From Corporate Chief to Corporate Thief, an analysis of the Tyco scandal.

Background

Tyco International Ltd. (NYSE: TYC) is a diversified manufacturing conglomerate incorporated in Bermuda, with United States operational headquarters in Princeton, New Jersey (Tyco International (US) Inc.). Tyco International is composed of five major business segments:

- ADT Worldwide,
- Fire Protection Services,
- Safety Products,
- Flow Control and Electrical
- Metal Products.

The Kozlowski era.

Dennis Kozlowski joined Tyco in 1975 and succeeded John F. Fort as CEO in 1992. In 1993 Tyco changed its name to Tyco International Ltd. The 1993 fiscal year saw the company post net income of a mere $1 million. After 1993 the business picked up dramatically and from 1994 to 2002, Kozlowksi built Tyco into a global conglomerate with $36 billion in revenue from the sale of everything from diapers to fire alarms.

Through acquisitions and mergers Tyco spent over $60 billion and acquired 200 major corporations and hundreds of smaller companies. Kozlowksi was notorious for being a very fast paced acquisitor, earning him the nickname "Deal-a-Day Dennis . Targets had to be complementary to an existing Tyco operation, however subtle that synergy might be. Tyco’s management was completely decentralized. Provided that they met their ambitious profit goals, Kozlowski’s executives could run their divisions as entrepreneurs. The strictly-by-the-numbers management--tended to antagonize the top executives of acquired companies, most of which Tyco radically shrank to boost cash flow immediately.

Kozlowski became notorious for his extravagant lifestyle, supported by the booming stock market of the late 1990s and early 2000s. Allegedly, he had Tyco pay for his $30 million New York City apartment which included $6,000 shower curtains. Kozlowski also purchased several acres in the private gated community, "The Sanctuary", in Boca Raton, Florida.

The collapse of Enron Corporation in 2001 was a wakeup call for investors. Like Enron, Tyco had a complex accounting structure due to its myriad of acquisitions. In January 2002, Kozlowski announced a temporary stop to acquisitions and presented a radical plan to boost shareholder value. Tyco was to be split into four separate publicly traded companies. This would make the corporate structure more transparent and would boost shareholder value. Investors reacted with skepticism. Three months later, Kozlowski shifted course again claiming that he would only sell off one subsidiary, CIT Group, through an IPO.

CIT Group had been bought in 2001 after a suggestion of Tyco board member Frank E. Walsh Jr., who was friendly with Albert R. Gamper Jr., CIT's CEO. Kozlowski had paid Walsh, fellow Seton Hall alum, a $20 million reward “fee” for the deal. The divestment of CIT ultimately brought Tyco a $7 billion loss.

By May 2002, Tyco's stock was trading at less than $20 per share, down 66 percent since the beginning of the year. The firm's market capitalization, which in December 2001 had been higher than that of General Motors Corporation, Ford Motor Company, and DaimlerChrysler AG combined, had plummeted by about $80 billion.

The accusations.

As far back as December, 1999, the SEC had investigated Tyco's handling of some 120 acquisitions. The following summer, however the agency had sent a letter informing Tyco that it was not taking action. It wouldn’t be accounting fraud that brought Tyco’s glamorous CEO down. In June 2002, Manhattan District Attorney Robert M. Morgenthau brought charges against Kozlowski on two accounts. It was evasion of New York sales tax on the purchase of expensive artwork, not his manipulations at Tyco that forced him to resign as CEO of Tyco International. One day after his resignation, Kozlowski was indicted. On November 27, 2002, the State of New Jersey took separate action in the scandal, filing a federal suit against Tyco and former personnel, with charges in part of violating the New Jersey RICO statute. As a result of the scandal, Tyco and some former directors and officers were named as defendants in more than two dozen securities class-action lawsuits. That March 31, Tyco made a motion to dismiss, which was granted in part over a year later, on October 14, 2004. At the end of 2002, U.S. News & World Report picked Kozlowski as its corporate rogue of the year, choosing him over Enron and WorldCom executives involved in much more extensive corruption. On September 19, 2004 Kozlowski and Tyco’s former CFO Mark Swartz were finally sentenced to eight and one-third to 25 years in prison .

