Business Ethics: Nike - Case Study Example

BUSINESS ETHICS THE CASE OF NIKE Table of Contents Page 3 2 Introduction 4 2 Company Background 4 2.2 Effects of Globalization 5 3 The Nike Practice 6 3.1 The Ethical Problem 7 3.2 Public Concern 9 4 Business Ethics Theories 10 5 The Rejoinder 14 6 The Solution 15 7 The Promises 16 8 Bibliography 18 1 Abstract The case of Nike was studied within the business ethics context. The relevant facts were laid out and the ethical issues were explained. Business Ethical Theories were expounded and applied to the problems faced by Nike. It was found that the entire situation was allowed to develop for the benefit of the single stakeholder, the shareholder. The theories pointed to a solution and that was applied and presented in the discourse. The company’s attempt to redress the situation by ways of declaration was also commented upon and the recommendation was for the company to speed up the process by applying the ethical norms suggested by the non-economic stakeholders. 2 Introduction 2.1 Company Background Nike is a formidable name in the sportswear Industry, a Leader, an Icon, a Colossal that raises far above all its rivals. Nike controls roughly 44% of the industry, more than Adidas and Reebok combined. Therefore, when Nike sets a standard, the industry follows it like a tradition. If Nike were to set a standard, in which they systematically listen and respond to the demands of their subcontracted employees, the rest of the industry would have to follow suit both to remain competitive and because of public pressure which would follow. For the past 30 years the marketing strategy was dependant on the make to sell model. Products were made in anticipation of sales and cross fingers became a habit as the mysteries of the unknown were omnipresent. Every manufacturer likes to evolve into make to order market. That is a segment that spells stability and a certain level of recognition in the market. It becomes more pronounced when the market is global, across geographies and cultures. Nike too had this vision. They wanted to cross frontiers with a common approach. It was like wanting a clan, not just a family, which followed common principles, yet had identity of its own respecting their environment and circumstances, but adhering to the common fundamental principle. It was a huge call and needed people to understand the conglomerate of which they were a part. It required a merger of thought, not just action, and the very vision became their clarion call, ‘Just do it’. This colossal has since expanded its reach far and wide. There is no country of any significance in which Nike is not present. All across the Globe, like Coca-Cola and MacDonald, Nike is a well known name. It has rivals, and some have outshined Nike in some areas, but overall it is the Giant that prevails. 2.2 Effects of Globalization To become a Global Player critical mass is a must for any multi-national company. This is the evaluation tool to find a company’s capability to survive both financially as well as exponentially. Global Distribution Network and economies of scale are the two key factors for ensuring success. Continuous availability of the product is a very important factor and this is possible by having a competent retail outlet set-up. Equally important is the supply chain and it must be geared up for local supplies at short notices. Lack of these facilities will result in loss of market and inhibit market penetration and dominance. In addition, achieving economies of scale through minimizing manufacturing costs is necessary for manufacturers to meet their financial goals and to erect a barrier for competition to encroach their markets via prices. For Nike this global expansion has come at a price. Not everyone can afford American and European prices, so the price had to be brought down to suitable level. This meant cost cutting which was not possible in US and Europe. In came the concept of local manufacturing at local rates for local markets. To get permission was tough in some cases, so a carrot was offered in form of manufacturing for overseas markets. This satisfied the dollar starved economies of South Asia and cheap and abundant labour became available for mass production. Above all it improved the bottom line to the great satisfaction of the shareholders, the only stakeholder the company felt the need to please. 3 The Nike Practice Nike follows the offshore outsource manufacturing strategy. The basic idea is that Nike engages other firms to carry out its foreign manufacturing operations; thereby, utilizing the profusion of cheap labour in third world countries. This is a combination of the centralization and specialization strategy. The partners follow the common production pattern but apply their local laws for the process. These partners are typically independent companies located in various Asian countries. So far there was no rouse. But with the need to improve the bottom line, came the blind acceptance of local labour practices as well. This meant * Wages paid were so low that in most cases the worker was unable to feed his family properly. * Hazardous work conditions, work and gender