Read the editorial at the NY Times.
The California State Teachers’ Retirement System, the largest teachers’ retirement fund in the country and known as CalSTRS, filed an important lawsuit this month against 27 current and past executives and directors of Wal-Mart Stores Inc., the world’s largest employer.
The case alleges widespread corruption and bribery at the company’s Mexican subsidiary. Last week, the company said it was expanding an internal inquiry to include other subsidiaries. The Justice Department and the Securities and Exchange Commission have begun parallel inquiries. This suit, along with those investigations, could help ensure that the company reckons with what it did wrong and fixes its broken corporate governance.
CalSTRS, an owner of millions of Wal-Mart shares, brought this shareholder action on behalf of Wal-Mart, seeking damages for the company as a result of alleged violations of fiduciary duties by corporate officials. This type of suit, filed in the Court of Chancery of Delaware where Wal-Mart is incorporated, is often a long shot. But under Delaware law, it seems the right response for the kind of wrongdoing alleged, which was reported by David Barstow in The Times last month.
The complaint describes hundreds of illegal bribes from September 2005 to May 2006 and a subsequent cover-up by an executive “implicated in authorizing bribes,” who caused Wal-Mart to sweep “everything under the rug” for almost six years. It details the harm executives and directors caused to Wal-Mart and shareholders because of legal and ethical violations.
In a shareholder action, a plaintiff has to establish one of two things: that the corporate officials acted out of their own self-interest rather than the company’s, or that the officials no longer deserve protection against liability under the so-called business judgment rule because of indefensible decisions they made.
While this test was designed to make it hard for such lawsuits to proceed against a company’s officials, it leaves room for meritorious suits against misconduct. In this case, shareholders are right to demand answers and accountability from Wal-Mart’s executives and directors.