Executive behavior.

What could have made a man who wanted to be a combination of Jack Welch and Warren Buffet turn into a greedy defrauding manipulator? Like any crime, the reason was a combination of reward, opportunity and a slim chance to be caught.
Kozlowksi was never one of the handsome fast boys like the traders and executives at Enron. He has frequently described himself as the son of a Newark cop turned police detective. Kozlowski was so keen to advance at Tyco that he started taking night classes at Rivier College, a Catholic college in Nashua. He completed only three classes, though he claimed to have earned an MBA from Rivier in a questionnaire submitted for the 1988-89 edition of Who's Who in America . For most of the 27 years that Kozlowski worked at Tyco, he was an exceptionally enterprising and effective manager.

In the early 1990, the success of the stock market had created the notorious “Bubble Era” that would end with the great dot com crash of 2001 . Not to be outdone by the upcoming “new world” companies, the traditional industry started a merger and acquisition spree of unprecedented scale. The phrase "Get large or get lost" was the wisdom of the day. Companies that knew how to grow where awarded with large boosts in share price. The CEO’s that brought about this new wealth were lavishly awarded. The growth caused ever higher shareholder expectations which in turn put the pressure on companies to produce ever higher results. The lack of corporate governance combined with their status as superstars caused many CEO’s to actually behave like superstars. Delusions of grandeur had previously been reserved for heads of state but in the corporate kingdoms of the late 20th century, the CEO’s felt increasingly above the law. According to Tyco, Kozlowski misappropriated $43 million in corporate funds to make philanthropic contributions in his own name, including $5 million to Seton Hall, which named its new business-school building Kozlowski Hall. This is behavior is not unlike that of a Roman emperor or an African dictator.

According to the indictment, Kozlowski's thievery escalated after Tyco shifted 40 more employees from Exeter to Boca Raton, where ADT had a luxurious office. Like Enron, Tyco had cultivated a corporate culture where executives felt entitled to the company’s assets. This attitude is further demonstrated by statements made during the Tyco trial where Kozlowski and Swartz testified that they had no intention of deceiving anyone and that they were entitled to the payments as bonuses under the company's board-approved compensation formulas.

Kozlowki’s apparent success, his status and ambition caused increasingly erratic behavior. Apart from his private spendings, financed by the firm, he allowed himself to become influenced by flamboyant men, like Lord Michael Ashcroft. Ashcroft was founder and CEO of ADT, a security and motoring auctions group. As drab as Kozlowski’s pre-CEO life had been, so exciting was Lord Ashcroft’s lifestyle. ADT was set up in Bermuda and Ashcroft used his yacht, the Atlantic Goose as a floating office. The acquisition of ADT was structured as a reverse takeover, allowing Tyco to move its statutory headquarters to the tax haven. Ashcroft joined the board of Tyco as one of the few executives of acquired companies. This was the first step in creating a network of offshore subsidiaries to shelter foreign earnings from U.S. taxes. It would be financial constructions like this that would ultimately bring down Enron.

Board oversight.

As long as Tyco’s profits soared, the investors couldn’t get enough of “Dennis the Menace”. The board of directors, normally installed to oversee the behavior and results of the executives on behalf of the shareholders, let Kozlowski do whatever he pleased. This wasn’t very different from the situation at Enron, Worldcom and other high rolling companies. Tyco’s SEC filings show no significant challenges to Kozlowksy’s reign in that period.
From 1997 through 2001, Tyco's revenues rose by 48.7% a year, five times faster than General Electric's, while its pretax operating margins improved to 22.1%, easily topping GE's 16.4%. It was easy for Kozlowksi to argue that he deserved a higher salary then Jack Welch, the CEO of GE, who was the best paid executive at that time.