abuse, child labour were accepted as common local practice and the management ignored it all. * Owners/Managers of the factory refused to engage in good-faith bargaining with workers regarding wages and working conditions. Unions were not permitted. There were political undertones as well. Large corporations, being multinational in nature, carry their own clout akin to a foreign power. They were, and to a large extent still are, treated as royalty and obeisance is paid by rote. Few could raise their voices for fear of reprisals. Getting a job was better than having no job. Being paid was better than starvation. If these partner companies were to pay Global wages and to provide the Global amenities to the workers, then they will not remain competitive. Therefore Nike conveniently closes its eyes and makes a conscious effort only when it gets caught up in their mess. It then makes the right noises about local conditions and local laws but of late it has realized that a more comprehensive effort is required to meet the global protests by consumer forums and Human Rights watches. It has begun to be more transparent and has begum improving the lot of the global worker through special programmes. (David M. Boje) 3.1 The Ethical Problem An Australian NGO Educating for Justice highlighted the problems and various Human Right Violations by Nike and its global partners. Freedom of Association - In 10% to 25% of Nike’s partner factories, freedom of association is prohibited by law (e.g. China, Vietnam), whereas, in up to 10%, freedom of association is prohibited due to an exclusive union agreement. Besides in up to 10% of these factories, freedom of association is not allowed or provided although it is legal. Harassment Issues- Between 25% to 50%, workers report verbal, physical, sexual and /or psychological abuse and do not trust the grievance process In fact, a confidential grievance system is not provided at all and this inhibits workers to come forward and register complaints against their superiors. Working Hours- In 50% to 100% cases, work hours exceed Nike’s Code of Conduct, and in 25% to 50% cases, one day off in seven is not provided (i.e. employees are working 7 days a week). In 25% to 50% of cases, work hours exceed legal limit and when workers refuse to work overtime they are penalized. Wages- In 10% to 25% of cases, the overtime pay rate is less than the law demands or the cases, the wage calculation rate is inaccurate (i.e. the amount that workers are paid is wrong, and most likely below what they should get) and wages paid to workers are below the legal minimum wage. (Note: Nike has not published any research on living wages for their partner factories.) Child Labour- In 10% to 25% cases, worker age verification is inconsistent or not well-documented workers are younger than Nike’s "Child Labour" standard. (Educating for Justice) On April 6th, 2005, one week prior to the release of Nike’s 2004 Corporate Responsibility Report, a respected labour rights group in Indonesian reported that workers at a Nike contract factory were paid wages that were far below the legal minimum wage, violating both Indonesian labour law and Nike’s own Code of Conduct. (FNPBI) But this is only one account. There are other more ghastly narratives. Nike was the subject of considerable scandal in 1997 when it was revealed that workers in one of its contract factories were being exposed to toxic fumes at up to 177 times the Vietnamese legal limit. Although Nike claims that its factories now meet U.S. Occupational Safety and Health Administrations (OSHA) standards, it gives factory managers advance notice of testing, giving them considerable scope to change chemical use to minimize emissions on the day the test is conducted. Nike is also not yet willing to regularly make the results of those tests available to the interested public. Rights groups have challenged Nike to put in place a transparent system of monitoring factory safety standards involving unannounced monitoring visits by trained industrial hygienists. (Vietnam Labour Watch report, NGO) 3.2 Public Concern It was not long before there were protests from US as well as from local activists. The inhuman conditions were considered to be violation of Human Rights. Later WTO also came out with policy statements for Worker Protection in developing and under-developed countries. In its own sphere, Nike was the centre of the storm. Their status in the worldwide industry made them an obvious choice, although they were not the only ones seeking profits from cheap labour. Their 700 factories all over the world became focus of every activist and the target of every NGO worth its salt. A large number of reports were published to draw attention to these issues. The idea was to raise a hue and cry via formation of public opinion and then create pressure for Nike and their likes to redress the situation. Some of the prominent reports were 1 Worker Rights Consortium report on Nike factory in Thailand (October 2004) 2 Recent Worker Rights Consortium report on Nike factory in China (September 2004), including Educating For Justices Response 3 Gap and Nike: No Sweat? (October 2000) - The BBC looks at a factory in Cambodia producing for Nike and Gap 4 Industrial Embroidery (August 2003) - National Labour Committee reports on factory conditions in Honduras where Nike, Gap, Old Navy and Polo goods are produced 5 La Lucha Sigue (July 2001) - A report by Centro de Apoyo al Trabajador and the Collegiate Apparel Research Initiative giving a collection of interviews on the life, work and struggle of workers at the Kuk Dong Factory, a Reebok and Nike contract factory in Puebla, Mexico. 