Corporate Code of Conduct versus Reality: A Comparison

Introduction

The large number of fraud and unethical behavior publicized in the mass media during the last two decades has directed the attention of the public business ethics and consequently caused consumers to question the morals of organizations and their leaders. The scandals of Enron, Nike, and more recently, the subprime mortgage crisis are only a few that were made known to the public through international news agencies. The vast majority of cases of unethical business behavior is undoubtedly hidden from the public eye and may go unnoticed. Whenever crises and scandals of large multinational corporations do surface, however, often litigation and regulations follow to protect the consumers and general public. As a result of the dimensions of recent unscrupulous and immoral actions of executives, academics have begun actively studying corporate social responsibility and business ethics in order to provide managers with valuable tools to prevent unethical conduct. The media coverage of ethic breaches has also put sufficient pressure on organizations to cause leaders to actively monitor their corporate social responsibilities. Globalization, however, has complicated business ethics into a new dimension due to the large number of countries, cultures, and legal systems involved.

While laws and regulations exist in each country to control and litigate wrongdoers, in the case of multinational organizations, the legal situation is far more complex (Cavanagh, 2004). Because there are only a few international instruments to control multinational corporations, globalized organizations are exposed to additional legal risks; however, some global organizations abuse their power and exploit the lack of regulations in Asian and Third World countries to their advantage. As a consequence, international treaties were enacted to establish a minimum of ethical standards worldwide.

Cavanagh (2004) suggests the existence of three main strategies to control business ethics. The strongest strategy is the regulation by international treaties, such as the North American Free Trade Agreement (NAFTA), the Kyoto treaty on global warming, and the OECD Anti-Bribery Agreement. Participating countries can enforce the international rules and regulations locally and thereby protect the public to a certain degree. Global codes of business conduct are another strategy that organizations may follow to establish ethics standards. For example, the United Nations Global Compact promotes among other standards the abolition of child labor. The least powerful strategy to endorse ethical conduct within organizations is voluntary self-restraint. Businesses following this type of strategy set their own rules, especially when operating in an area with limited legal standards to protect the workforce as well as the organization.

Child Labor and Sweatshops

Child labor and sweatshops pose a significant ethical dilemma and had a long history and presence in the Western hemisphere during the Industrial Revolution. In fact, every Western and industrialized country has exploited children, beginning with Britain (Hindman & Smith, 1999). History is repeating itself today in the developing and Third World countries where a high prevalence of child workers is common. Based on 1996 statistics, more than 40% of Africa’s children are child workers and 61% of all child workers in the world live in Asia (1999).

Child labor is unethical for several reasons. First, it deprives children of their childhood and normal development. In addition, it is economically detrimental and inefficient (Hindman & Smith, 1999). Because the adults in countries with child labor prevalence have been the victims of child labor themselves, they are illiterate and therefore cannot perform a better paid, more advanced task. Child labor thereby traps the family and society in a cycle of poverty for each successive generation. It has been argued that the productivity growth in industrialized nations had risen dramatically following the shortening of the workweek from above 60 hours to fewer than 40 because of the abolishment of child labor and the gradual improvement in the population’s literacy levels (1999).

In 1997, Bangladesh exported $900 million worth of garments into the U.S., mostly made by children; yet, it is difficult to change the laws and work culture in a poverty-ridden and corrupt Third World country (Hindman & Smith, 1999). Organizations engaging in child labor and sweatshops, such as Nike, shamelessly support their decisions to employ children, claiming that children would otherwise be working under worse circumstances, such as prostitution (1999).

The global abolition of child labor remains an unresolved ethical dilemma, especially in Third World countries. While the United Nations Global Compact attempted to set a global standard to eliminate the employment of minors, participating countries and organizations often lack the required level of enforcement and control (Cavanagh, 2004).

