Walmart México

Wal-Mart, J.P. Morgan, and the perils of ignoring shareholders

May 21, 2012: 1:26 PM ET

The two companies' boards failed to pay heed to risk and compliance warnings from its shareholders, which could have saved both companies considerable trouble.

FORTUNE -- No working stiff wants bad news about his performance to hit the boss' desk right before review time. Although the review is supposed to represent a year's worth of effort, there's always a chance that the "what have you done for me lately?" question will influence the review and pay outcome.

The same happens with boards and CEOs in the run up to their companies' respective annual shareholder meetings. This hasn't been a fortunate year for the largest of firms on that front.

At Citi (C), the inability to pay a promised dividend because of a lack of Fed confidence hit the headlines prior to its annual meeting, where shareholders voted down its executive pay plan. J.P. Morgan's (JPM) more than $2 billion trading debacle made headlines right before that bank's annual meeting last week, a story that has led to investigations that will not go away anytime soon. And Wal-Mart (WMT) might have preferred for the New York Times' bribery investigation to hit the presses sometime other than the run up to its annual meeting on June 1.

For the first time in its history, pension fund CalSTRS has initiated a suit on behalf of Wal-Mart and its shareholders against the retail giant's executives and directors for their handling of the bribery scandal and investigation. "We take our responsibility to our shareholders very seriously. We are reviewing the lawsuit closely and are thoroughly investigating the issues that have been raised," a Wal-Mart spokesperson emailed me. In advance of the company's upcoming board meeting, the New York City Pension fund will be voting no on the re-election of five of Wal-Mart's directors.

Missed warning signs at Wal-Mart

Wal-Mart's board received warnings on its compliance oversight seven years ago, newly released documents reveal. In a May 25, 2005 letter to Roland Hernandez, who was then chair of Wal-Mart's audit committee, New York City Comptroller William Thompson gave fair warning: "Strong internal controls are … essential to ensuring full legal and regulatory compliance.… We urge the Audit Committee to appoint a special committee of independent directors to conduct a thorough review of the company's controls," the letter said. Although the impetus for the letter was not the bribery scandal, the signatories to the letter, which included the New York City and Illinois pension funds as well as USS and F&C Investment Management, recognized what the board did not seem to: weak controls in one area can be a symptom of larger problems yet to be unearthed.

Rather than recognize the seriousness of these issues, the board offered a weak response: two months later, Hernandez wrote that the compliance systems for the company were in good shape and that the audit committee was on top of things. But the funds continued to pursue the issue in a meeting in New York City held in September 2005.  Both Hernandez and Wal-Mart's current audit chair, Chris Williams, attended. More

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