Nike: Managing Ethical Missteps

Sweatshops to Leadership in
Employment Practices*

d
and
his
his University of Oregon track coach Bill Bowerman founded Blue Ribbon
Knight
phl
hil renamed Nike, in 1964. The idea, born as a result of a paper written by Knight
yris,,later ir
his MBA program, was to import athletic shoes from Japan into the U.S
his Stanford M
market.
nich was otherwise dominated by German competitors Puma and Adidas. The
anv began as a distributor fora Japanese athletic shoe company, Onitsuka Tiger, but
in the American market. The
1yany

developed its own brand of athletic footwear to promote brand was created
relationship with Onitsuka Tiger ended in 1971, and the Nike
mpany's
om The company as a whole was
"Nike" after the Greek goddess of victory).
in 1972
(named worldwide seller of athletic
and has since grown to be the largest
renamed Nike in 1978, stores in the United States and presence
a in about
168 Nike
goods, with approximately
160 countries.
As the popularity of
the prod- Nike
athlete sponsors.
Nike was publicized by celebrity demands. In c o n t r a s t to
its meteoric rise in
manufacturing about
the company's of combating allegations
uct grew, so did period
the late 1990s began
a
had
public, countries in which
manufacturing
the 1980s after going World
violations in Third critics to be more
labor and human rights issue has been considered by
to this
subcontracted.
Nike's response at labor
retorm.
been sincere attempt
on a
control than
tocused on damage

CRITICISMS OF NIKE'S
MANUFACTURING PRACTICES

athletic
footwear pro-
costs low,
shoes (as well
Assembly of
manulacturing

and keep
l a b o r costs.
competitive w i t h low and co
c on
nssu
umme
err

remain world equipment,

equipment,

In order to of the Sporting goods

sporting Taiwan,
Taiwan,
to areas
Vs, toys,
lOys, Korea and
has
moved radios, TVs, then to
duction lirst to Japan,
first and Korea
footwear,
1960s,
19o0s, Taiwan
apparel, in the. the
the
mid-1980s
mid-1980s

as
low-cost offshore
shifting Southern
S O u l h e r n
hina.
Chit
Ch ina. By
By has continually
continually
shifted
sh
electronics)
began 19
I 98
800s
s,,
to
and
p roduction
production
in the wear exports,
exporis,

beginning orld's foot

toorwear is lower still.
and then, of the worlusc o s t ofm a n u f a c t u r i n g nanutacturing
and produc-
and produc
percent the manufacturing
m anutacturing
45 where Japanese
o n sports gear
supplied with J apanese
nations
experience cut costs
and a way to
CAPciicucwItn
Asian nd as
other history m a n u facturing
ac
to of its o v e r s e a s

B e c a u s e
in the assisted on
pioneer and Alexi Sherrill
a Melanie Drever handling
Nike
was
Sawayda. or ineffective
and Jennifer
tion,
Ferrell,
Jenniter
Jackson,
rather than to
illustrate either effective
obtained through
publicly
discussion
C. were
used for this
classroom case
nrenared by O. nrepared for
Ta
O c
m e n t
All sources
manufacturing. When Japan became too expensive, Nike shifted
d its contract to
Indonesia, and China. The working conditions in these fac
controversy. Allegations of poor conditions, child labor, widespread have been
have all been issues for the company. Because the Asian
tracted out the work, it has become increasingly difficu
regulate the working conditions and wages in these factories,
factori.
arassment, aasorcenetd adm,oure
have furt
Sweatshop labor is not merely an issue for Nike. It permeat.
all manufacturing. Perhaps the incident that s the public
ep track oSa
sbcon
ness across
ught and
foretront of American consciousness was the Kathy Lee Giffor
human rights group the National Labor Committee
ifford weatshop
uncovered thatoebacle in 1996abor to the conciu
child labor. As
was made in Honduran sweatshops that used childI an
indusstry fford's clotwhen
h the
visibility made it ripe for attack when labor rights violations were n
Since the mid-1990s, Nike has faced a barrage ofcriticism froered leader, Ninngkeshistighine
the mainstream media, and others for human and lab abor rights ac
The accusations have included deticiencies in health and
rights violations
in its
safety condisi
fact
wages, and indiscriminate hiring and firing practices. Wh
While much of ons, extremeorie.
ney o
died down as Nike and other athletic wear manufacturers have soughe the firestorm
images, the criticism has damaged the company's reputation.
In Indonesia, where Korean suppliers owned a majority of Nike fac.
labor activists and other nongovernmental organizations revealed sever. ies, reports hy
rights abuses and labor violations. These condition came to the ases of hurmar
public through stories such as Roberta Baskin's CBS
attention
of the gener
report on the conditions
manufacturing facilities in Indonesia in 1993. in Nkes
N
In 1996 Life magazine published an expose complete with photos of Pakicta
stitching soccer balls for Nike, Adidas AG, and other companies. The images.
dren had a devastating impact on Nikes sales and corporate reput
utation. ofth hese
Customers wh chil.
previously held the American athletics brand in high regard began to develon a l
ion of the company. Bob Herbert's op-ed article in The New York Times in 1996led to
public interest in this issue, and protests and demonstrations were held all overthe further
States. Several demonstrations occurred at "Nike Towns, the Nike retail megastores
United
Nike also experienced problems with factory conditions in Vietnam. A private reporton
one of its factories commissioned by Nike as part of an audit by Ernst and Young was lalki
to the press, and The New York Times ran it as a front-page article. The audit reported unae
ceptable levels of exposure to chemicals in the factory and documented casesofrsliag
employee health problems, as well as other infringements of the established code ofmeasures
condut

