Wal-Mart: Continuing to Behave Badly?

Readers may recall that we commented, in “Wal-Mart Behaves Badly, Again,” on an April 4 Wall Street Journal article that described the activities of its Threat Research and Analysis Group. This story came to light because the Bentonville company fired Bruce Gabbard, one of the unit’s members, because he intercepted a reporter’s phone calls while monitoring pager frequencies (something he admits he was not specifically authorized to do). The Journal piece described practices that were extreme, bordering on illegal. Not only does Wal-Mart use military-grade technology to relentlessly monitor employee communications (employees may not bring personal cell phone on the premises) and vendor use of its network, but it also investigates parties that propose shareholder resolutions, like the New York City Comptroller’s office, and views employee e-mails, even when sent from private accounts.

The fallout from this article continues and if anything is worsening. From what I can tell, as we will discuss below, one particularly appalling revelation has not gotten the attention it deserves.

An April 5 WSJ article reported that Wal-Mart apologized to shareholder groups, A spokesman said they were making themselves “available for any questions they might have” and giving “an apology and an explanation.” The story indicated that some groups found the answers and apologies inadequate.

The embarrassment worsened on April 9 when the Wall Street Journal ran a page one story, “Wal-Mart’s Firing Of a Security Aide Bites the Firm Back.” It turns out the same Bruce Gabbard was also responsible for security relative to a top secret “Project Red” to boost Wal-Mart’s stock price, possibly by spinning off Sam’s Club. The company was so paranoid that it engaged two McKinsey teams and divided responsibilities so that in theory neither knew the nature of the assignment.

According to the Journal:

Mr. Gabbard says he was tasked with the electronic monitoring of directors’ meetings, in a hunt for anyone who might be spying on them. This gave him unusual access to information. He says that two years ago, while manning a countersurveillance desk during a board meeting in Puerto Rico, he listened as directors debated a multibillion-dollar settlement offer in a big lawsuit alleging sex bias in pay and promotions. The board voted to reject it for several reasons, including the bad publicity it would generate….

In January, an outside attorney for Wal-Mart questioned Mr. Gabbard and some colleagues about unauthorized taping of phone calls between a Times reporter and Mona Williams, Wal-Mart vice president of corporate communications. Mr. Gabbard says he was asked what gave him the right to eavesdrop on a vice president’s conversation. He says he replied: “I’m the guy listening to the board of directors when Lee Scott is excused from the room,” referring to the Wal-Mart chief executive. He says the lawyer dropped the topic.

It is completely outside the pale to have an outside party listening in on board meetings. It is a serious breach of confidentiality, almost assuredly counter to official Wal-Mart policies, and if a board member every dialled in, likely constitutes an unauthorized wiretap. And Gabbard’s comment that he listened in when the CEO left the room confirms that the intent was spying, not some passive recording for possible future use. The board members would ask the CEO to leave precisely so they could deliberate privately. That expectation was also violated. If I were a board member, I’d want someone’s head, most likely the CEOs.

This is a far more serious breach than the pretexting at Hewlett Packard. As tacky as that action was, it wasn’t against the laws in effect at the time. Board chairman Patricia Dunn was faced with ongoing leaks that could come only from a board member, and repeated inquiries and investigations had not uncovered who the perp was. Remember, pretexting obtained records of calls made and received, not the content of calls. Moreover, outside counsel advised HP that the pretexting was legal.

So why was HP chairman Patricia Dunn trashed while there have been no public executions at Wal-Mart? Because powerful HP board member Thomas Perkins was opposed to Dunn from the minute he joined the board, and led the campaign to have her ousted (recall also that he had the temerity to defend the board member in his camp who had been leaking sensitive board matters, including pending deals, to the media). HP had a deeply divided board, while Wal-Mart has circled the wagons.

And the latest Wal-Mart development, recounted in Wednesday’s Journal, is that the New York City Comptroller is calling for Federal and SEC investigations:

The New York City Comptroller asked the U.S. Attorney General’s office and the Securities and Exchange Commission to investigate Wal-Mart Stores Inc. for what it called “ill-considered and possibly illegal surveillance operations” directed at shareholders who submitted proxy petitions.

In letters to both agencies, Comptroller William C. Thompson Jr., citing a recent article in The Wall Street Journal, said he was “particularly troubled by reports that Wal-Mart engaged in chilling and truly outrageous surveillance activities.”….

Shortly after the article ran, Wal-Mart contacted some of the shareholders to apologize, particularly for referring to them as potential threats. Mr. Thompson said the phone call didn’t appease his office.

“The response they gave my office was that it was justifiable and that they had no problem with it,” Mr. Thompson said. “We want to know to what level this background investigation went. If they just Googled us, fine. But we can’t get answers.”

Wal-Mart wouldn’t comment, but it provided a letter written by its top legal officer that was faxed this past Thursday to all shareholder proponents, in which the company said the request to do a threat assessment was never carried out.

The letter went on to explain that “in the ordinary course of business and for legitimate business reasons, Wal-Mart will conduct background research on persons or organizations, including proponents of shareholder proposals … Any information gathered about proponents of shareholder proposals would come from internet searches and from other publicly available sources of background information.”

The Comptroller’s office says it received the fax but still wasn’t satisfied….

Steven J. Milloy, the Potomac, Md., fund’s managing partner, asked that the retailer’s chief executive and general counsel “personally certify” that the company had done no “inappropriate surveillance of shareholders” who submitted petitions for the upcoming annual meeting.

It remains to be seen whether Wal-Mart’s claim that it never carried out threat assessments is indeed true. If not, this could turn out to be one of those cases where the cover up is worse than the crime.

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