4 Business Ethics Theories Normally ethics is understood to be the underlying values attached to an activity. There may be laws and rules enforceable by a regulatory authority that defines ethics but in some cases it is defined by morally acceptable unwritten customs. The concept is drawn from the basic ideals of what is right or wrong within the meaning of the activity under question. Beauchamp and Bowie (2004:4) contend that ‘law is the public agency for translating morality into explicit social guidelines and practices’. But it may not always be possible to encompass everything within the meaning of a law. Again in the context of ethics law provides us with some rules and not guidelines. This is the main reason that business ethics are often termed as the grey area of business activity where the observance of legal minimum is generally overstepped. This usually is considered as corporate social responsibility that is beyond the legal framework. Modern businesses can no longer afford to ignore an increasingly informed public that is becoming more vocal in punishing organisations that fail to perform in an ethical manner. Business Ethics is the specific and practical implementation of policies and interventions that include and accept the importance of the need for organisations to behave in a more ethical manner. Most notably, ‘ethical’ responsibilities are illustrated as those that are above and beyond ‘legal’ responsibilities. These concepts have been around since the turn of the twentieth century. The norm was that there were a set of laws prevailing in any one country and the company that was predominantly located in that country practised business ethics in relationship to it. However there was little International presence in the sense that has come in after Globalization. Then International presence usually meant opening of trading posts or outlets. Now it means setting up of manufacturing facilities within the target market or near it, anyway far from the country of origin. These new concepts developed the idea and issues of sustainability and corporate citizenship and the role and scope of business ethics relative to the local governments, local civil society and local non-economic stakeholder. It is commonly understood that laws shape the role of business, but in broader perspective it is the contribution of the business, by virtue of its varying role-play, to shape future laws and forms of regulatory activities. They also help in the evolution of business ethics when they cross the boundaries to set new rules for themselves. It would not be far-fetched to state the contributions by business towards law-making are enormous. It has a tremendous impact on the society in general. In counteraction the society too plays a vital role by accepting, modifying or rejecting these activities and re-defining the role of business ethics. In many countries of the world there are no laws preventing experimentation on animals or laws regarding selling armaments to oppressive regimes or laws for formulation of labour unions. However these issues are strongly felt about and expressed by many interested economic and non-economic stakeholders. Here these strong vies and feeling assist in defining business ethics in absence of relevant law. The following chart shows the influences by different stakeholders on business ethics in different areas of the developed world and for what reason. These issues are however nearly absent in the third world countries and the so-called emerging economies. United States Europe Who is responsible for ethical conduct in business? The individual Social control by the collective Who is the key actor in business ethics? The corporation Government, trade unions, corporate associations What are the key guidelines for ethical behaviour? Corporate codes of ethics Negotiated legal framework of business What are the key issues in business ethics? Misconduct and immorality in single decisions situations Social issues in organizing the framework of business What is the dominant stakeholder management approach? Focus on shareholder value Multiple stakeholder approach The impact of globalization on the role and relevance of national and trans-national regulation of business activity is depicted above. Traditionally law of a land is confined to its territory. When a company leaves its territory the law is no longer binding on it. More importantly it comes under the laws and regulations of the new territory it enters to do business in. In such cases it abides by the new set of laws and drafts new ethic for the conduct of its activities. Very often, especially in case of companies moving from developed to under-developed