In response to the criticisms raised during the 1990s, Nike had to take rapid
and lack of inter
not only to redeem its reputation, but also to rectify problematic policies
national oversight of its operations. Nike's new priorities became to make certaintha
each worker had as
tactories were not taking advantage of its workers and to ensure that
work environment and competitive wage.

ENVIRONMENTAL PROBLEMS RELATED

TO THE TEXTILE INDUSTRY and
pol
i r o n m e n tw h e r e e

Because of the nature of the textile industry, Nike faces numerous ci N3

and
tially critical problems. The textile industry negatively impacts the c general,

n
industy
is located. Problems generated by the textile
manufacturing
 CASE 1 9 .
G ETHICAL I

MissTEPs
include increased water
pecith

aterways; a n d i a large fossil deticits; climate

fuel and raw 497
men, hazards, today's. material pollution change:
con.ange; hol

electronic
ronic
tev srial
textile consumption. In
of land,
addition air, and
these
are exace
ISSues
bated by Western plants expend to these
il of nths before being discarded.
A culture, wheresignificant amounts of envi
fashions are energy.
n to environmental considerations, popular for only
rking conditions. Ihe textile
manufacturers must consider
Vietnam,
Vietnamn,
as China, demaind
and cheap tor
labor and lax their
tries such Indonesia have led labor laws in
and abusive practices. In her book No
to an developing
increased prevalence
iies Logo,
Naomi Klein claims child of
countries begin to work toward
when
cturing sites when that Nike
mentrigh
es critics believe the company should developing better pay andabandons
employ
tories, allow indevendent
ind
inspection to verity improve transparency measures
lied with these demands to conditions, and disclose all in its
limited audits to the
a
pub-
determined that Nike pays wages above theextent.
neTally have determi
For
example, audits of Nike
legal minimum.
arguing that in most cases the wages still do not
. Critics are not sat-
constitute a fair living wage.
nse Nike claimed that sharing tactory locations with
dential basis enables the company to independent third parties
af the factory names, plus details ofmonitor
its
n a confide

supply chain
properly. It stated
audits of those
thatd i s c l o s u r e
factories, would be used by
NGOs ply to make further attacksrather than as a way to help the company address and
lems. Nike also stated that establishing what constitutes a "fair"
sove is wage difficult
iven the fact that costs ofliving and«economic conditions vary from country to country.

NIKERESPONDS TO CHALLENGESs
Duhlic protests against Nike have taken the form of boycotts and picketing of Nike stores.
their deals with Nike to produce branded athletic goods. In
lniversities have cancelled
stock prices decreased by apprOximately 50 percent, and the com-
1998 Nike revenues and
any laid off 1,600
workers. Nike launched a large public relations campaign to combat the
conditions, and low or nonex-
damaging allegations of child labor, inhospitable working
concerns of student activists, Nike visited
istent wages. In an effort to directly address the
students and university administrations
several college campuses, opening dialogue with
teams of Dartmouth graduate students
tbout its manufacturing policies. Nike even invited
to tour the Indonesian and Vietnamese factories for three weeks at Nikes expense.
improving the labor stan-
spent considerable resources focusing
on
Ihe company has
ards in each of its factories. It must weigh the expense of labor in nations where product
out to the local
ianutacturing is available. However, because these factories subcontract
NOrktorce, it is difficult for Nike to regulate the working environment. Nike must take

measures to ensure that the independent subcontractors used to supply the work
d as child labor,
excessive
actories do not engage in any illegal activities such
olcir
UIK hours, hostile work environments, or inappropriate payments.
Nike a has implementeda code of conduct for all of its suppliers, and has been worKIng
Nike Corporation joinea
eA
Aliance to help review its factories. In August 1996 groups
Apparel Industry Partnership, aCoalition of companies and labor and human rights
embled by the Clinton administration, to draft an industry-wide code of conduct.
Since universities form a core segment of Nike's market and the company
felt the reper
Cussionsofits canceled university
contracis,
dCuring practices in the form of several
 498 PART 5:CaSES

Nike sent letters detailing the acceptable conditions in its tactories and stressing its co
around the country. Representa:
to corporate responsibility to universities
ient
Nike also visited campuses and spoke to students, assuring them of Nike's into
Tom
to be a responsible corporate citizen. Phil Knight himself visited the campus of the It
Univer-
sity of North Carolina at Chapel Hill. Nike also launched a public relationscampaign that
included writing op-ed pieces, letters to the editor, and press releases to defend its renut

tion and to refute critics' claims.

