Hazard Pay at Wal-Mart

The discount giant's risky costs that could hit both its financials line and reputation.

Alyce Lomax
Alyce Lomax
May 30, 2013 at 1:11PM
Consumer Goods

When things go bad for high-profile Wal-Mart (NYSE:WMT), it can get ugly. The discount retailer has hit another public relations speed bump given its guilty plea to charges of improper disposal of hazardous waste, with pollutants having gone down sanitation drains in California. The company will pay a pretty penny: an $81 million fine, which also covers related allegations in Missouri.

In its press release, Wal-Mart explained that the charges stem from activities that took place years ago, that regulators did not allege specific environmental impact, and that it now has comprehensive environmental programs in place. It gave examples of its more responsible methods for disposing of such waste after it began implementing stringent environmental measures in 2006, some of which the EPA says go above and beyond regulatory laws.

Hazard pay and hazard payback
Regardless, the idea of costs -- both financial and reputational -- comes at an interesting time given a pending shareholder proposal. The resolution asks that Wal-Mart disclose utilization of its existing clawback policy to recoup compensation from executives that have indulged in unethical behavior or acts considered detrimental to the company. Investors will vote on the measure at the company's annual meeting on June 7.

Hazardous waste payments aren't the only potentially costly issues facing Wal-Mart. Consider its possible violations of the Foreign Corrupt Practices Act, alleging bribery in Mexico, Brazil, China, and India. Investigations by the Department of Justice and the Securities & Exchange Commission are ongoing. The company disclosed additional costs to come, even beyond the $157 million in fiscal 2013 in dealings with the matter. Although Wal-Mart doesn't believe its financial hit will be material to its business, it also can't guarantee it.

Wal-Mart faces other legal proceedings that could prove costly, or cast it or its employees in an unethical light, such as class action lawsuits related to wages and gender discrimination allegations.

The risks of leading in the response to tragedy
Wal-Mart's use of Bangladeshi factories for merchandise also gained a high profile after the recent tragic factory collapse in that country. The public's increased awareness of the human toll of low-priced goods could also put a dent in Wal-Mart's reputation.

Wal-Mart quickly opposed signing a European accord for better factory conditions, claiming that it can perform inspections of its suppliers' factories quicker and better on its own. Maybe some retailers even took a cue from Wal-Mart, and leading in an event like this includes many dangers.

Take two struggling retailers that stand in Wal-Mart's gigantic shadow. J.C. Penney (NYSE:JCP) and Sears Holdings (OTC:SHLDQ) both said they have their own safety measures. Penney's is increasing its requirements, and wasn't a customer of the collapsed factory. Sears also rejected signing onto the accord, and wouldn't specify which factories it uses in Bangladesh. Their refusal to sign on may further soil their already-struggling brands, and therefore, their businesses. J.C. Penney and Sears both recently reported atrocious quarterly losses.

Given Wal-Mart's sheer size, it has a lot of power, which can be wielded positively or negatively. Despite risks like the ones above, it isn't in imminent danger like Sears and Penney. The above incidents don't shed a good light on it, though, and Wal-Mart shareholders can only hope that maybe the retailer can make up for some of the negative press with, say, improved conditions for its factories in Bangladesh and other developing countries. When Wal-Mart speaks, suppliers listen.

The price of controversy
Many supposedly punitive fines companies like Wal-Mart pay amount to chump change when it comes to the size and scope of their businesses. Wal-Mart itself racked up $114 <em >billion in revenues last quarteralone. However, liabilities stack up, and the reputational risk that Wal-Mart faces in instances like these may be a far more costly intangible for investors to consider. Although Wal-Mart has cleaned up its act in many areas, it's clearly still scrubbing away; investors should be wary of the multifaceted price of controversy.