- The ISS, advisors to institutional investors, opposes Wal-Mart CEO's re-election and criticizes board for doing little to rectify possible violations of foreign bribery probes in Mexico.
- In addition to strong negative press, sales have declined consistently.
- We recommend investors sell Wal-Mart and look for more profitable and ethical retailers.
Institutional Shareholders Services (ISS), a prestigious organization that advises big shareholders like mutual funds on how to cast their vote during corporate elections, has given Wal-Mart's (NYSE:WMT) current board a scathing review.
They not only oppose the idea of the reelection of Chairman S. Robson Walters and former CEO Michael T. Duke to the board, but also believe the company directors have done little to address the issue of foreign bribery probes by government regulators and have also failed to address the issue of fair executive pay.
ISS Sees Two Big Red Flags
The ISS is calling for a more independent board to improve how business is overseen by the global retailer. The organization is troubled by two major issues in particular:
- The first issue is that the company has failed to identify, or disclose, which executives might be implicated in alleged foreign bribery probes.
- The second issue is that executive pay is not commensurate with declining Wal-Mart revenues, but appears set independently of how the company is actually doing.
Executives Awards Remain, Despite Consistently Poor Performance
Wal-Mart's US sales have dropped for the fifth quarter in a row, with more signs of declining revenue ahead. Additionally, the company is struggling in the international market.
ISS has recommended investors vote "No" on the proposed executive pay plan and consider appointing an independent chairman during the June 6th annual company meeting.
Wal-Mart has defended itself vigorously against all these accusations.
Randy Hargrove, the company spokesman, said that there was a strong correlation between executive pay and company performance, and that Named Executive Officers were interested in aligning with the interests of shareholders. He also said that Wal-Mart had spent over $400 million in cooperating with government prosecutors to look into whether overseas executives had violated the Foreign Corrupt Practices Act, which prevented American companies from offering money or services as a bribe to foreign government authorities.
ISS was not impressed by this throaty defense, saying that after several years into the foreign bribery investigations, there was still no firm evidence to indicate that Wal-Mart was in compliance with the Foreign Corrupt Practices Act. Furthermore, there was little reason to have confidence that the company would make senior executives accountable if some were found culpable by investigators.
ISS also said that a decline in Wal-Mart's performance had shown no correlating decline in executive pay. Instead, sophisticated accounting adjustments had been made in the form of special awards and retroactively granting more shares so that the executive's high pay would continue without interruption.
ISS's Recommendations Likely to Be Ignored, Negative Publicity To Remain A Haunt
In 2013, ISS opposed the re-election of the company's three directors over their failure to make any progress in the bribery probes. Despite this outspoken protest, the directors easily managed to retain their seats. This year too, it is unlikely that the organization's suggestion will have much impact on investors, because the chairman is part of the founding family, which controls 50% of the company's stock.
Although, Mr. Duke is no longer the CEO of the company, he will also probably be re-elected for another term as a board member. With the Walton family's control over the company, it is unlikely that there will be much change in the company's direction, despite consistently poor sales in domestic and overseas markets.
Takeaway For WMT Shareholders
Wal-Mart has long been a target for liberal political and economic activists. The city of Portland, for example, has begun divesting from the retail giant, deciding not to replace the first of Wal-Mart's five bonds, which reach maturity this year. (Previously, Wal-Mart holdings accounted for approximately 3% of the city's portfolio, or about $1 billion.) Some residents have deemed it a "killer of free market capitalism," squashing small business growth and putting downward pressure on wages and benefits.
In Europe, this has been a trend for some time, with Dutch pension funds refusing to invest, due to the company's opposition to unions.
The scandal involving possible violation of the FCPA in Mexico due to bribing Mexican officials is a negative factor for many investors as well.
While negative publicity from the ISS or other corners of the globe certainly won't boost WMT stock in 2014, investors should be most wary about declining sales and the company's consistently (and drastically) missing revenues estimates. In Quarters 2, 3, and 4 of 2013, WMT missed revenues expectations by $1,554, $1,887, and $1,592 million, respectively. In the past five quarters, the company has lowered its estimates three times.
For now, we recommend investors sell WMT, until the company has proven a better growth strategy.
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