of compensation already paid or not yet granted. But Wal-Mart doesn’t provide investors with information on whether the board has actually enforced the policy.

Without this information, these policies lose their effectiveness, particularly if some employees interpret a lack of disclosure as management indifference to unethical behavior. Some companies argue that disclosure of reclaimed compensation is already required under rules mandating public reporting of pay for certain senior executives. But disclosure rules that apply to just a few executives in large multinationals with hundreds of thousands of employees and numerous business segments are inadequate.

Investors want greater disclosure. Consider the positive response when JPMorgan Chase & Co. announced that it had recouped pay from those employees responsible for the London Whale trading losses.

So far, Wal-Mart has spent more than $200 million on the corruption investigations and expects to incur significant costs in the future. Should the disclosure proposal receive substantial support, Wal-Mart might realize that a little sunlight can go a long way.

(Charles M. Elson is a finance professor at the University of Delaware. Craig K. Ferrere is a research fellow at the University of Delaware.)

To contact the writers of this article: Charles K. Elson at elson@udel.edu Craig K. Ferrere at cferrere15@gmail.com

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net