countries, the ethics will clash. It is very obvious in the case of Nike, as discussed elsewhere in this discourse, and the company usually takes the course that benefits its primary stakeholders, in this case the shareholders of the parent company. As a result its managers can no longer simply rely on the legal framework when deciding on the right or wrong of certain business practices (Donaldson, 1996). If we work on the premise that business ethics begins where the law ends then under the force of globalization the country of origin’s laws and financial regulations are not applicable and the demand of business ethics increases as the companies are beyond the control of the national governments. (Scholte 2000). Indeed in the absence of Internal laws and global regulations businesses themselves form regulatory business ethics through self-regulation, global codes of conduct, ethical sourcing etc (Ronit 2001; Cashore 2002). This regulatory function of businesses actually refers to a wide variety of levels, from the company level through to the industry level, to national and international levels (Crane and Matten, 2004: 387-434). In some cases the company-specific codes are devised at the industry level and adopted widely to set a level playing field for all competitors. In other cases the company forms its own business ethics to thwart competition and to ward of grievances by non-economic stakeholders. An example of the first category would be the efforts by the sporting goods industry to ensure compliance with labour standards (van Tulder and Kolk, 2001). Essentially the narrow view of earlier times, that business ethics begins where the law ends, is no longer consistent with the practical reality of the global business activities. Companies are deeply involved in evolving business ethics that are now shaping the law. Decisions on moral issues are continually being evaluated and changed into enactments. It is a reversal of roles where business ethics are now leading to formulation of laws. This has led to the development of the idea of the ‘civil regulation’ of corporations by non-government organizations (Bendell, 2000; Zadek, 2001). This is evident from the fact that business-civil society relations are inherently involved in the exercise of setting the standards for evaluating business ethics. Protests and boycotts have raised the heckles of the companies and forced them to re-think their ethical policies and revise their view in conformity to public demand. This no-economic stakeholder is becoming an important constituency that even the traditional stakeholder cannot ignore. There is increasing inclination to develop business partnerships with civil society organizations, the NGO’s to deal with ethical problems as diverse as labour standards, corruption, and sustainability practices (Bendell, 2000). It is no longer the responsibility of the government alone through laws and regulations to encourage and influence business ethics, rather it is the NGO’s and the civil society at large, that is addressing the ethical dilemmas of the companies. A huge example is that of labour standards in the developing countries. The local laws have failed to protect its own workforce’s interest but the companies, forced by actions of NGO’s and customers, have devised compliance conditions which must be met by units operating in those countries. These compliances insist that fair wage and working conditions, as defined by the companies, have to be strictly observed in order to get their business. This forces the units to revise and raise the standards for labour wages and conditions. This can be observed from developments such as industry programmes and codes like those emerging from the sporting goods industry (van Tulder and Kolk, 2001), 5 The Rejoinder In response Nike did make feeble efforts here and there to a certain extent but really came out with a declaration in 2005 making their intentions clear, although they are still shrouded in some ambiguity. Indeed to counter some of the adverse reports, Nike claimed that monitoring by Price Waterhouse Coopers (2000) ensured that labour standards were respected in Nike contract factories. However, attacking this report, MIT Professor Dara ORourke finds that PwC’s monitoring methods are significantly flawed and that they paint a false impression of labour conditions. (O’Rourke, MIT, 2000) On April 13th, 2005, Nike issued its "2004 Corporate Responsibility Report", admitting the countless abuses that were taking place in their factories. The also gave a list of 700 odd factories around the globe. Nikes Corporate Responsibility Report confirmed that workers are paid less than the legal minimum wage at 25% to 50% of Nike’s partner factories around the world. Similar violations were found and acknowledged by Nike in past reports, and the founder of Nike, Phil Knight also admitted that 25% of Nike’s factories were still not meeting minimum standards. Further, Nike has admitted that its factories are places where physical and sexual abuse, extraordinarily low wages, restrictions of bathroom use and other human rights abuses happen on a regular basis. Nike believed that self monitoring was the way to go but all NGO’s like EFJ, Global Exchange, OXFAM Australia, and Press for Change, have found them unresponsive to their suggestions. Nike executives have always preferred a public relations campaign and have spent millions in trying to defend themselves and the company and improving the Company’s Global image. 