updated 4/13/2007 4:53:37 PM ET 2007-04-13T20:53:37

Wal-Mart’s board of directors should open an independent investigation of claims the retailer spied on shareholders, suppliers and others, a large state investor said Friday.

William Atwood, the executive director of the Illinois State Board of Investment, said Wal-Mart’s board could have avoided the surveillance scandal if it had not rebuffed a proposal from a group of large investors in 2005 to name an independent committee to review company policies.

It is the latest call from investors for more information on Wal-Mart’s security operations after the public firing last month of an employee for wiretapping and allegations since then by that technician, Bruce Gabbard, that the company had widespread surveillance operations.

“This case personifies why such external oversight is required,” Atwood told The Associated Press. The Illinois State Board of Investment owns approximately 456,000 Wal-Mart shares.

John Simley, a spokesman at Wal-Mart, declined to comment.

The $11.9-billion Illinois state pension fund is part of a group of investors, also including New York City Comptroller William C. Thompson, who approached Wal-Mart’s board in 2005 asking for an independent review of labor and other policies at the world’s largest retailer.

In meetings and letters in 2005 and 2006, Wal-Mart’s board repeatedly rejected the group’s request on the grounds that an independent panel might “get the issues wrong,” according to correspondence and depositions that are part of the evidence in a lawsuit by Wal-Mart workers in Pennsylvania.

The investor group argued at the time that Wal-Mart’s reputation and share price were suffering from a series of worker lawsuits, a leaked memo outlining ideas to cull older and unhealthy workers and other negative news about the company.

Roland Hernandez, the head of the Wal-Mart board’s audit committee, repeatedly responded that the company was working to improve its performance and that the audit committee did not believe it was “necessary or appropriate to form a special committee”.

Atwood said the need for an independent body to probe workplace policies and practice at Wal-Mart is all the more pressing now that the company is embroiled in accusations of corporate espionage.

“Certainly if you had an independent observer out there on behalf of independent directors monitoring the goings-on in the company, one would hope that would reduce the likelihood of this kind of operation,” Atwood said.

Wal-Mart has denied any wrongdoing but has been pressed by shareholders for information after a memo became public that suggested some investors be investigated as potential threats to the June 1 shareholder meeting.

Wal-Mart has written to those shareholder groups to say it did not act on the January memo, which asked for a “potential threat assessment” of investors proposing policies opposed by management.

New York City’s comptroller this week asked the Securities and Exchange Commission and the U.S. Justice Department to investigate whether Wal-Mart illegally spied on some of its shareholders.

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