Nike’s Child Labor Scandal

Today, Nike controls 36% of athletic shoe market and is one of the largest global athletic apparel manufacturers (Locke, Kochan, Romis, & Qin, 2007). In the 1990s, Nike was reportedly exploiting children in Pakistan by partnering with unscrupulous local supplier companies who abused, sexually harassed, and underpaid workers (Hindman & Smith, 1999). The child labor and worker exploitation allegations where further reinforced by evidence provided by protest groups and consumer protection agencies. The scandal became a major media spectacle lasting for several years; however, some critics argue that Nike managed the crisis well and even accomplished a strong comeback using a clever marketing tactic.

The scandal began in 1995 when CBS aired a documentary showing children stitching soccer balls for Nike. This documentary caused a worldwide chain-reaction of bad publicity for Nike, especially because of the irony of Pakistani children working so that Western children can play (Boje & Khan, 2009). All of a sudden, Nike’s image was tarnished on a global scale when the heroic company, which manufactures high-quality, high-performance athletic apparel and accessories, was accused of exploiting children and abusing adults in developing countries. The New York Times published several critical articles that attacked Nike, such as an article accusing Nike of using slave labor in Asia in order to create a giant pyramid built on the backs of Third World oppressed and underpaid workers (DeTienne & Lewis, 2005). The list of accusations was not limited to child labor and abuse. Nike’s supplier’s factories had serious health and safety deficiencies that caused serious illnesses in workers (Carty, 2001). In addition, workers were forced to work overtime and where compensated unfairly, often below the host country’s legal minimum wage requirement (2001).

In Indonesia, Nike’s suppliers employed over 25,000 workers and many Indonesian show factories did not even pay US$1 (Locke & Siteman, 2002). Even more absurd was the suppliers’ petition to the Indonesian government to exempt them from the country’s minimum wage requirement because it would cause them hardship to pay workers a fair rate (2002). In Vietnam, Nike paid workers 20% below the local minimum wage law. More evidence was introduced by auditors of workers reported to be yelled at and abused. Nike’s ruthless suppliers would even cut the workers’ pay when the workers could not reach their quota for the day.

Nike employed approximately 700,000 women in Southeast Asia and Latin America (Boje, 2001). Of those 700,000 women, as Boje noted, none was present at a debate. In fact, Nike’s employees were never allowed to speak directly in a debate, they are always “represented”. Similarly, Nike’s statements about work conditions were always made by the management and never by a worker. It appears as if Nike was, and possibly still is, hiding behind its subcontractors and suppliers and their intricate networks, trying to avoid liability and responsibility for the local work conditions.

Nike’s Response to the Allegations

A review of historical documents revealed that Nike’s officials were initially unprepared and made inconsistent statements to the public (Boje & Khan, 2009). In 1998, Nike CEO Philip Knight admitted that 14 year old children work for some subcontractors. He stated that the minimum age in Nike supplier factories will be raised to 16 for clothing and equipment factories and to 18 for areas where elevated toxic fumes are present (Nike’s New Labor Practices, 1998). These and similar statements, however, were later found to be unfounded as audits years later proved no such progress or at best little improvements had been made in that direction (Boje & Khan, 2009).

One statement made by Nike was that its Pakistani supplier was pressured to create stitching centers so that its management could monitor the age of every worker (Boje & Khan, 2009). Previously children and other workers worked from home and it was practically impossible to track who worked on each product. In 1998, Nike reported it had sent a representative from Singapore to inspect the first batch of soccer balls manufactured for Nike in Pakistan and that he concluded that the conditions were not acceptable. Children, old, and blind people were working under bad conditions in an uncontrollable environment (2009).

Mixed accounts on the subject of child labor continued to arise when in an interview with Michael Moore, Nike’s chairman Phil Knight did not seem bothered by the fact that children aged 14 work for Nike’s suppliers (Boje & Khan, 2009). By 1996 Nike had acknowledged that it had not implemented a child labor free production in its Third World factories, even though its code of conduct included a section “memorandum of understanding” that explicitly condemned forced labor. By 1999 President Clinton was praising Nike, the apparel industry, and UNICEF for having abandoned child labor and instead given work to poor women in surrounding villages. The children were sent to school instead and American apparel manufacturers, including Nike, created the image of a caring corporation that creates jobs for poor women and to sending children to school ensuring they receive adequate education.

