[More on Wal-Mart]
When Wal-Mart Stores Inc. became the world's biggest public company, it also became one of the world's biggest targets. The barrage of criticism reached a crescendo last year as Democratic presidential candidates lambasted the company's employment practices.
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Over its 43-year history, Wal-Mart typically ignored its critics. But after the primaries were over, Chief Executive Lee Scott went on the offensive. Through Thomas "Mack" McLarty, a former Clinton aide and a consultant to the Bentonville, Ark., retailer, Mr. Scott arranged a September dinner in Washington, D.C., at Mr. McLarty's home with several former Clinton administration officials.
"I don't hate all Democrats," Mr. Scott told his guests, by way of breaking the ice. Wal-Mart apportions more than 80% of its political spending to Republicans. He went on to argue that Wal-Mart's quest to lower prices helps low-income customers.
In running one of the U.S.'s most insular public companies, Mr. Scott hadn't imagined his mission would be to break bread with high-profile Democrats, or, for that matter, critics of any stripe. A former head of Wal-Mart's largely invisible logistics division, he is the ultimate corporate insider, someone who used to be terrified speaking in front of large groups. As recently as 2003, Mr. Scott declined an invitation to be photographed for the cover of Fortune magazine, on the grounds that he didn't want to hog the limelight.
But a couple of years ago, under fire for everything from its health-care benefits to the size of its stores, Wal-Mart decided to wade into the controversy it creates and gave Mr. Scott, 56 years old, responsibility for leading the offensive. So for the past nine months, he has crisscrossed the country as Wal-Mart's defender-in-chief, grappling with activists of every persuasion, including congressmen, environmentalists and Sister Barbara Aires, a Catholic nun and longtime critic. In many ways, his personal evolution mirrors that of the company.
"Over the years, we have thought that we could sit in Bentonville, take care of customers, take care of associates and the world would leave us alone," Mr. Scott said at a Goldman Sachs investors' conference earlier this year. "It just doesn't work that way anymore."
In February, Mr. Scott addressed 500 business and community leaders in Los Angeles, many of whom were hostile to Wal-Mart's local expansion plans. It already operates more than 3,500 U.S. stores. Afterward, during a visit to a nearby Panorama City store, the executive was asked if he was having fun in his new role. "No, not at all," he responded. "Fun is walking stores and seeing what is selling, seeing how we're taking care of customers. The rest is the lot I've drawn."
In recent years, Wal-Mart has been accused of offering substandard wages and insufficient health benefits. It has been sued for discriminating against women and for forcing employees to work beyond their shifts. It is blamed for hastening the decline of the American manufacturing sector by buying products from overseas and ruining town centers by putting local firms out of business.
The critiques have ranged from overblown to more reasonable. Wal-Mart's own missteps haven't helped its reputation. In March 2005, Wal-Mart settled with the Justice Department over allegations that it knowingly hired contractors that provided illegal immigrants to clean its floors. Several days later, former vice chairman and onetime No. 2 executive Thomas Coughlin resigned from Wal-Mart's board amid allegations he misappropriated up to $500,000 from the company. Through his attorney, Mr. Coughlin has denied the allegations.
And after a period of five years during which Wal-Mart's business looked invincible, its financial performance has started to show strains. Sales growth at stores open at least a year, an important industry metric, has slowed, due in part to high gas prices that pinch consumer spending. Another problem is robust competition from discounters such as Target Corp. and Costco Wholesale Corp. who are luring upscale customers while keeping prices low. Wal-Mart's share price has fallen 22% since Mr. Scott took the helm in 2000.
Wal-Mart's own image campaign may be partly to blame. During a recent get-together with financial analysts, Mr. Scott conceded that Wal-Mart's recent advertising has focused too much on its community contributions and not enough on its merchandise and prices.
A Rowdy Cow Town
Mr. Scott grew up in Baxter Springs, Kan., a tiny town in the southeast corner of the state where his father owned a local gas station. Baxter Springs was once a rowdy cow town, and later a prosperous mining community, but it had fallen on hard times.
Situated on Route 66, the gas station was threatened by a new interstate that took away its regular supply of customers. Mr. Scott's father sold the business, an event the CEO sometimes talks about in speeches. "I know that change isn't necessarily fun, but understand also that change isn't necessarily someone's fault," he said this spring, referring to the interstate, during Wal-Mart's first press tour.
