Chapter Four: Companies Behaving Badly

Chapter Four: Companies Behaving Badly


Efficiency and overhead reduction was the rationale for the dramatic shift of production and logistics responsibility to third parties, and measured by these standards, outsourcing to thirdparty vendors in developing economies has worked remarkably well. Consumer prices have dropped dramatically, while productivity and profits have soared. But in the last five years , particularly, many companies have gone through a painful learning process that has moved from early denial, through half-baked methods intended to force better behavior among their suppliers, to fully developed supplier management programs.

Initially, relocating and outsourcing production in order to take advantage of low labor costs and loose environmental and safety regulations seemed to be a perfect solution for everyone concerned ” corporations, consumers, investors, and those employed in developing economies (although U.S. unions weren t too pleased). In fact, it made such perfect operational sense that it took some time for companies to realize that there might be a down side to this supply chain revolution. Even as late as 1995, mentioning social responsibility issues in a company s annual report, emerging Web sites, or in advertising or marketing campaigns ” particularly those involving labor or environmental activities of a supplier in a developing country ” was practically unheard of. Even in 1997, despite stiffer EPA rules and penalties for violations, only 32 percent of procurement departments surveyed admitted to having questioned their suppliers during the strategic sourcing process about their environmental activities. [1 ]

It therefore came as a surprise to analysts and business leaders that the same parties that benefited from these lower costs ” the consumers and investors ” would actually come to join sides with human rights and environmentalist pressure groups to demand that buying corporations continue to assume responsibility over employment and environmental actions of their suppliers. In short, what was never considered as this supply chain revolution was taking place was that shifting responsibilities for production to third parties did not fully abrogate the parent companies from ethical and social responsibilities that came with that production.

[1 ] Ram Narasimhan and Joseph Carter, Environmental Supply Chain Management, Center for Advanced Purchasing Studies, 1998, p. 12.

Denial, Obfuscation, and Half-Baked Measures

So how have companies dealt with pressure to take on accountability for their often wayward suppliers over the past decade ?

The initial reaction of most companies to charges that they were sponsoring, dependent upon, and benefiting from low-wage, unsafe, and environmentally unfriendly production methods was one of incredulity and denial. After all, corporate leaders explained, a company cannot be held responsible for actions taken by a subcontractor in a foreign country. As late as September 1997, Nike was still producing a press release that dismissed critics of its supplier policies as fringe groups. [2 ] The obvious answer was for local governments to maintain higher standards of labor and environmental law and enforcement. In the early phases of this transition, companies disclaimed any control or responsibility over the process at all.

Many companies back then like Nike ” which are essentially design and marketing companies ” could have a top grade ˜A rating by us or the Europeans, or the Japanese CSR Research groups, says Alice Tepper Marlin, President of Social Accountability International. But the data we got was all on what was happening in our own borders . . . and so we ran into many companies that got excellent evaluations on the environment and on employment issues, but they weren t doing any of their own production. We would only find out through somebody s expos ˆ that the employment situation [overseas] was horrendous. [3 ]

But as groups such as the International Labor Organization and Societ ˆGenerale de Surveillance began to actively inspect factories, it soon became apparent that high-profile brand name companies that had contracts with suppliers were going to be exposed anyway. As high-profile cases began to emerge, activists asserted that, given that developing-world governments provided little protection to workers, responsibility for the subcontractors social and environmental policy rested squarely on the company ordering and purchasing the product. After all, they reasoned, the buyer “ supplier relationship meant that companies were much more influential than local government in demanding high standards or monitoring compliance. As companies were the ones that requested , directed, and paid for the production, and benefited from the contract, their responsibilities logically extended to the behavior of their subcontractors. If major buying corporations couldn t twist a supplier s arm to make it behave, who could?

The corporate world has demonstrable global reach and capacity, says John Ruggie, from Harvard University s Center for Business and Government. It can make and act on a decision far faster than governments or agencies. And parts of it ” particularly such brand-sensitive companies such as Coca-Cola ” are vulnerable to external pressure. Society, therefore, has come to demand help from the corporate sector in coping with adversity. [4 ]

This reasoning was even more persuasive given the power that U.S. companies, in particular, wielded over suppliers in developing economies. As we have already seen, in 2002 the United States imported more than one-third (36 percent) of China s total exports, including 1.2 billion garments that accounted for $39 billion in U.S. retail sales. Nearly 30 percent ($22.5 billion) of all of India s exports fall into the category of housewares and the U.S. market alone (a $67 billion industry in the United States) accounts for nearly one-third of all of those exports. If any single group had power over the standards of behavior of these suppliers, it seemed to be the multinationals that contracted the manufacturing of the goods in these massive markets. [5 ]

