Seven years ago, a senior lawyer at Wal-Mart Stores Inc. found out that the company had participated in systemic bribery schemes and fraudulent accounting in Mexico to gain market dominance. An investigation followed uncovering proof that more than $24 million in bribes were paid for building permits, zoning approvals and reductions in environmental impact fees—all with the full knowledge of key Wal-Mart executives.
But instead of reporting this rampant corruption and facing the legal consequences, that lawyer along with dozens of Wal-Mart executives agreed to cover it up. And rather than reprimanding the executive leading the Mexican division of the business for breaking U.S. and Mexican laws, he was promoted to vice chairman.
Not only was Wal-Mart's behavior in Mexico unethical, but also it was potentially illegal under the Foreign Corrupt Practices Act, or FCPA, which bars U.S. companies from bribing officials abroad. The bribery allegations have led to investigations by the U.S. Justice Department and the U.S. Securities and Exchange Commission. Those investigations are still ongoing.
In the meantime, the scandal, which came to light earlier this year, could cost Wal-Mart $4.5 billion in Justice Department penalties, along with a reduction in its stock price and growth targets.
In an effort to regain shareholders' trust, the company fast-tracked the appointment of former KPMG executive Tim Flynn to its board of directors in July. Flynn is expected to be involved with the audit committee looking into the bribery scandal internally. Still, it likely will take years for Wal-Mart to live down this legacy and rebuild its corporate brand.
It's a cautionary tale for business leaders who are willing to turn a blind eye to unethical behavior in exchange for business profits, according to Mark Toth, chief legal officer for ManpowerGroup North America. "When companies have ethical issues, it comes down to plain old leadership," he says. "It's not enough to have a code of ethics in the company handbook. Employees live by what they see at the top."
When leaders say they are ethical, but reward employees who break the law to get business, it demonstrates to employees that profits are more important than integrity, and they will act accordingly.
"You have to reward employees who do the right thing, even if it costs you time or money," Toth says.
Yet unethical corporate behavior seems to have worsened recently. The 2011 National Business Ethics Survey from the Ethics Resource Center shows that 45 percent of employees have witnessed ethical misconduct at work, and 13 percent say they are feeling pressure to bend the rules or even break the law—up 5 percentage points from 2010.
Such pressures are even more commonplace when companies do business in places such as Mexico, where bribery and corruption are expected, says Jeff Saltzman, CEO of consulting firm OrgVitality and adjunct professor in the School of Management at Binghamton University in New York.
"When companies do business in countries that treat bribery as a competitive differentiator, they have to orient employees about what it means to behave ethically," Saltzman says. "Corporate culture must trump local culture, and business leaders have to specifically define what that culture is."
As government agencies crack down on illegal corporate conduct, business leaders need to take stock of their own actions to be sure they are rewarding the right kinds of behavior—and punishing those who break the rules. That's exactly what DAI, a global project management development firm, did last November when it turned a local employee over to the Afghani police for demanding bribes from beneficiaries of a U.S. Agency for International Development, or USAID, program.
DAI oversees government-funded global development projects, and must hold itself to the highest ethical standards, says Michael Walsh, the company's chief ethics and compliance officer. "If you take short cuts or turn a blind eye to unethical behavior, people pay attention to that, and you can quickly lose their trust."
In the case of the USAID program, a local employee was asking for money from small-business owners in exchange for approving their grants, even though the grant form explicitly stated on the first page that if anyone on the DAI staff asks for money they should report it immediately.
One of the applicants reported the misconduct, and DAI immediately took action. Company officials removed him from the position last November and turned him over to police. In March the Afghan Special Anti-Corruption Tribunal Court sentenced him to three years in prison and a $10,000 fine.
"We worked closely with USAID on that conviction," Walsh says. "We have a system in place to move quickly to justice."
It's a bold step for a group such as DAI to report one of its own, but in Walsh's eyes and the eyes of DAI's leadership, there was simply no other choice. "You have to let people know that they have to do the right thing or there will be consequences," he says. "It's the only way to feel confident that everyone will make the right choices."
DAI provides ethics training and workshops for all of its workers, and it regularly audits projects for any violations. "People see our auditors all the time, so they know we are watching what they are doing," Walsh says.
Making the tough discussion to turn in an unethical worker does more than root out one bad apple. It sends a message to every employee, stakeholder and the community that this company is honest, and trustworthy, Walsh says. "Our people know that the people above them have their back as long as they do the right thing."
Sarah Fister Gale is a freelance writer based in the Chicago area. Comment below or email email@example.com.