Leadership Lessons From Wal-Mart's Bribery Scandal

In response to reporting by the New York Times, the U.S. and Mexican governments are conducting criminal investigations into alleged corruption in Walmart's Mexican operations and a possible cover-up by the firm's top officers. This story of a deplorable leadership failure at one of the world's largest companies is a cautionary tale for corporate executives.

In 2005 a former lawyer with Walmart de Mexico contacted corporate headquarters in Bentonville, Ark., claiming that the unit's spectacular growth had been facilitated by widespread bribery. A preliminary internal investigation found evidence that Walmart de Mexico had paid over $24 million to public officials and governments throughout the country to expedite building permits to gain a competitive advantage over rivals. Presented with a report detailing the illegal payoffs, Walmart's senior managers rejected the investigators' call for a full inquiry. Instead, according to the Times, they turned the investigation over to Walmart de Mexico's general counsel, a man the whistleblower had named as a key figure in the conspiracy. He promptly closed the case.

In assigning the investigation to one of its targets, these officials violated a cardinal principle of corporate leadership in the digital era: Assume your decision will become public. The Times article depicts some of them as worrying about the "legal and reputational harm" of the findings of a formal investigation. But they appear not to have considered the possibility that their decision not to authorize such an investigation would come under media -- and legal -- scrutiny.

The lesson here is that evaluation of a contemplated action should focus on its public defensibility -- on whether it could be supported with strong, credible reasons. That means ensuring that, as much as possible, the deliberation is unbiased. Research in psychology has shown that bias is an inherent feature of our cognitive processes and is generally unconscious, influencing our decisions without our being aware of it. Consequently, avoiding biased decisions requires taking measures to counter the effects of self-interest, personal loyalty, and other biases that too often skew our judgment and impel us to make bad choices. What can managers do to minimize the effects of bias on their decision making -- something Walmart's leaders so grievously failed to do?

First, make sure a conflict of interest isn't preventing you from approaching the choice objectively. As Walmart's senior executives, Mr. Scott and his colleagues certainly had self-interested reasons for not wanting to pursue the matter. As the Times noted, "Under fire from labor critics, worried about press leaks and facing a sagging stock price, Walmart's leaders recognized that the allegations could have devastating consequences." What is more, the preliminary investigation implicated Eduardo Castro-Wright, Walmart de Mexico's chief executive until 2005, finding that the bribery was carried out at his direction. Because of his success in Mexico, he had become a favorite of top officials in Bentonville, who had promoted him to a senior position in the U.S., so that he was now part of Walmart's corporate leadership. It's not hard to imagine that their close affiliation with Mr. Castro-Wright may have clouded their judgment as to whether further investigation was warranted.

Moreover, beware of self-serving arguments for the decision. While Walmart would have acted decisively to charges of corruption in the United States, one source told the Times, "some executives saw Mexico as a country where bribery was embedded in the business culture. It simply did not merit the same response." As the firm's leaders framed it, "It's a Mexican issue; it's better to let it be a Mexican response." Furthermore, Walmart de Mexico's senior managers doggedly pressed Bentonville to accept the groundless "hypothesis" that the whistle-blower -- who admitted complicity in the bribery -- had pocketed the money himself. Despite the scenario's absurdity, Walmart's executives deemed it plausible enough to shut down the investigation.

Finally, make sure that the decision is consistent with the company's policies and values. Walmart's policy was explicit: "Never cover up or ignore an ethics problem." Referring to both the corruption charges and how the firm dealt with them, a spokesman sought to distance Walmart from its leaders' actions, saying, "If these allegations are true, it is not a reflection of who we are or what we stand for." Also, apart from being a dictate of common sense, it is an established norm for corporate internal investigations that they should not be carried out by any individuals being investigated. In fact, this point was contained in a "best practices" booklet distributed by Walmart's ethics office.

In deciding whether to launch a thorough investigation of corruption in Mexico, Walmart's top executives should have taken the perspective articulated by Mr. Castro-Wright after he had become vice-chairman of Walmart and a likely successor to Mr. Scott as CEO. In a 2009 interview, when asked what he had learned about leadership, he said, "Walking the talk is the most important lesson I've learned. There's nothing that destroys credibility more than not being able to look someone in the eye and have them know that they can trust you. Leadership is about trust."