The biggest news emerging from Wal-Mart’s (NYSE:WMT) annual shareholder meeting on Friday was that the board approved a new $15 billion stock repurchase program, the first in two years. Such buybacks reduce the number of shares held by the public, and the smaller float means that even if profits remain the same, the earnings per share increases. For Wal-Mart, boosting that key metric is especially important because its business in the United States is only just recovering from a two-year slump that was prompted by mistakes in pricing and merchandising.
But the share repurchase was by no means the only announcement, or even the most important announcement for Wal-Mart’s future, that was made at the Bentonville, Arkansas-based company’s meeting. The retailer’s board of directors could now be at risk of losing independent voices.
Wal-Mart’s current trajectory dates back to the retailer’s last stock repurchase program. That June 2011 $15-billion buyback propelled the stake held by Wal-Mart’s founding family, the Waltons, above 50 percent — giving them majority control and more power of the board of directors. According to the rules of the New York Stock Exchange, that makes the retailer a controlled company, a designation that allows it opt out of a requirement to have a majority of independent directors.
While Wal-Mart has said it has no plans take advantage of that provision, the board is losing three independent directors who were not renominated to their positions. As a result, the 17-member board will shrink to 14, and 64 percent of the directors will be independent, down from the previous 71 percent. Seven of the nine remaining independent directors have outside financial ties to the company, according to an April proxy statement, and of the five non-independent directors sitting on the board, three are members of the Walton family. However, in that document, Wal-Mart stated that none of those relationships compromise the independence of its directors.
Still, with ongoing investigations of bribery charges in Mexico — which have made shareholders determined to make sure the company is holding senior management accountable — and problems with store operations at home, the discount retailer needs more independent oversight rather than less, Amalgamated Bank’s director of corporate governance, Scott Zdrazil, told Bloomberg. He said Wal-Mart should adhere to guidelines from the Council of Institutional Shareholders, which recommend that two-thirds of boards be composed of independent directors.
Randy Hargrove, a Wal-Mart spokesman, told the publication in an e-mail that the company had no intention of relying on governance exemptions available to “controlled companies,” but that decision is almost irrelevant. Transitioning to a controlled company would not necessarily give the Waltons more influence than they already have. “It’s not like they didn’t have enough shares before to run it their own way anyway,” Montgomery Scott analyst David Strasser told Bloomberg. “They effectively control the business and have run it that way for a while. It’s a closely held company.”
Shareholders have voiced their concern about governance. In 2012, one-third of non-Walton shareholders voted against four directors — Chief Executive Officer Mike Duke, former CEO H. Lee Scott Jr., Chairman Samuel Robson “Rob” Walton, and audit committee chairman Chris Williams. Comparatively, all four were re-elected with 99 percent or more of the votes cast the year before. That was a clear message to the board that a change was needed. But rather than “move to increase independence on the board, the board has done exactly the opposite,” noted Mike Garland, director of the corporate governance program for the office of the New York City Comptroller.
It is questionable whether the share buyback will be enough to appease shareholders concerned about corporate governance, executive misconduct, and struggling operations, problems that have been magnified by the bribery allegations in Mexico, poor labor practices in Bangladesh, and slower sales growth in the United States.
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