The board of directors was only sparsely informed about Tyco’s executive decisions. The acquisition of CIT Group, which cost the company $9.2 billion wasn’t relayed to the board until 6 months later when Swartz mentioned it in a rough draft of a proxy statement. The $20 million fee that Walsh had received for the deal stunned the board members. When the board challenged him, Kozlowski claimed that he had made an innocent mistake--but at least had talked Walsh down from the $40 million he had initially wanted. Walsh refused to give the money back and left the board. Tyco sued Walsh and brought in the lawyer David Boies and his firm to start turning over every rock. Walsh declined to comment.

During the Tyco trial, prosecutors showed that Kozlowski and Swartz used company tax and relocation loan programs to make personal investments, buy jewelry and art and live ``like royalty.'' They were accused of awarding themselves and others $137 million in unauthorized payments in the form of cash, Tyco stock and company loan forgiveness.
The executives forgave their own debts without getting proper approval from the compensation committee of Tyco's board. Tyco’s executives were also charged with misleading investors about the company's financial condition while selling $575 million in Tyco shares and options. All of which the board of directors apparently never knew about. According to the other board members, Director Philip Hampton, who died in 2001, was aware of some of the payments. This statement drew comments from Assistant District Attorney Ann Donnelly who said it was “despicable to use a dead man's testimony as a defense”.

In the pre-SOX era, the independence of outside board members was questionable. Relationships with accounting firms were so tight that, in case of the Enron scandal, the auditors where often in on the scheme or at least closed their eyes to any irregularities. The increasingly complicated structure made it very difficult for board members who weren’t accountants to know exactly what was going on.

Why did the board disregard reporting rules?

In the Bubble Era, shareholder value was the most important factor. As long as companies provided growth, other stakeholder priorities were effectively bypassed. Unlike Enron, there was no whistleblower that brought the case to light. The lack of compliance to reporting rules wasn’t confined to Tyco. Former Chairman of the SEC Arthur Levitt pointed out, “the spate of (…) corporate failures and scandals of the past few years could not have occurred without the widespread breakdown in the oversight system of American corporate markets . Too many corporate professionals, including officers, directors, analysts, investment bankers, and most notably the accountants and attorneys, appeared to have forgotten that their fiduciary duties require them to represent the interests of the corporation and the shareholders first, above all other interests, including their own”. The culture of 'what can we get away with' eroded public confidence in American financial markets.

Until the passage of the Sarbanes-Oxley Act of 2002 both the accounting and the legal professions were allowed to set their own ethics rules with little or no oversight by the government. Official oversight results by professional auditors were therefore often kept confidential. This caused a “see no evil, hear no evil” attitude in many boards, because no board member wanted to be accused of being a “spoil sport” when the going was good.


How to regain trust?

In 2002, Tyco agreed to replace all board members who served with Kozlowksy, notably one of them being Michael Ashcroft. The move came after investors and a New Hampshire regulator objected to a bid to keep two of the board members . It was a good step in the direction of regaining investor confidence. Sarbanes-Oxley establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains a minimum standard which Tyco needs to improve upon. There are several points that Tyco can take into consideration.

Direct measures:

1. Transparent corporate structure.
The complex acquisition schemes of the late 20th century caused a great many board members to lose oversight. Only a professional accountant or lawyer would be able to make sense of the great many links, special purpose vehicles and other specialized structures. Board members are often chosen because of their standing and past expertise, not for their current knowledge. The simpler the company structure, the easier it is to follow for board members and shareholders.

2. Truly independent board members.
Sarbanes-Oxley requires a greater number of outside board members. Individual board members should be able to acquire outside advice and be accountable for any decisions they make. Board members should be able to challenge executive decisions before they are made.

