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New York Pension Funds to Challenge Wal-Mart

Gretchen Morgenson|The New York Times

Concerned about Wal-Mart’s reported cover-up of bribery in its Mexico operations, leaders of New York City’s pension funds said Monday they would vote their 4.7 million company shares against five directors standing for re-election to the retailer’s board at its annual shareholder meeting next month, the New York Times reports.

People stand in front of a Walmart store before the doors open at 5am on 'Black Friday' in Miami, Florida.
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It was unclear whether other investors would join the city pension funds and vote against Wal-Mart’s directors. Board members at some large public companies have come under fire from shareholders at annual meetings this year, but most of the opposition has been related to executive pay practices. It is unusual for board members to be unseated by a shareholder vote.

With Wal-Mart’s internal practices under the microscope, however, some investors said the company’s annual meeting could be contentious.

Officials at the New York City pension funds said they were taking action against the Wal-Mart directors because their previous efforts to persuade the board to increase its oversight of legal and regulatory practices at the retailer were unsuccessful. In 2005, for example, after reports that Wal-Mart had hired undocumented immigrants and violated child labor laws in three states, a group of institutional investors including the New York City comptroller asked the company’s board to hire an independent firm to review its regulatory controls and report findings to shareholders. Although Wal-Mart directors met with the investor group, the group’s request for a review was rebuffed.

The fruitless 2005 discussions re-emerged as an issue for John C. Liu, the New York City comptroller who is the trustee of the pension funds, because that was the year high-level Wal-Mart officials were told of bribery in its Mexico unit, according to a recent report in The New York Times. It is unclear whether Wal-Mart’s independent directors were aware of the Mexican improprieties, which The Times reported were related to expediting government approvals to build stores.

“In its relentless drive for profit and expansion, Wal-Mart has paid millions to settle charges that it violated child labor laws and exploited immigrants,” Mr. Liu said Monday, in announcing the decision to vote against the company’s directors. “Now we learn that not only did Wal-Mart allegedly bribe its way through Mexico, but may have tried to cover up the corruption. A select few Wal-Mart executives may benefit in the short term, but the company, its share owners and everyone else lose in the long run.”

Wal-Mart declined to comment.

The directors opposed by the New York City pension funds are Michael T. Duke, the company’s chief executive, and H. Lee Scott Jr., his predecessor. Pension fund officials said in a statement that Wal-Mart’s failure to pursue an independent investigation into bribery allegations in 2005 “has potentially exposed the corporation and its share owners to even more serious financial and reputational harm.”

Along with opposing corporate insiders, the shareholders will vote against Christopher J. Williams, chief executive of the Williams Capital Group, an investment bank, who heads the audit committee of the Wal-Mart board and who has been a director since 2004; and Arne M. Sorenson, the chief executive of Marriott International, who sits on the audit committee.

They will also oppose the board chairman, S. Robson Walton, because he presides over a board consisting of too many directors with company ties, Mr. Liu said.

William C. Thompson Jr., Mr. Liu’s predecessor, was the New York City comptroller when the investor dialogue with Wal-Mart’s board began. In a letter dated May 25, 2005, he and three other large institutional investors urged the audit committee of the company’s board to set up a group of independent directors to conduct a comprehensive review of the company’s legal and regulatory controls.

The board responded by having two members of its audit committee meet with the investors, according to William R. Atwood, executive director of the Illinois State Board of Investment, who attended the meetings. “They were confident that the processes that were in place were sufficient, but we walked away from the meeting doubtful that that was the case,” Mr. Atwood said Monday. “Fast-forward to now, and unfortunately they relied on internal controls that clearly were wholly inadequate.”

After the meeting with the Wal-Mart directors, the shareholder group continued to press for greater outside policing of the company’s policies and controls. In November 2005, the investors requested more material from the board, asking for, among other things, information about what the company was doing to ensure that “individual and regional store performance targets and aggressive growth targets are not driving noncompliance through the system.” The company did not comply with the request.

Elizabeth McGeveran, senior vice president for governance and sustainable investments at F&C Management, a $150 billion London-based asset manager, also participated in the meeting with the Wal-Mart directors. “We had a good preliminary discussion,” she recalled Monday. “From that I had hoped we were going to springboard to a more detailed conversation with independent directors about controls, and they didn’t seem to have an appetite for that.”

Now that the bribery scandal has erupted, Ms. McGeveran said: “One of the biggest questions that I still have is this is such a big institution, how are they evaluating the true effectiveness of their policies? It would be a good time for the board to start talking more broadly and more publicly about those questions.”

The board will have that opportunity at the Wal-Mart annual meeting, scheduled for June 1 in Fayetteville, Ark.

The New York City pension funds that will vote against the Wal-Mart directors are the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System.