In several accounts Boje and Khan (2009) illustrate how the media and Nike speak in the stitcher’s and child laborers name; yet, their actual voices are never heard. From interviews with stitchers, the reality was a different one. Even after these improvements where made that received presidential praise, the hard-working adults in developing countries were not able to make ends meet because the soccer ball stitching income did not suffice to make a living. The stitchers had to take loans to buy books for their children and could not pay for a medical emergency. They were not offered any social security, bonuses, or profit sharing. The essence of the ethical breach was that the stitchers were too poor to present their shocking living conditions and demeaning work conditions via the media to the end consumers; however, the companies exploiting them had more than enough resources to create a huge media campaign to claim the opposite.

In 2006 two child workers were identified, who were still working for Nike (Boje & Khan, 2009). Nike allegedly switched suppliers and added contractual constraints prohibiting part-time and off-site stitching in order to control the identity and legality of the supplier’s workforce; however, all these decisions were made without any worker participation or negotiation from the stitchers’ side (2009). Boje and Khan criticized harshly that the current culture of the West remains that of the imperialist where it is normal to ignore the “natives” when making decisions about them elsewhere.

Following the severely negative media coverage, Nike suffered serious financial losses. In 1998, Nike’s workforce was reduced by 1600 workers and the Nike stock price dropped nearly 50% (Carty, 2001). In another attempt to rescue its market share and brand image, Nike created a 32-page report which summarized the working conditions and concluded that Nike’s facilities meet all standards that apply locally (DeTienne & Lewis, 2005). Nike further maintained it was paying workers twice the legal minimum wage amount. Moreover, Nike published press releases and advertisements to show evidence that it had accomplished its mission to abolish forced labor and Nike’s operations in Third World helped communities to find a way out of poverty. In contrast to this statement, however, a report of one of Ernst and Young audits leaked to the press. It stated that one factory had no drinking water at all available for its workers and workers were exposed to toxic chemicals that were 177 times above safe limits. To make things worse for Nike, the report mentioned workers were punished for taking time off, and almost all workers worked more overtime than permitted by law (2005). Yet, Nike claimed it had put subcontractors under pressure by increasing its inspections and monitoring activities (Locke & Siteman, 2002).

In an interesting move it play down the worker exploitation and abuse of children, Nike stated that its facilities are no worse than those of other firms in related industries (Wokutch, 2001). It is true, however, that most subcontractors who work for Nike also manufacture apparel for Nike’s competitors. It follows, then, that Nike must have been attacked in the media for tactical reasons, since most if not all apparel manufacturers were guilty of the same ethics breaches.

Nike’s Code of Conduct

In the early 1990s, Nike’s official code of conduct focused on the organization itself, the environment, and it briefly mentioned human rights. In 1992, Nike’s code of conduct was extended by a section headed “memorandum of understanding” (Nike’s Code of Conduct, 1997). In this new section Nike condemns forced labor, child labor, and proclaims that it would provide safe and healthy work environments for its contractor’s employees. Yet, the statement regarding child labor was morally questionable because it would only set a lower limit of 14 years for workers, when in industrialized countries the limit for employment is either 16 or 18 years. Nike’s code of conduct in 2010 was modified to omit the term “child labor” and instead state that employees are at least aged 16. Another interesting change is the change of implied liability. In the 1990s, Nike explicitly mentioned that the contractor certifies not to employ minors, whereas today the subsections of Nike’s code of conduct state in an active, factual tone that in fact all employees are aged 16 or above. The question remains whether Nike is liable for such statements, especially in the countries where a breach occurs.