3. More influence of stakeholders.
Financial stakeholders should be engaged in (potential) management issues. Even in the SOX era, stakeholders are often informed after a decision has been made. A good example of this is ABN AMRO’s sale of LaSalle to Bank of America. This deal was made over the weekend without informing the shareholders. The decision was held up in court but only because ABN AMRO was to be sold anyway.

4. Direct influence on reward structure.
SOX requires executive compensation to be published. This doesn’t guarantee any influence over the board’s executive compensation policy. Fortis Bank’s CEO, Jean-Paul Votron has been ousted because his salary was raised 73% while at the same time Fortis chose not to pay dividend and to issue emergency stock. This was done after the decision and only because shareholders revolted. It will undoubtedly result in a golden parachute for the former CEO.

In the long term, Tyco should create and stimulate a corporate culture where the interest of all stakeholders comes first. A workers council, like that required by law in The Netherlands should be able to challenge management decisions. Shareholders need to get more direct influence on important company decisions and long term strategy. Other stakeholder groups should be engaged in the dialogue.

Periodical reporting could be replaced by a balanced scorecard or dashboard structure. In the information age it’s much easier to provide up to date information to stakeholders without losing a competitive edge.

Resources.

To enhance a company’s reputation there are principles to adhere to:

• Publish what you preach. The internet is a good medium to tell the world what your company is up to.
• Practice what you preach. Show in actions what the board tends to do about stakeholder issues. The media are an important source to show and tell.
• Be accountable. Board members and executives should be held accountable for their actions. This doesn’t mean blamestorming but each decision should be defendable. If not, the board member or executive needs to go.
• Training. One of the most important resources to get a good reputation is training of staff and board. If you know about SOX requirements it becomes a lot harder to say that you weren’t aware when there are issues to deal with.
  
  
  
  
  
  

Boeing and Airbus, Flight of the Titans part 2.

For the last five years both Boeing and Airbus have been in a head-to-head battle to market their new airplanes; the midsize, efficient 787 “Dreamliner” and the super large and comfortable Airbus A380. Despite their differences both planes can be seen as substitutes as not many airlines will buy both models.

2004 was a tense year for Seattle. Once again, the company’s leaders’ forecasts — 200 B787 Dreamliners to be sold by the end of the year— failed to come true. As the company scrambled to restore its reputation from a defense procurement scandal, CEO Harry Stonecipher started a trade war with Europe — and was then forced out in disgrace over sexual indiscretions. Toby Bright became the latest of a line of Boeing commercial directors to be cast out . The strategies of Boeing, the long standing industry leader and that of its European rival Airbus are quite different. While they share a view of market size, there is one big difference in the two companies’ market forecasts. Airbus sees a very large 20-year market for widebody aircraft, accounting for 10 percent of deliveries and 22 per cent of revenues: 1,250 passenger aircraft and almost 400 freighters. Boeing latest market forecasts suggest that airlines will need barely more than 300 passenger aircraft larger than the B747, and around 400 aircraft in the B747 bracket. In fact, Boeing expects that the average size of commercial aircraft will decline as airlines turn to intermediate and large twin engine aircraft for long-haul routes, bypassing hubs. That view has in turn driven the companies’ major investments. Airbus has pumped more than $12bn into the A380 program, including overruns. Boeing never reveals development costs (much less overruns), but the company has spent a large budget on the development of the new Boeing 787 as can be derived from the new factories and production tools that were developed to support production of the new airplane.

The 787 is a modest successor to the iconic 747-400 and the 767. It’s smaller and more fuel efficient. The Airbus bets on the trend that airlines will carry more passengers in fewer flights. The Airbus A330 on the other hand is a very large super jumbo that can carry 555 seats in a three class and 853 in a single class configuration. This is 35% more than the Boeing 747. Singapore Airlines, the first that received an A380 even has super first class “cabins” on board that have their own beds.

Boeings outsourcing strategy versus Airbus in-house production.