To support himself while studying at Kansas' Pittsburg State University, Mr. Scott worked nights at a factory making steel molds for tires. In his junior year, he married fellow student Linda Aldridge. By his senior year, the couple were parents of a baby boy and lived in a 10-by-50-foot trailer in the Lone Star Trailer Court not far from campus.
After graduating with a degree in business, he went to work for Yellow Freight System, a trucking company, as a dispatcher in Joliet, Ill. "I had one job offer, so it made sense to me to think that trucking was in my future," he says.
In 1977, Mr. Scott had his first encounter with Wal-Mart and didn't like what he saw. Still working for Yellow Freight, one of Wal-Mart's shippers, Mr. Scott went to Bentonville to collect a disputed $7,000 bill. David Glass, who was then head of distribution and finance, refused to pay.
As Mr. Scott started to exit in a huff, Mr. Glass offered him a job. "I liked the way he handled himself," recalls Mr. Glass, who eventually became Wal-Mart chief executive and Mr. Scott's predecessor. "He was articulate and made his point very well."
The feeling, however, wasn't mutual. "Why in the world would I leave a good job for a company that couldn't even pay a $7,000 bill," both men recall Mr. Scott saying at the time.
Mr. Glass pursued him for the next two years, eventually convincing him to work for Wal-Mart as an assistant director of transportation where he was charged with building an in-house trucking fleet. Mr. Scott says he changed his mind based on Mr. Glass's description of a company that was good to its employees and rewarded talent.
Fear of Public Speaking
At the time, Wal-Mart had 276 stores in 11 Southern and Midwestern states and had just hit $1 billion in annual sales. But the young executive hated speaking to large groups of people.
As he drove to weekly Saturday meetings at Wal-Mart's headquarters, Mr. Scott tried recalling which side of the room had been questioned the previous week. That's where he would sit, hoping that Sam Walton, the company's founder, would start elsewhere. If his turn came before the time ran out, "I would shake and my voice would crack," he recalls.
In small groups, by contrast, Mr. Scott could be abrasive. During one meeting, he tried to convince warehouse managers to unload trucks faster. Don Soderquist, then a Wal-Mart vice chairman, cornered him after the meeting. "He told me that if my intention was to irritate and annoy everyone in the room, I had succeeded," Mr. Scott says.
As boss of the crew, Mr. Scott frequently delivered dictums, for example, demanding truckers drive slower to reduce accident rates. If a driver drank on the job or was caught visiting a girlfriend, Mr. Scott would write scolding letters to all Wal-Mart drivers, who were infuriated by these broadsides. Some complained directly to Mr. Walton and asked the boss to fire Mr. Scott.
Instead, Mr. Walton made Mr. Scott listen to the drivers' complaints and thank each one individually for using the company's "open-door policy." Mr. Scott said it was a humbling experience but one that gave him a good introduction to the company's culture.
By 1993, Mr. Scott was heading Wal-Mart's vast logistics division. Wal-Mart was the first discount retailer to have its own distribution centers, a move that cut costs by removing a layer of middlemen. It was a key to the company's success. Mr. Scott designed a hub-and-spoke distribution network with warehouses serving a series of stores not more than a day's drive away. That allowed shelves to be replenished quickly and inexpensively by keeping less inventory on hand.
Though he had spent his entire career in logistics, Mr. Scott was tapped in 1995 to run Wal-Mart's merchandising division, the unit responsible for selecting and buying goods. Wal-Mart had hit a rough patch. It was struggling with several acquisitions and distracted by rolling out new supercenters, gargantuan stores selling goods from diamond rings to bicycles. That year, the company reported its first quarterly profit decline in a quarter of a century.
Mr. Scott cut $2 billion of excess inventory by reducing the number of products Wal-Mart sold in each category, zapping slow-moving merchandise and convincing suppliers to ship smaller amounts. Yet he remained in the background. Whenever Mr. Scott addressed company meetings, it was often in tandem with the more-garrulous Mr. Coughlin, who was then running Wal-Mart's stores.
His success in merchandising showed Mr. Scott to be a capable generalist. It helped secure his ascension to the top spot. After a planned succession, in which he served as chief operating officer, Mr. Scott took over as CEO in January 2000. He brought with him a corporate professionalism that had been missing from a company still imbued with the spirit of its folksy founder Mr. Walton.
