Wal-Mart Board Seen at Risk of Losing Independent Voices

The Walton family now owns more than 50 percent of Wal-Mart Stores Inc.’s shares, which could give it greater control over the company’s board of directors.

As shareholders gather tomorrow in Bentonville, Arkansas, for the company’s annual meeting, some institutional investors are expressing concern that the founding family’s stake allows the chain to have a minority of independent directors. As a result of buybacks, the Waltons own at least 50.9 percent of outstanding shares, up from about 39 percent a decade ago. Under New York Stock Exchange rules, that makes Wal-Mart a controlled company, allowing it to opt out of a requirement to have a majority of independent directors.

The company said it has no plans to opt out. Still, the board is losing three independent directors, who weren’t renominated. The 17-member board will shrink to 14, and 64 percent of the directors will be independent, down from 71 percent. Seven of the nine remaining independent directors have outside financial ties to the company, according to the April proxy. Wal-Mart said in the proxy that none of those relationships compromise the independence of its directors.

Amid investigations of bribery in Mexico, challenges keeping shelves stocked at home and slow growth in emerging markets, the world’s largest retailer needs more independent oversight, not less, said Scott Zdrazil, director of corporate governance for New York-based Amalgamated Bank.

“Recent events at the company indicate failures in board oversight,” said Zdrazil, whose funds hold about 445,000 Wal-Mart shares. “Now is not the time for Wal-Mart to be reducing independent oversight on the board.”

The company should adhere to guidelines from the Council of Institutional Investors, which call for boards to be at least two-thirds independent, he said.

NYSE Rules

“We have no current plans or intentions to rely on any of the governance exemptions available to ‘controlled companies’ under the NYSE rules, if and when they may become available,” Randy Hargrove, a Wal-Mart spokesman, said in an e-mail. “Our board is guided by strong governance principles.”

Controlled companies make up a small minority of the Standard & Poor’s 1500 Composite Index, according to an October 2012 report by the Investor Responsibility Research Center Institute and Institutional Shareholder Services Inc., the largest shareholder advisory firm. Fewer than 10 companies with a single class of stock -- meaning all shares have equal voting power -- had outright ownership greater than 50 percent, according to the report. Wal-Mart, which has a single class of shares, wasn’t included in the study, Jon Lukomnik, executive director of the institute, said in an interview.

Voting Power

Other controlled companies have multiple classes of shares that give some shareholders -- generally founding family members -- greater voting power. Examples include Ralph Lauren Corp., Washington Post Co. and Tyson Foods Inc.

Wal-Mart becoming a controlled company won’t necessarily give the Waltons more influence than they already have, said David Strasser, an analyst for Janney Montgomery Scott LLC.

“It’s not like they didn’t have enough shares before to run it their own way anyway,” said Strasser, who is based in New York. “They effectively control the business and have run it that way for a while. It’s a closely held company.”

Shareholder criticism of Wal-Mart’s board independence has been growing since 2011, when the Waltons approached the 50 percent ownership threshold. At the time, some institutional investors raised concerns that Wal-Mart would take advantage of the controlled company exemptions.

Last year, one-third of non-Walton shareholders voted against four directors, including Chief Executive Officer Mike Duke, former CEO H. Lee Scott Jr., Chairman Samuel Robson “Rob” Walton and audit committee chairman Chris Williams. Previously, all four were re-elected with 99 percent or more of the vote.

‘Clear Message’

“Last year shareholders delivered a clear message that board change was needed,” said Mike Garland, who directs the corporate governance program for the office of the New York City Comptroller, which oversees pension funds holding more than 5.1 million Wal-Mart shares. “Rather than move to increase independence on the board, the board has done exactly the opposite.”

The three independent board members leaving are lead director Jim Breyer, who has served since 2001, M. Michele Burns, on the board since 2003, and Arne Sorenson, who has served since 2008. The company said the trio rotated off the board in accordance with its governance guidelines.

“The board has not provided guidance” on whether the three will replaced, Hargrove said. “However, we are always on the lookout for qualified individuals who will add to the skills and experience of our board.”

Walton Sons

Wal-Mart’s five non-independent directors include three members of the founding family: Sam Walton’s eldest and youngest sons, Rob and Jim C. Walton, and Rob Walton’s son-in-law, Gregory Penner. The fourth and fifth are Duke and Scott.