For Boeing one of the major challenges to overcome was the unprecedented outsourcing of production. To keep cost down, third party contractors were used to design and build a large amount of the tens of thousands of parts, a majority of which would be made out of carbon fiber instead of the more traditional aluminum alloys. Direct fixed costs would be larger than those of Airbus because of the specialized new machinery needed to work with carbon fiber but variable and labor cost were expected to be much lower because of the outsourcing and off shoring of production. Boeing set up an internet based “world community” to design the then unnamed 7E7 that later would be renamed 787. Top level design however was done in Everett as Boeing holds closely to it’s store secrets. In this Boeing is moving from an airplane manufacturer to a designer and system integrator like Apple Inc. Applying a lean manufacturing process could help expand margins like it did for Toyota which uses a similar process for its cars.

The wings are manufactured by Japanese companies in Nagoya, e.g. Mitsubishi Heavy Industries; the horizontal stabilizers are manufactured by Alenia Aeronautica in Italy; and the fuselage sections by Vought in Charleston, South Carolina, (USA), Alenia in Italy, Kawasaki Heavy Industries in Japan and Spirit AeroSystems, in Wichita, Kansas, (USA).Final assembly employs just 800 to 1,200 people to join completed subassemblies and integrate systems. Despite cost savings the long supply line proved vulnerable, causing delays in production. The 787-8, which previously was listed at $148-$157.5 million was re-priced tot $157-$167 million after re-evaluation of cost and materials. The production delays not only cause penalties to be paid to the airlines but devaluation makes payment in dollars less attractive for the Seattle Company. In economic terms: every dollar not in the Boeing account makes production more expensive. Production abroad is becoming more expensive as well because local wages and fees have to be paid in higher value local currency.

Airbus took a different approach by keeping development largely in house. By keeping supply lines relatively short and designers closer together it was able to develop faster. Major structural sections of the A380 are built in France, Germany, Spain, and the United Kingdom. Due to their size, they are brought to the assembly hall in Toulouse in France by surface transportation. Since all EU countries except the UK settle accounts in Euro’s there was much less currency risk. Airbus is still acting like a traditional manufacturer that keeps everything in house. Even so, the multinational roots of the company make it difficult to work as a team. The French and German engineers often misunderstood each other. The delays in manufacturing were more caused by extra demands from the airlines and hold ups in the design process then from the production process itself. A big difference with the Boeing approach is that by manufacturing in house, labor cost is more a fixed part of the total cost then a variable part. Boeing can pick and choose whom to hire for its production, Airbus doesn’t have that luxury. Meanwhile, the two competitors continue to sell head-to-head in every market segment. In single-aisle aircraft, Airbus has no plans for any major changes to the A320 family.

The aircraft market is in fact a duopoly with very high barriers to entry. So far, Boeing’s success with the B787 has not changed the fact that the two rivals’ market shares are close to 50:50; and both, recently, have stated that profits matter more than market share. Both companies, also, share an optimistic overview of the market — projecting well over 800 new aircraft deliveries a year for the next 20 years, a market that Airbus values at $1.9 trillion.

As an American company, Boeing has a big competitive advantage; the military. There is no threat that the US government will negotiate away Boeing’s access to Washington state tax breaks or to any of the foreign markets that are depended on US military aid. Airbus simply can’t compete to replace the USAF’s tanker planes. Airbus has to compete in each European country separately if it wants to sell its aircraft for military purposes.

Conclusion

Offloading part production is a sound method for producing complicated products like aircraft. Boeings outsourcing has become more flexible because production can be switched to other factories or countries if bottlenecks occur. Asia is a large target market for Boeing and as such the availability of production and maintenance facilities close to the customer are a good sales argument. There are drawbacks however. Airbus can invest in improving processes — for example, using lasers rather than physical gauges to inspect composite skins — test it on one product (the A320, for instance) and then apply it immediately to the rest of the line and thereby amortize its costs. Boeing can’t do that because their sub-contractors are more or less independent, outside the company. Boeing’s aircraft have no parts in common while Airbus strives at inter-operability of parts.