Worsening Reputation
But Wal-Mart's biggest problem wasn't financial. Without much notice, the retailer had become a mammoth force in the U.S. economy. Only two years later, one out of three diapers, one out of four tubes of toothpaste and one out of five CDs bought in the U.S. would be sold by Wal-Mart, according to research groups A.C. Nielsen and Retail Forward. That made the company a highly visible target for mainstream criticism.
One of Wal-Mart's antagonists was the United Food and Commercial Workers Union, which had struggled in vain to set up shop at the company. Starting in 1999, when Wal-Mart became serious about selling groceries, the union stepped up its campaign. It accused Wal-Mart of paying poverty-level wages and pushing workers to rely on government health benefits. The union also set up a Web site listing complaints from former workers it dubbed "WalMartyrs."
Wal-Mart rarely responded directly to the union, dismissing its complaints as propaganda.
In 2001, author Barbara Ehrenreich wrote "Nickel and Dimed: On (Not) Getting By in America." For the book, one of several published since then taking the company to task, she spent a month folding clothes at a Wal-Mart for $7 an hour. Ms. Ehrenreich described a workplace where employees performed endless, mind-numbing tasks. Employees, she wrote, often didn't make enough to afford even marked-down merchandise.
That same year, Wal-Mart was hit with a sex-discrimination suit alleging that women were paid less and promoted at a lower rate than men with equal qualifications. In 2004, a federal judge granted the suit class-action status. Wal-Mart has appealed the judge's ruling.
In 2002, the media began paying more attention to the growing number of suits filed by hourly workers, alleging they had been forced to work off the clock. It would be another two years before Wal-Mart implemented store-level controls, such as cash registers that lock up, which prevented employees working through their scheduled breaks.
Wal-Mart's reaction to criticism was to dismiss it as the work of opportunists or propagandists. "Going from everyone loving us to being a target and having to defend ourselves, justly or unjustly, took us by surprise," says former CEO Mr. Glass, who now sits on the company's board. In retrospect, he says, the company's attitude was "naive."
Scott's Fresh Approach
From the outset, Mr. Scott was a little more willing than his predecessor to address the growing chorus of disapproval. Wal-Mart rarely, if ever, settled lawsuits and was frequently fined for withholding, hiding or destroying evidence relating to legal disputes. Just months before Mr. Scott became CEO, a Texas judge threatened to fine the company $18 million for failing to produce evidence in a suit from a woman who had been abducted from a store parking lot in Beaumont, Texas, and raped. The judge didn't make good on his threat after Wal-Mart apologized to the plaintiff and the court.
Mr. Scott asked his legal team why the company had been fined so often. "They kept telling me, it was all the liberal judges that had been appointed," he says. Six months later, an executive appointed by Mr. Scott to investigate told the CEO that Wal-Mart deserved many of the sanctions. In the abduction case, for example, Wal-Mart's outside lawyers didn't turn over a document because the plaintiff's lawyers had asked for a "study" that was classified a "survey."
At Mr. Scott's direction, the company recruited a seasoned corporate counsel from Raytheon Corp., Thomas Hyde, and hired a prominent outside firm to review the way Wal-Mart handles evidence in court cases. Last year, Wal-Mart wasn't hit with any sanctions or fines for its conduct in litigating cases.
Mr. Scott also began reaching out to critics. Starting in 2000, he met occasionally with Sister Barbara Aires, who sits on the board of the Interfaith Center on Corporate Responsibility, a New York-based pressure group that often sponsors resolutions at Wal-Mart's annual meetings. Several groups in the ICCR coalition each own more than a million Wal-Mart shares, out of a total of 4.2 billion.
The ICCR raised a slew of topics from gender discrimination to low pay and benefits. Wal-Mart agreed to improve its monitoring of labor conditions in overseas factories and insist on standards for its suppliers.
In April 2002, Wal-Mart became the world's largest public company, ranked by sales. Magazine and newspaper headlines asked, "Is Wal-Mart Too Powerful?" and, "Is Wal-Mart Good for America?" By the company's reckoning, it was the subject of 2,165 articles a week in the print media in 2004, compared with 950 in 2001.
In 2002, Wal-Mart's board began to worry that the backlash was changing public sentiment about the company and could hurt its business. "The board saw it before we did," says Mr. Scott. "They run in circles we don't run in, on one coast or the other. They were hearing things from their friends." These board members included Roland Hernandez, the former head of Spanish-language TV network Telemundo Group Inc., and James Breyer, a venture capitalist from Accel Partners based in Palo Alto, Calif.
