MIKKA ANN A.

KINTANA BSA-4
SEPTEMBER 6, 2016
GGOVSOR; 8:30 – 10:00 (TTH)

CASE STUDY:

“WALMART”

Wal-Mart Stores, Inc. doing business as Walmart, is an American multinational retail

corporation that operates a chain of hypermarkets, discount department stores and grocery stores.

Headquartered in Bentonville, Arkansas, the company was founded by Sam Walton in 1962 and

incorporated on October 31, 1969. As of July 31, 2016, Walmart has 11,539 stores and clubs in

28 countries, under a total of 63 banners. Walmart is the world's largest company by revenue,

according to the Fortune Global 500 list in 2016, as well as the largest private employer in the

world with 2.2 million employees.

COMPANY CASES:

Child Labor in Bangladesh

At the end of 2005, the Radio Canada programme Zone Libre made public the news that

Walmart was using child labour at two factories in Bangladesh. Children aged 10-14 years old

were found to be working in the factories for less than $50 a month making products of the

Walmart brand for export to Canada.

Referring to Walmart’s policy at that time consisting of cutting ties with suppliers when

violations occurred, the NGO Maquila Solidarity Network said that ‘cutting and running is the

worst possible response to reports of child labour or other sweatshop abuses’. Critiques said that
it only discourages workers from telling the truth to factory auditors for fear of losing their jobs

and encourages suppliers to hide abuses or to subcontract work to other factories that will escape

inspection.

Nevertheless, Walmart ceased business with the two factories immediately. Walmart

alleges that despite its effort to inspect all factories, it is difficult to enforce its own corporate

code of conduct with thousands of subcontractors around the world.

COMPANY RESPONSE:

The media exposed the fact that Walmart’s suppliers in Bangladesh were using child

labour. Undertaking audits on foreign factories was a corporate practice of the multinational. In

its 2005 Report on Ethical Sourcing, Walmart reported having increased audits from 8 to 20% of

the total audits. This report also finds an increase in workers’ age violations by suppliers’

factories. The company claimed in the same report that the increase in violations was due to

Walmart’s adoption of more rigorous standards, including an increase in unannounced audits,

and a reclassification of violations strengthening their severity – although the rating criteria to

determine what a minor and moderate offence are is not reported by Walmart. The company

pledged to be using the audits on its suppliers to improve working conditions in factories by, for

instance, giving suppliers the opportunity to remedy the underage-related violations instead of

breaking the business relationship. However, many still criticise the fact that Walmart’s

corporate ideology consisting of ‘offering low prices everyday’ is part of the source of the child

labour problem not only in Bangladesh, but along its entire supply chain. It is argued that

Walmart, in its efforts to maintain operations costs as low as possible, is ‘paying its suppliers too

little to meet even minimal standards’.

CRITIQUE:

The conflicts experienced by Walmart that were studied in this case were of a labour

nature. One of them consisted of a media attention alleging that two of Walmart’s sub-

contractors in Bangladesh were using child labour.. This issue was not the first one to be

experienced by Walmart, which is one of the most often sued companies in the US.

.Walmart changed its zero tolerance child labour policy due to NGO Maquila Solidarity

Network’s advice. Now, instead of immediately cutting business relationships with suppliers

hiring up to two underage workers, they receivea warning and are obliged to take corrective

measures for the next audit. Only when the supplier has hired more than two underage workers

and has not corrected the situation does Walmart permanently terminate business relationships.

This new policy was adopted in order assure that suppliers report the reality of working

conditions.

The responses of this multinational company to the conflict varied, ranging from

attempting to repair reputation damage and denying the claims, to providing a remedy.

Walmart’s initial approach consisted of denying that the accusations were true. The company

was very open about this and used the media, its website and its reports to make statements about

its position in the conflict. These efforts, however, mainly had the purpose of re-establishing the

integrity of the company by providing evidence to prove that the accusations were untrue. But as

was illustrated in the case study, making public statements and reporting on the conflict were not

sufficient for the company to repair the reputation damage. In response, the company took a

more proactive approach that aimed at preventing such discrepancies.

MIKKA ANN A. KINTANA BSA-4
SEPTEMBER 6, 2016
GGOVSOR; 8:30 – 10:00 (TTH)

REACTION PAPER:

“AGENCY PROBLEM”

A conflict arising when people (the agents) entrusted to look after the interests of others

(the principals) use the authority or power for their own benefit instead.

It is a pervasive problem and exists in practically every organization whether a business,

church, club, or government. Organizations try to solve it by instituting measures such as tough

screening processes, incentives for good behavior and punishments for bad behavior, watchdog

bodies, and so on but no organization can remedy it completely because the costs of doing so

sooner or later outweigh the worth of the results.

Agency problems arise when the incentives between the agent and the principal are not

perfectly aligned and conflicts of interest arise. As a result the agent may be tempted to act in his

or her own interest rather the principal’s. Conflicts of interest are almost inevitable. For example,

the agent bears the full cost of putting effort into the task delegated by the principal, but usually

does not receive the full benefit that results from these efforts. This may create an incentive for

the agent to put in less effort into the task than he or she would do if acting on his or her own

behalf. Similarly, traders or managers may take on excessive risk if they enjoy the benefits of

doing so (a high bonus in case of success), but not the costs (shareholders and lenders losing a lot

of money in case of failure). This arises because the agent’s actions that lead to the increase in

risk are not publicly observable.

 Why can the agent get away with not acting in the best interest of the principal? A first

possible explanation is that the cost to the principal of removing or punishing the agent is too

high relative to the benefit. For example, a politician may get away with corruption during his

term in office because in some environments it may be too costly for dispersed voters to

undertake actions to remove the politician from office. A second, more widely applicable,

explanation is the presence of information asymmetry. Information asymmetry arises when one

party (the agent) is better informed than the other (the principal). Information asymmetry makes

it difficult or even impossible for principals to know whether the agent acts in their best interest,

especially if crucial variables (such as the agent’s effort or competence) are unobservable.

Overall, agency problem will continue to exist as long as there is an existence of

corporate organizations. It is an inevitable feat that could not be fully extinguished but can be

lessened. One may not love it but also can’t leave it. While it is not possible to eliminate the

agency problem completely, the manager can be motivated to act in the shareholders' best

interests through incentives such as, direct influence by shareholders, the threat of firing and the

threat of takeovers. The most important method used to overcome the agency problem is

performance- based shares, bonus schemes and external audits.