Airbus decision to develop an airplane in an entirely different segment of the market was both risky and necessary. Boeing sought to take advantage of a truly globalized world while Airbus wanted shorter production lines and more control. Off course nationalistic factors should also be taken into account. As a crown jewel of the American industry, the US government is bound to support Boeing as much as possible. Japan has been a close ally of the US since WO2 and could be used as a safe outsourcing destination. Airbus on the other hand has EU politics to contend with. Its decision to spread out production between EU member states is as much a political as a strategic decision. At the launch of the A380, French president Chirac, Prime Minister Blair from the UK, The German Chancellor Schroeder, and Prime Minister Zapatero from Spain were all present, underlining the political commitment to make Airbus a successful business. This was much to the dismay of the US officials who (officially) oppose any kind of government intervention in the marketplace.

For Boeing to be proved correct the A380 must not attract substantial new business and existing customers must cease buying the aircraft beyond their initial orders. This does not seem likely. The duopoly will continue until a third player enters the field. This player might well be of Chinese origin .

Stakeholders and Wal-Mart, an analysis

1. Wal-Mart, a history of success.

In 1962, Sam Walton expanded his retail career by opening the first Wal-Mart Discount City Store in Arkansas. Walton had had significant success with a discount shop he called “Walton’s Five and Dime Store” in Bentonville by putting sales volume before prices. Accepting a slightly lower margin, he had managed to drive out the competition and achieve an image of low prices without compromising quality. Walton continued the growth of his Bentonville store at accelerated pace and soon expanded to 24 stores across Arkansas, reaching $12.6 million in sales.

The company was incorporated as Wal-Mart Stores, Inc. on October 31, 1969. In 1970, it opened a home office and first distribution center in Bentonville. It had 38 stores operating with 1,500 employees and sales of $44.2 million. It began trading stock as a publicly-held company on October 1, 1972, and was soon listed on the New York Stock Exchange. The first stock split occurred in May 1971 at a market price of $47. By this time, Wal-Mart was operating in five states: Arkansas, Kansas, Louisiana, Missouri, and Oklahoma; it entered Tennessee in 1973 and Kentucky and Mississippi in 1974. As it moved into Texas in 1975, there were 125 stores with 7,500 employees and total sales of $340.3 million.

The growth continued, indicating that Wal-Mart’s strategy was solid. In 1987 there were 1,198 stores with sales of $15.9 billion and 200,000 associates. In 2006, Wal-Mart was 67th most profitable corporation (profits divided by total revenue), behind retailers Home Depot, Dell, and Target, and ahead of Costco and Kroger. Today Wal-Mart employs more than 2 million associates worldwide, including more than 1.4 million in the United States with over $374 billion in sales worldwide for the fiscal year ending Jan. 31, 2008

With success often come concerns over the way this is achieved. Labor unions, religious organizations and environmental groups have criticized Wal-Mart for its policies and business practices. Other areas of criticism include the corporation's foreign product sourcing, treatment of product suppliers, environmental practices, the use of public subsidies, and the company's security policies . Wal-Mart has also been criticized for some of the products that it carries. Diverse groups have accused Wal-Mart of selling anti-Semitic, anti-black, anti-Christian or other objectionable materials or of not selling products like “The Daily Show's America (The Book)” that depicted a US Supreme Court judge nude, calling it censorship.

Despite the criticism, Wal-Mart seems to stick to the core strategies that carry its success.


2. Wal-Mart strategies and their impact.

The way that Wal-Mart Stores Inc. creates growth is summarized by the company’s new slogan:

“Save money, Live better”

When Sam Walton created Wal-Mart, he declared that three policy goals would define his business: respect for the individual, service to customers, and striving for excellence. By choosing clearly identifiable strategies and sticking with them, Wal-Mart has achieved de-facto cost leadership and sustainable value for the company’s shareholders.