Analysis

Nike began with the story of the heroic entrepreneur making specialized shoes for athletes. When the media accused Nike of child labor, the image was suffering and the hero story was changed. After the scandal Nike tried to turn the situation around and Nike’s management added in its mission statement the heroic image of Nike being the protector and emancipator of the children and women of the Third World (Boje, & Khan, 2009).

Some argue Nike’s acted hypocritical by advertising an image as defender of human rights (Carty, 2001). One instance of hypocrisy is Nike’s huge advertising budget compared to minimal pay for workers in Third World, which is around $1.25 a day. To this day, Nike routinely retaliates against protesters and boycotts friendly protests utilizing all legal ways of resistance. Even though activists have the freedom to organize and publicize their information on Nike’s unethical practices on the Internet, the financial strength of the corporation allows it to fight back by monitoring content placed on the Internet, such as planned protests.

Several researchers conclude that Nikon’s marketing of its corporate social responsibility effort is an attempt to depict itself as a good, caring, and ethically responsible organization when in fact it is a plot to counteract the negative publicity. This double-standard is unethical because the statements made in public about Nike’s operations are deceptive and not based on factual information (DeTienne & Lewis, 2005).

Consumer activist Marc Kasky realized this hypocrisy and filed a lawsuit against Nike accusing Nike of false advertisement and unfair competition. In the court case Kasky v. Nike (2003,539 U.S.654) Kasky presented proof and criticized Nike of using corporate social responsibility disclosure as a way to maintain and increase sales; thus, Nike’s code of conduct was in reality a commercial speech that was legally binding and could not be classified as free speech. Nike countered by arguing its speech was political, not commercial, and that it should receive First Amendment protection (DeTienne & Lewis, 2005).

As the Nike scandal illustrates, compliance with self-made codes of conduct depends largely on interaction of various stakeholders (van Tulder & Kolk, 2001). While American companies were the first to publicize their code of conduct, probably due to the massive media pressure, similar corporate codes of conduct have been adopted by many multination corporations and continue carrying some marketing function as well. It is questionable, however, to what degree organizations will be held responsible in international courts for breaching their own, private standards. An ethical dilemma arises when organizations distort the integrity of corporate social responsibility reports by utilizing them as a marketing vehicle.

Conclusion

DeTienne and Lewis (2005) recommend requiring multinational corporations by law to issue corporate social responsibility statements to create a transparent market. This aspiration may sound difficult to implement since the addition of new regulations to the legal system takes considerable time and lobbying resources to be implemented. Opponents of this suggestion may also note that additional regulations will create an unfair burden on American corporations, unless the issuance of corporate social responsibility reports becomes international standard. Besides the reporting, international legal systems would need to adapt this regulation worldwide in order to create a fair playing field for all global corporations, regardless of their home country.

The Nike breach of ethics is of historic importance and a red flag signaling the dangers of uncontrolled globalization. Nike tried to draw an artificial line and separate its liabilities and responsibilities abroad by a contractual gimmick. Instead of building its own factories in Third World countries where it could retain full control of its workforce and train, educate, and grow workers to become more efficient, it preferred to exploit even children by dealing with unscrupulous local companies and contractually designating them as suppliers. The legal tactic, however, did not succeed and as soon as the facts of worker abuse and child labor became public, Nike could no longer hide behind its legal façade. At last, the media and the public managed to put enough pressure on Nike to change its operations towards the better.

It is doubtful that Nike and the other apparel manufacturers completely eliminated the problem of child labor and worker exploitation in the Third World. There are also doubts about the marketing practices of Nike when it deceived consumers about its operations with false information and later on refused to be held responsible in court. In any case, the definite lesson to be learned by the Nike scandal is that the greater organizations become, the more they need to be monitored and controlled in order to avoid abuse of power and workforce, deceit, and exploitation. To protect the common, globalized market place, it should be in the interest of all governments worldwide to create and efficiently enforce internationally enforceable standards to control multinational organizations, regardless of where they are based and where they operate. The Nike case clearly demonstrates how serious damage can be done at an international level—undetected—and at the expense of powerless people.

 

References

 

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