6 The Solution This brings us to the question of what Nike is doing to really change the situation for better, apart from issuing corporate statements. 1. Nike must allow independent monitoring by groups that are in no way connected with Nike, such as the Workers’ Rights Consortium instead of FLA whom Nike funds. 2. Nike must ensure that contract workers are paid a minimum living wage which is oriented to the living standards in country where it is operating so that they can meet their basic needs; the minimum age for employment must also be 18. 3. Nike must guarantee the rights of their contract workers to form independent unions and make it obligatory that factory management collectively bargains with these unions in good faith. Various Human Rights groups have come up with following demands of Nike. Protect workers who speak honestly about factory conditions, provide for regular, transparent, independent and confidential procedures for monitoring factories and investigating worker complaints. Offer decent wages for over 53,000 workers in South East Asia and allow reasonable working hours. Provide safe and healthy workplaces and permit freedom of association to all workers. 7 The Promises In return Nike has made following promises in 2005 to enable itself to meet the demands of the activists in addition to satisfy the public opinion. They also plan to stay ahead of the competition in reforms and to set outstanding example of good governance worldwide. All Nike shoe factories will meet the U.S. Occupational Safety and Health Administrations (OSHA) standards in indoor air quality. The minimum age for Nike factory workers will be raised to 18 for footwear factories and 16 for apparel factories Nike will include non-government organizations (NGO) in its factory monitoring, with summaries of that monitoring released to the public. Nike will expand its worker education program, making free high school equivalency courses available to all workers in Nike footwear factories Nike will expand its micro-enterprise loan program to benefit four thousand families in Vietnam, Indonesia, Pakistan, and Thailand. Funding university research and open forums on responsible business practices. (Nike, Corporate Announcement 2005) There is great excitement about these promises. However, Nike still has a long way to go. They have to move with speed to uplift their workforce in the short term. Nike must also reallocate resources to meet these requirements. Their size and scope of operations can easily produce the resources required. They must realize that being Industry Leaders, they will be setting a healthy standard. Competition will also have to follow suit so they must go forward with the belief that by raising their expenses they will not be giving any leverage to the competition. They too will have to toe the line eventually, as the global pressure is directed towards them as well. The problems are clear and so are the solutions. To borrow their oft-used motto, Nike need to “Just Do It.” 8 Bibliography Boje, David M.,Vietnam Labour Watch Nike Information available at: http//business.nmsu.edu/mgt/handout/boje.htm Beauchamp, T. L. and N. E. Bowie: 2004. Ethical theory and business, 7th ed. (Prentice Hall, Upper Saddle River, NJ). Bendell, J. (Ed.) 2000. Terms for Endearment: Business, NGOs and Sustainable Development (Greenleaf, Sheffield). Cashore, B.: 2002. Legitimacy and the privatization of environmental governance: how non-state market-driven (NSMD) governance systems gain rule- making authority, Governance 15(4), 503-529. Crane, A. and D. Matten: 2004. Business ethics: a European perspective (Oxford University Press, Oxford). Donaldson, T.: 1996. Values in Tension: Ethics Away from Home, Harvard Business Review (Sep-Oct), 48-62. Educating for Justice’s EFJ, Global Exchange, OXFAM ,Australia, and Press for Change available at: http://www.educatingforjustice.org/stopnikesweatshops.htm FNPBI available at: http://www.educatingforjustice.org/stopnikesweatshops.htm O’Rourke, Dara (2000), “Monitoring the Monitors: A Critique of PricewaterhouseCooper’s Labor Monitoring,” white paper, released Sept. 28, 2000, available at web mit.edu/dorourke/www/ Ronit, K.: 2001. Institutions of private authority in global governance, Administration & Society 33(5), 555-578. Scholte, J. A.: 2000. Globalization: A critical introduction (Palgrave, Basingstoke). van Tulder, R. and A. Kolk: 2001. Multinationality and corporate ethics: codes of conduct in the sporting goods industry, Journal of International Business Studies 32(2), 267-283. Zadek, S.: 2001. The civil corporation: the new economy of corporate citizenship (Earthscan, London). Vietnam Labour Watch report, (NGO), Nike In Vietnam: The Tae Kwang Vina Factory* available at: siteresources.worldbank.org/INTEMPOWERMENT/Resources/14826_Nike- web.pdf - www.nikefoundation.org Read More