At the board's suggestion, Wal-Mart conducted its first comprehensive reputation survey. It found that workers "were more positive about the company than critics would have you believe," says Jay Allen, Wal-Mart's senior vice president for corporate affairs. Workers also wanted the company to stand up to its critics. Mr. Scott said he was getting similar feedback through an internal Wal-Mart Web page called "Lee's Garage," named for his father's service station.
Consumers were a different matter. The study found that 10% of all consumers -- including both Wal-Mart and non-Wal-Mart customers -- hated the company. An additional 30% said they had "sincere questions about Wal-Mart," based on what they heard about its treatment of workers, Mr. Allen says.
As a result, the board determined that the company had to do more to combat its critics. "I don't believe Lee ever thought so much of his job would include communicating with the outside world," said Jose Villarreal, a Wal-Mart director and a partner in the San Antonio office of Washington, D.C., law firm Akin, Gump, Strauss, Hauer & Feld, LLP. "After all, he comes out of logistics, a field so far removed from public view."
Mr. Scott concedes that Wal-Mart's management was too slow in responding to the company's worsening reputation. "We were so busy minding the store that we didn't realize we had become a political symbol," he says.
Counterpoint
In 2003, Wal-Mart began running television ads highlighting workers' opportunity for advancement as well as the retailer's community contributions. In addition, Wal-Mart concluded that Mr. Scott needed to be the single, high-profile spokesman defending the company to the public. In an election year, the need was even more acute. In 2004, a Congressional committee released a report titled, "Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart."
A couple of months before the elections, Mr. Scott met with former President Bill Clinton. (Hillary Clinton sat on Wal-Mart's board between 1986 and 1992.) At a Dallas meeting with store managers in August, Mr. Scott paraphrased Mr. Clinton's advice, telling his troops to be careful that their performance wasn't defined by events unrelated to their core business. "We can't let our critics define who we are and what we stand for," Mr. Scott said.
Mr. Clinton could not be reached for comment. A spokesman says the former president has met Mr. Scott on several occasions although he couldn't confirm what they discussed.
Earlier this year, Wal-Mart for the first time bought a series of ads in national newspapers to defend its practices, titled "Setting the Record Straight." It also printed a 3,000-word essay in an ad that appeared in the New York Review of Books in response to an article that appeared in the left-leaning magazine.
In recent months, Mr. Scott has met with members of the Congressional Black Caucus and hosted a reception for members of Congress. He convened a series of meetings with the Center for Environmental Leadership in Business, part of Conservation International, a business-friendly environmental group. Wal-Mart Chairman Rob Walton sits on the group's board. Wal-Mart is now exploring requiring suppliers to use more cotton grown without pesticides.
Seeking the spotlight is anathema to Wal-Mart culture, and the transition hasn't been easy. Mr. McLarty, the former Clinton aide, recalls making the rounds of the morning talk shows in January with Mr. Scott. After one show, Mr. Scott turned to his companion and said: "How did you do this for so long and stay sane?" both men recall.
Clear Limits
There are also clear limits to Wal-Mart's willingness to compromise. "We have an obligation to be socially responsible," Mr. Scott says in an interview, "but that is not the same as being a social enterprise." He refuses, for example, to publicly engage in debate with the United Food and Commercial Workers, which Mr. Scott accuses of lying about working conditions at the company. UFCW spokesman Greg Denier emphatically denies the charge.
And despite a concerted effort to soften his rougher edges, Mr. Scott can still be impatient with criticism. During the meeting in Los Angeles with business and civic leaders, he was asked about Wal-Mart's reputation for squeezing suppliers.
"I don't feel sorry for our suppliers," he shot back. "I flew here today on a Lear 31 [jet] that had to make fuel stops. Our suppliers fly directly into Bentonville on their G5 [jets]. They're not stopping on the way. And they have got a bathroom."
He caught himself mid-screed and acknowledged that some buyers have treated suppliers unfairly. He said those who do so are fired.
The region's torrential rains, which caused severe flooding, let up the day of the speech. Mr. Scott told the crowd that several Angelenos had thanked him for bringing the sunshine. "But I don't want to take any credit," he added quickly. "At this point I don't think anyone has blamed Wal-Mart for your rain."
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