Wal-Mart achieves Cost Leadership by four main strategic goals .

1. Dominate the Retail Market wherever Wal-Mart has a presence.
2. Growth by expansion in the US and Internationally.
3. Create widespread name recognition and customer satisfaction with the Wal-Mart brand, and associate the retailer with the reputation of offering the best prices.
4. Branching out into new sectors of retailing such as pharmacies, automotive repair, and grocery sales.

Wal-Mart management strategy emphasizes its workforce and its corporate culture. It wants to create an image of a morally conservative, religious, and family-oriented business. Wal-Mart emphasizes how it listens to the needs of its workforce as stated in the “factsheets” on the corporate website. Store employees are called “associates” and are treated part of the Wal-Mart family. Wal-Mart states that “Unlike the employees of many of our retail competitors, Wal-Mart associates – both full and part-time – can become eligible for health benefits”. However; the bulk of Wal-Mart's employee base that work at Wal-Mart stores are part time workers who are paid the local minimum wage. Most employees are not entitled to any benefits, as it takes a part-time employee over five years to become eligible for benefits, profit-sharing, or other such compensation . On April 17, 2006, Wal-Mart announced it was making a health care plan available to part-time workers after 1 year of service, instead of the prior 2 year requirement.
Wal-Mart's corporate management strategy involves selling high quality and brand name products at the lowest price. To keep costs low, Wal-Mart negotiates deals for merchandise directly from manufacturers, eliminating the middleman. This often leads to accusation that Wal-Mart misuses its market power to deliberately underpay its suppliers. In Walton’s philosophy, the essence of successful discount retailing is to cut the price on an item as much as possible, lowering the markup, and earn profit on the increased volume of sales. However, when the markup is as low as the company can bear, the burden is often transferred to the supplier, who is depended on Wal-Mart to sell his products. In a modern globalized society, Wal-Mart no longer buys its products on the domestic market but in low-wage countries with often questionable labor practices. More than 70% of the goods sold in Wal-Mart are manufactured in China .

3. What are the stake holder groups and what are their expectations?

A large company like Wal-Mart has a diversity of stake holders, each with their own agenda. Like any commercial entity, the first group is most important for the company’s survival. Stakeholder groups can be divided into internal and external stakeholders:

1. Internal stakeholder interests:

1.1 Shareholders.

As a listed company, Wal-Mart is accountable to its shareholders. Despite growing revenue, share price development has been trailing over the years, only recently picking up. Shareholders are most interested in profit generation and dividend, although in recent times there have been calls for more transparency. Wal-Mart donates generously to political causes without detailing exactly who they are donating to, or how much. Wal-Mart says that full disclosure is already required in many states, but the proponents for this resolution would prefer a centralized source for determining Wal-Mart's state-based political contribution levels. However, as long as the share price of Wal-Mart has a positive trend, shareholders remain upbeat.

1.2 Employees

Wal-Mart’s strategy in keeping prices low translates into an effective “low as possible” wage strategy. Associates at Wal-Mart have often little education, work part-time and have little or no alternative job perspective. Labor conditions and wage are for most an important factor. Recently Wal-Mart has faced issues on both which has led to criticism by labor unions and other external stakeholder group. By the end of 2005, Wal-Mart had launched the website Working Families for Wal-Mart to counter criticisms. Additional efforts to counter criticism include launching a public relations campaign. In reality, the core issues haven’t been addressed yet since they can impact Wal-Marts bottom line severely. Wal-Mart claims to listen to its employees but doesn’t seem to engage their staff.

1.2 Management

Although management is part of a company’s employee corps they can have different interests and priorities. In 2007 when Wal-Marts growth seemed to come to a halt, the company re-organized its top management layers rigorously. It is this groups responsibility to turn the core strategies into practice while at the same time balancing stakeholder interests.