And as the press continually points out, many of the most influential companies are more powerful in economic terms than the developing nations whose factories they use. According to the United Nations Conference on Trade and Development (UNCTAD), 29 of the world s largest economic entities are multinationals, led by ExxonMobil, a company that was larger than all but 44 national economies, and had an economic equivalent of Pakistan. The UNCTAD report concluded that the economic importance of the largest 100 multinational firms compared to national economies had grown significantly during the past decade. [6 ] The logic of the purchasing company having responsibility for suppliers might be tenuous under international law, but it has held great sway with pressure groups, consumers, and investors concerned about labor and environmental exploitation.

What is more, growing evidence indicated that consumers and investors not only supported this point of view, but were potentially liable to act to punish companies that they felt were misbehaving. A Millennium poll on Corporate Social Responsibility of 22,000 consumers across 23 nations on six continents, for example, found that 90 percent of consumers worldwide agreed that large companies should do more than focus on profitability. [7 ] A similar survey by Burson-Marsteller found that 64 percent of European opinion leaders ” media, politicians , church leaders, NGOs, and institutional investors ” said that a company s reputation for social responsibility would affect their buying behavior, and over 40 percent of those polled said that a company s social and environmental behavior would affect share prices. A recent European survey found that 86 percent of those interviewed said they would have a preference for purchasing a product from a company that was actively engaged in a CSR program, [8 ] and 60 percent of consumers said they formed their impression based upon labor practices, business ethics, responsibility to society at large, or environmental impacts. [9 ]

But it was not liberal Europe alone that felt corporations should behave better. A U.S. survey by Harris Interactive found that 79 percent of Americans said they considered corporate citizenship when they made purchasing decisions, and 71 percent considered corporate citizenship when they made investment decisions. Twelve percent said that they would purchase a less profitable stock if it had better corporate citizenship performance.

Yet in a Hill & Knowleton poll, 73 percent of Americans rated U.S. companies as below average when it came to corporate citizenship. [10 ] A PricewaterhouseCoopers survey in 1999 found that nearly a quarter of Americans during the year had boycotted a company s products, or urged others to do so, because they didn t agree with the company s policies or activities. The survey found that nearly 90 percent of Americans held companies totally or partially responsible for keeping operations and supply chains free of child labor, and 95 percent said companies were responsible for preventing discrimination, protecting worker health and safety, and not harming the environment. [11 ] Nine of ten opinion leaders in Europe and America believe companies should continue efforts to become more socially responsible despite recession . [12 ]

Compounded by a seemingly unending spate of corporate scandal that began in 2001, the people s verdict was becoming clear, and it was soon obvious that complete denial of responsibility for the actions of their suppliers was simply an unworkable strategy, particularly for companies in vulnerable industries. As activists relentlessly exposed sweatshop conditions in overseas factories and the anti-globalization movement began to grow, several prominent companies began shifting their focus somewhat. By the late-1990s, even the companies that had at first stridently resisted efforts to make them assume responsibility for the activities in their supply chain ” particularly in the light manufacturing, garment , and footwear industries ” had begun to accept the need to make some effort toward controlling suppliers.

[2 ] John Samuel, Sites for Sore Consumers, The Washington Post, March 29, 1998 at

[3 ] Interview, June 24, 2003.

[4 ] John Ruggie, Managing Corporate Social Responsibility, The Financial Times, October 25, 2002.

[5 ] Sourcing from India s Informal Sector Homeware Industry, Levi Strauss & Company, Homeware Meeting summary, March 1, 2002.

[6 ] Guy De Jonquieres, Companies ˜Bigger Than Many Nations, The Financial Times and

[7 ] Teresa Fabian, Supply Chain Management in an Era of Social and Environmental Accountability at

[8 ] John Samuel, op. cit.

[9 ] Surveys Find Many Consumers Hold Companies Responsible for Their Actions, September 30, 1999, from Press Room on the PricewaterhouseCoopers Web site at

[10 ] Consumers Skeptical of Corporate Citizenship Activities, Holmes Report, p. 1 at

[11 ] Surveys Find Many Consumers Hold Companies Responsible For Their Actions, op. cit.

[12 ] U.S. Attitudes on CSR Move Closer to Europe s, Holmes Report, April 25, 2002, p. 2, at