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We don’t need no stinking badges – WMT execs guilty!

The California State Teachers’ Retirement System (CalSTRS) this week filed a lawsuit against current and former Walmart executives stemming from the April 22 New York Times article, which chronicled the company’s alleged use of bribes to accelerate expansion in Mexico and efforts by top executives to quash an investigation when the situation was called to their attention.

CalSTRS appears to have taken everything that appeared in the New York Times piece at face value, presumed Walmart executives are dirty and in a classic rush to judgment filed what’s know as a derivative lawsuit.

“By utilizing the derivative action, CalSTRS is seeking to remedy the damages sustained by Walmart as a result of alleged gross misconduct by Walmart's executive officers and directors," CalSTRS CEO Jack Ehnes said in a statement. “The focus of this action, unprecedented in CalSTRS history, is corporate governance reform to ensure that similar misconduct is not repeated in the future. We need truly independent directors who will set the right tone from the top.”

In the lawsuit CalSTRS contends, “The board’s prolonged failure to address detailed and credible allegations of criminal activity undertaken with the tacit or express consent of current and former senior corporate officials, and the complicity of the company’s highest level executives in shutting down any investigation into those allegations, is causing and will continue to cause the company substantial harm.”

Those are pretty strong allegations to make on the basis of a newspaper article. Granted, the New York Times piece was very detailed, extensive and undoubtedly required a great commitment of resources from the publication. It made current and former top executives look disingenuous at best and outright dirty at worst and set back the company’s reputation after years of hard work that yielded in incremental gains. The scandal has provided new momentum to the vocal minority long opposed to Walmart that had been denied ammunition the past five years as Walmart improved its operations and won over open-minded critics.

CalSTRS has a right as a shareholder to take action it thinks appropriate to improve the value of its holdings in Walmart and affect corporate governance. Filing a lawsuit against top executives when all the facts are not in evidence seems wrongheaded, premature and counterproductive. In fact, filing the suit will require Walmart to incur increased legal costs that will negatively impact its ability to operate on a low cost basis that underpins execution its low price strategy. Without a further reduction in its cost structure, Walmart will be challenged to widen the price gap with competitors that is seen as essential to the ongoing turnaround in U.S. operations that is viewed as the catalyst to drive Walmart shares higher this year and next.
 

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