Death Comes to Wal-Mart China

Includes: AAPL, WMT
by: Shaun Rein

This commentary originally appeared in Forbes

What would you do if several of your employees bludgeoned a customer to death? That is the nightmare scenario Wal-Mart (NYSE:WMT) executives are facing in China after five workers allegedly beat a suspected shoplifter to death on Aug. 30 in Jiangxi, China.

While the details are murky, it seems that the employees followed a 37-year-old woman out of the store and ordered her to prove that she had bought, not shoplifted, some merchandise she was carrying. The woman, suspicious because the men weren't wearing uniforms, refused to cooperate, and a fight broke out that resulted in her death and the arrest of two people so far.

Aside from the tragedy of a woman's loss of life, Wal-Mart is facing a public relations disaster in China, one much worse than any fallout from the poorly crafted advertising campaign I wrote about in "Learn from Burger King's Advertising Fiasco." The company has remained mum on the subject despite a growing firestorm on online message boards calling for boycotts.

It is still unclear whether all or some of the accused killers were even Wal-Mart employees. Many companies outsource their security, along with other functions like production and accounting, to outside firms, as a way of reducing fixed costs. It certainly does lower costs and does allow companies to be more responsive to market conditions, but many fail to oversee the policies of their outsourcing partners.

Multinationals need to ensure oversight not just of their own employees but also of all companies they outsource to. They need to spend more money on the training of both their own employees and employees of the companies they outsource to. Consumers and the media make no distinction when something goes wrong.

In this age of Twitter and YouTube, companies' images can be tarnished not only by a single moronic employee, as happened to Domino's in the U.S., but also by the companies that they outsource to around the world. Wal-Mart needed to do a better job of policing its own employees or, if they hired an outside firm to handle security, of training its partners' employees.

Unfortunately, many companies view such spending on employees as an unnecessary tax made useless by high turnover. But their short-term savings translate into big costs when something goes wrong.

Apple (NASDAQ:AAPL), for example, outsources much of its manufacturing to Foxconn, a Taiwanese company. Foxconn's factories are kept in virtual lockdown with extremely tight security. When a prototype of an Apple iPhone was found missing in July, security officers accused a worker of stealing it and beat him. The distressed worker later committed suicide. The resulting P.R. firestorm burned Apple much worse than Foxconn, because Apple was a much bigger target for the media. Headlines like The New Yorker's "Death at an Apple Manufacturer in China" flew around the world, even though Apple was not directly involved in the matter

Failing to seriously review the policies of business partners can damage not only reputation but stock price as well. Ten years ago I sat on the Advisory Committee for Shareholder Responsibility for Harvard University. We analyzed Harvard's endowment from an ethical standpoint and often recommended that Harvard divest holdings we considered unethical. We often recommended selling the stock of companies that had objectionable business dealings in developing regions--even when those dealings involved factories not owned by the brands themselves.

Wal-Mart may already have good policies in place in China. In that case it needs to make sure its employees and its outside contractors know and follow them. In the U.S. many retailers have clear and strong rules directing employees to call police rather than confront shoplifters, because of the danger of serious violence. In China, many companies have draconian rules that penalize employees for all kinds of losses, the aim being to reduce employee theft. Often these rules are decided in headquarters with little thought about their wider ramifications. They usually cause more problems than they solve.

Forcing an employee to cover a $20 loss can mean taking away nearly a week's salary from that employee. Far too many Chinese still live just above the poverty line, and $20 can mean the difference between feeding one's family and going hungry. Being put in such a position can be a prod to violence.

I recently went to a restaurant where I was served a dish that I hadn't ordered that cost $3 more than the one I had asked for. When I pointed out the error, the manager rushed over and assured me he'd charge me only the lower price. I didn't think twice until I heard yelling in the back. It turned out that the waiter was going to be held accountable for the $3 difference, which was a day's wages for him. He had made an honest mistake. I paid the difference, and the fighting stopped.

As globalization leads to ever greater interconnectedness between companies and to the instant spread of news and commentary on the Internet, companies from Apple to Wal-Mart need to very aggressively oversee the actions of all the companies they work with and invest in training to ensure that events can't spiral out of control. The world is too small and the costs are too great to act otherwise.