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April 20, 2007

Surveillance, Schmurveillance?
    by Erik Wilkins-McKee

Wal-Mart's apparent research and surveillance activities geared toward shareholders raises troubling, but perhaps fleeting questions about trust. -- The recent scandal involving Wal-Mart's surveillance activities raises complex questions about the level of trust that must exist between publicly traded companies and their stakeholders.

Visit the
Prospectus Ordering CenterAlthough the current situation is the latest in a list of revelations that include the head of Hewlett-Packard ordering surveillance of some of HP's Board members and Cintas's lawsuit against shareholder Tim Smith, the Wal-Mart (ticker: WMT) case is fundamentally different. In this case, the scandal may have little consequence for company-stakeholder relations.

The story initially broke when the Wall Street Journal reported on April 4 that Wal-Mart runs a "Threat Research and Analysis Group" at its Bentonville, Arkansas headquarters. Bruce Gabbard, an employee of 19 years, was fired after it was revealed that he had recorded phone calls with a reporter for the New York Times and intercepted internal pager messages as well.

Gabbard has since had a gag order put on him by a federal judge limiting further discussion of his allegations.

One of the WSJ's reporters, Gary McWilliams, told Amy Goodman of Democracy Now! that their investigation uncovered a security system run by Wal-Mart that included surveillance of employees, critics, and shareholders proposing proxy resolutions for the upcoming shareholders meeting in June.

Apparently, heightened security efforts began at Wal-Mart in the wake of 9/11. However, Wal-Mart's actions went beyond that of most companies. Its surveillance of employees, for instance, is done with software that allows the company to monitor workers' external email accounts, as well as company accounts, when sent from a company computer.

In the eyes of its critics, however, the larger issue has to do with the perceived effort by Wal-Mart to monitor all its stakeholders. Simon Billenness, former Director of the Big Box Collaborative and a consultant on corporate campaigns and socially responsible investment, says that "the company is revealing a deeply disturbing and increasingly dysfunctional corporate culture."

Billenness added that "Wal-Mart's actions are far worse than those of HP," which he described as "a curious case of boardroom politics." Wal-Mart, on the other hand "is systematically spying on all of its stakeholders (employees, NGOs, the press) that seek to hold the company accountable." Billenness did not know, however, what evidence might exist that the company went beyond a search of publicly available information.

The WSJ reported originally that a January 2007 memo requested investigation of some shareholders proposing resolutions for this year's proxy meeting. It seemed that special attention was focused on those groups or individuals making resolutions the company hoped to block.

The company, in response to the initial reports in the WSJ, sent a letter to the resolution proponents who had been named as under investigation. In it, Tom Hyde, Executive Vice President and Corporate Secretary, denied the allegations.

He wrote that "in spite of a January 2007 memo referenced in the article, there were no inquiries made with respect to the proponents of shareholder proposals… the request contained in the memo was not acted upon."

The shareholders purportedly examined include the Benedictine Sisters of Boerne, Texas, the Free Enterprise Action Fund, and the New York City Comptroller's Office. The responses of shareholders on the list varied.

In a letter to the company, the Sisters of Boerne wrote that they "are deeply disappointed, appalled and shocked that Wal-Mart would engage in this type of activity with any shareholders who are owners of the company." As part of the Interfaith Center on Corporate Responsibility (ICCR), the Sisters requested that all information on any surveillance that took place be made available to them, and that "this type of activity must cease."

Sr. Susan Mika, Director of Corporate Responsibility for the Sisters of Boerne, while declining to comment on Wal-Mart's possible motives, said on April 19 that a public apology would now be enough.

The Sisters and ICCR, she said, would prefer to move quickly past this, and to re-engage the company on what she called the "real issues" of health benefits, wages, and diversity among employees, sustainability, and wages paid to employees producing goods sold at Wal-Mart.

Sr. Mika also said that the resolution the Sisters of Boerne had proposed this year was identical to one they filed in 2006; it addresses the issue of pay inequity between the company's CEO and its average worker.

In 2006, Wal-Mart had acted to block consideration of the Sisters' proposal, but lost on appeal to the SEC. In this year's proxy, released April 20, the company recommends voting against the resolution.

The New York City Comptroller's Office represents New York City's Pension Funds, which hold 8 million shares of Wal-Mart stock. Comptroller William Thompson, Jr. wants more than an apology.

In letters to U.S. Deputy Attorney General Paul McNulty and Chairman Christopher Cox of the SEC, Thompson called for an investigation of the company's "ill-considered and possibly illegal surveillance operations directed…particularly[at] those shareholders…introducing resolutions that Wal-Mart was seeking to thwart."

Thompson also wrote Lee Scott, President and CEO of Wal-Mart, saying that in a discussion between his office and Wal-Mart, the company stated it "considers this conduct to be justifiable and proper and that Wal-Mart will continue this activity in the future." Thompson characterized that view as "mystifying and outrageous."

But John Simley, a spokesperson for Wal-Mart, said that the company's position is properly described in its letter to shareholders. There, Wal-Mart states "that information would be collected and reviewed simply for the purpose of helping us to know more about people with whom we would be communicating on matters of significant interest to our company and to our shareholders."

He added that a second letter was forthcoming on April 20, but as of press time it was not available.

This year's shareholder proposals are largely intended to change corporate practices, with goals related to good governance and transparency as well as conservative and liberal
economic agendas. Thus it seems unlikely that most shareholders would separate their ties with the company.

Indeed, while Billenness is right in saying that the Wal-Mart case is more serious than that of Hewlett-Packard, it is hard to define its long term effects. Billenness says that "Wal-Mart will have to re-build trust [with stakeholders]through demonstrated achievements."

He adds that shareholders will most likely "engage Wal-Mart more intensively on all issues."

Comptroller Thompson wrote in his letter to CEO Lee Scott that "our equity markets remain only as strong as the companies that comprise them. It is therefore critically important that every company maintain the highest levels of integrity in its dealings with its employees, its shareholders, and the public."

Whether or not shareholder groups have lost faith in the company's veracity, no one is talking about divesting themselves of Wal-Mart stock yet.

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