1.3 Suppliers

Suppliers are often seen as external stakeholders. In the case of Wal-Mart, the connection between suppliers and the company is so close that they can be considered internal. Wal-Mart’s cost leadership strategy means that the company will offer only a minimal margin to its suppliers. For a lot of suppliers, Wal-Mart is their major, if not only, customer. As mentioned before, Wal-Mart buys the majority of its products in China. The US labor market just can’t compete with the low wages and large workforce available. Suppliers often use questionable local labor practices to be able to offer the lowest possible price to Wal-Mart. Wal-Mart has been accused of using market power to force its suppliers into self-defeating practices. For example, it is argued that Wal-Mart's constant demand for lower prices caused Kraft Foods to "shut down thirty-nine plants, to let go [of] 13,500 workers, and to eliminate a quarter of its products ”.

2. External stakeholders.

2.1 Customers and the community

Suppliers and customers are both defined as product market stakeholders. In Sam Walton’s eyes, the customer is the most important stakeholder for the company. The demands and priorities of Wal-Marts customers are conflicting creating the largest and potentially most important issues. In an economic downturn, the results of Wal-Mart improve showing that customers shop at Wal-Mart because of the low prices. To maintain low prices, Wal-Mart needs scale, which means opening large stores in small places. This results in a perceived negative impact on communities. Additional, Wal-Mart is often seen as an unfair competitor because local stores can’t compete against the company’s low prices. The recent media attention has focused on the negative aspects although a recent study has shown that the impact of Wal-Mart on small local stores is less than is assumed. It is suggested that Wal-Mart even has a positive impact on small business. A study conducted in 2006 argued that while Wal-Mart's low prices caused some existing businesses to close, the chain also created new opportunities for other small business, and so "the process of creative destruction unleashed by Wal-Mart has no statistically significant impact on the overall size of the small business sector in the United States. "

2.2 Unions and NGO’s

Wal-Mart has been criticized for its policies against labor unions. Other nongovernmental organizations have accused Wal-Mart of using sweatshops and child labor in low wage countries. Wal-Mart's anti-union policies also extend beyond the United States. The documentary Wal-Mart: The High Cost of Low Price, shows one successful unionization of a Wal-Mart store in Jonquière, Quebec (Canada) in 2004. Wal-Mart closed the store five months later because the store had become unprofitable due to the costs of union demands. The priorities of unions are sometimes conflicting. If Wal-Mart fires employees and closes a store it will result in un-employment and loss of benefits. However if they insist on higher wages and better benefits, the result will be unprofitability, causing the store to close.

4. How does Wal-Mart manage stakeholder issues and expectations?

After Wal-Mart’s labor and supplier issues became publicized the company hired public relations firm Edelman to interact with the press and respond to negative or biased media reports. It has used TV commercials emphasizing the health benefits of Wal-Mart associates. Wal-Marts efforts are mainly focused on the positive affect the company can have. In October 2005, Wal-Mart announced it would implement several environmental measures to increase energy efficiency. After Hurricane Katrina struck, Wal-Mart gave $20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers.

The real issue however is that Wal-Mart’s cost leadership strategy doesn’t leave room for higher than minimal wages or excellent labor conditions. Wal-Mart argues that it provides millions with jobs and passes on the saving to millions more.

5. What can Wal-Mart do to improve?

Like many large and not-so-large companies, Wal-Mart has been caught by its own success. As employer and supplier of millions it is open to criticism and needs to be aware of that. By engaging stake holders early and by being transparent in its actions many issues can be prevented. Modern consumers and other stakeholders need to be taken seriously. This doesn’t mean cater to every whim but major problems can’t be covered up anymore in the internet age. Customers on the other hand need to be aware that higher wages, better benefits and labor conditions mean higher prices because Wal-Mart’s margin is already minimal. So far, there hasn’t been a competitor that leveraged on an ethical way of business and cost leadership. Wal-Mart can leverage its market advantage to divert a fraction of the savings it now passes on to the consumer to improve the outstanding issues as long as it can explain to the customer why it is doing so.