Wal-Mart has financial ties to companies or non-profit groups affiliated with seven independent directors who will remain on the board after tomorrow, according to the proxy. The board concluded that no independent directors have “material relationship with our company that would compromise his or her independence,” the company said.

Wal-Mart paid $29.4 million in fiscal 2013 to Cheyenne Industries Inc., for home furnishings and other products, according to the proxy. Eric Scott, the son of board member Scott, is chairman of the furnishings company.

Wal-Mart Donation

Williams, a director since 2004 who also sits on the executive committee, is on the board of directors of Caesars Entertainment Corp. and Cox Enterprises Inc. On Wal-Mart’s proxy, Williams is referred to as a “director or trustee of a Walmart vendor or service provider.”

“We do an insignificant amount of business with both of these companies,” Hargrove, the Wal-Mart spokesman, said in an e-mail.

Aida Alvarez, a board member since 2006, is chairwoman of the Latino Community Foundation. The San Francisco-based non-profit received more than $100,000 from the Walmart Foundation charity since 2010, according a review of filings with the Internal Revenue Service. Alvarez held a position at a not-for-profit group “to which Walmart made” a donation, according to the proxy.

Shareholder advisory firm Glass Lewis & Co. wants more specificity in the reporting of charitable donations, it said in its 2013 proxy report on the company.

“We are concerned that the Company has provided vague or incomplete disclosure of certain transactions it maintains with its directors,” according to the report. “Without more specificity about these payments, shareholders are unable to determine if the size and nature of the payments may have impaired the independence of these directors.”

Rising Control

Walton Enterprises LLC, the founding family’s financial services firm, has held about the same number of shares -- about 1.6 billion -- for at least a decade. The family’s control of the company crept up as Wal-Mart bought back shares. Wal-Mart has bought back about $36 billion in stock in its four previous fiscal years, according to data compiled by Bloomberg.

According the NYSE listed company manual, when one individual, group or another company holds more than half the stock or voting power, the company need not have a majority of independent directors. Controlled companies also aren’t required to have all-independent nominating, corporate governance and compensation committees.

In an August 2011 letter to CtW Investment Group, Carol Schumacher, Wal-Mart’s vice president of investor relations, said the company had “no plans to rely on any of the governance exemptions available to ’controlled companies’ under the NYSE rules, if and when they may become available or to make any other changes to our governance structure.”

Board Concerns

Union-backed CtW, whose affiliated pension funds hold about 2 million Wal-Mart shares, still has concerns about the company’s board.

“We don’t want to see a situation where the company is effectively privately controlled,” Richard W. Clayton III, Washington-based CtW’s research director, said in a telephone interview. “The Waltons and former executives are gradually moving toward control of the board without giving shareholders control of the process. It’s a basis for concern that public shareholders aren’t able to influence the company.”

Brian Yarbrough, an Edward Jones & Co. analyst based in St. Louis, said investors are pleased with the buybacks, and he sees the resulting growth of the Waltons’ ownership stake as a non-issue.

“Whether it’s 51 percent or 45, they’ve still got huge influence,” he said.

Myriad Challenges

Still, a less independent board could be less likely to push executives to assertively confront myriad challenges, said Robin Sherk, a New York-based analyst at consulting and research firm Kantar Retail.

“When it’s that closely held, they could end up doing less risk-taking and just care more about safe returns,” Sherk said.

Last month, Wal-Mart reported that same-store sales in the U.S. fell 1.4 percent in the second quarter, the first drop after six straight gains. It also said second-quarter earnings per share will be $1.22 to $1.27. Analysts projected $1.29, the average of 24 estimates compiled by Bloomberg. Through yesterday, the shares had advanced 10 percent, compared with a 13 percent rise for the Standard & Poor’s 500 Index. Wal-Mart rose 0.5 percent to $75.63 at the close in New York.

Glass Lewis and ISS recommended voting against a combined six Wal-Mart directors this year. ISS in its 2013 proxy report on Wal-Mart recommended voting against Duke, Rob Walton and Williams. Glass Lewis also recommended voting against Duke and Williams. Additionally, the adviser came out against Scott, Alvarez and James Cash Jr., a director since 2006.

New York City Comptroller John C. Liu said yesterday the city pension funds planned to vote against nine directors over concerns about the board’s overall lack of independence.

Shareholders have until tomorrow’s meeting to cast their ballots.

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