However, Marc Kasky, a California activist, maintained that Nikes claims were mi.
leading and deceptive to the public. He filed a lawsuit claiming that Nike's actions should
be classified as commercial speech that violated Californias unfair competitiorn and adver
tising laws. The legal controversy culminated in the California Supreme Courts decision in
Kasky v. Nike. The court determined that public relations communications may constitute
"commercial speech" that can be interpreted as "false advertising" As commercial speech
is afforded less protection under the First Amendment, Nike would be liable for any clainms
under its public relations campaign that could be construed as misleading the public. After
the ruling, Nike settled the lawsuit at approximately $2 million.

NIKE'S CORPORATE SOCIAL RESPONSIBILITY

Nikes corporate social responsibility (CSR) practices have been
"Nike has increased evolving since 1991. At first, Nike's approach to CSR could be
characterized as insufficient and generally lacking in any true
its efforts to be more forms of regulation and implementation throughout its
global
ethical in its manufacturing supply chain. Manufacturers in foreign locations were simply
practices and has become trying to comply with the minimal contract requirements,
while at times overlooking fair labor practices in order to
per-
something of an industry form as low-cost suppliers. Nikes initial
response to criticism
was reputation rather than wide-scale changes in
leader in certain areas. management
its practices. However, as more and more issues
have surfaced
and been brought to the attention of both the
its consumers, Nike has increased its efforts to corporation and
be more ethical in its
tices and has become something of an industry leader in certain manufacturing prac-
areas..
According to Harvard University senior fellow Simon Zadek, corporate
evolves through five stages: responsibility
1. Defensive: "Its not our fault.
2. Compliance: "We'll do only what we have to"
3. Managerial: "It's the business."
4. Strategic: "It gives us a competitive edge"
5. Civil: "We need to make sure
everybody does it.
Nike could be classified as having evolved
from the defensive
managerial stage. The company's first CSR stage through compl
ance stage to the the
Nike had handled complaints from report demonstrated how
stakeholders who wanted to see better
tions at Nike's contract factories. In its 2005 working con
locations of factories that produced its report, the company provided the namesa and
products for the first time ever. In its third CSR
.
 CAS MISSTEPS

499
report, art. Nike officials said
they were
risis-management tool and would moving away from using
and growth. instead be corporate
using it as an opportunityresponsibility as
for innovation
S Nike must now grow fully into
the fourth and
tinue to
develop its fifth CSR
olicies in its factories corporate responsibility stages. The company must
market share strategies and increase enforcement of its
to ensure its
s new emphasis on dominance in the footwear
farther CSR initiativescorporate
to make responsibility as an innovative
the tool, Nike is industry.
With
tive edge in the footwear industry. company an
industry leader and thus giveimplementing
it a
The following sections
further discuss some competi-
include environmental of Nike's CSR
sustainability, audit tools used to evaluatepractices. The areas covered
factory transparency, Nike's
corporate Nike contractor
responsibility committee, and practices,
philanthropy.
In 1990 Nike
Environmental Sustainability
began development of the
environmental footprint Reuse-A-Shoe Program to reduce
(so to speak) and the
shoes that company's
landfills. The purpose of the decrease the amount of
dispose worn-out shoes. The
of program was to find an end up in
Grind" In 1995 material made from the environmentally friendly way too
Nike expanded Reuse-A-Shoe recycled
began collecting old shoes in Nike shoes was called
"Nike
Reuse-A-Shoe by partnering with the National
retail stores. In 2002
beginning plans to go international Recycling Coalition and by
the
program was created, more with drop-off stations in Europe and
for recycling each than 1.5 million Australia. Since
pairs of used shoes
shoes since 1995. year. Nike has collected more than 25 million
have been collected
Nike has also crafted a pairs of used athletic
toward creating a sustainability philosophy called Considered
closed-loop
levels of the operation business. A Design in its step
can be closed-loop
business occurs when waste at
recycled. According to Nike,
panywide ethos built around Considered
all
the most sustainable
methods
designing the best products for the best Design is "a comn-
possible" To make Considered athletes while
forth a
variety of baseline standards Design using
have all of its that its
products
a
reality, Nike has set
products from all over the world meet these meet or exceed. Its goal is to
must
standards by 2020.

Audit Tools
In 1998 Nike
into the manner in
developed
auditing to help tools
provide
which Nike contract factories increasing transparency and insight
pany standards. are evaluated for compliance with
into one tool. It Management
Audit Verification (MAV) com-
combines audit and verification
helps to identify issues related to work hours,
0r
association, and grievance systems, as well as to follow on wages and benefits, freedom
up these issues and to create
dction plan to correct them according to local law and Nikes Code
ards. The Environment, Safety and Health (ESH) audit is an Leadership Stan-
C Compliance teams to determine compliance with Nike's Code in-depth audit tool used by

o n to its own auditing tools, external organizations such as NGOs Leadership Standards.
frequently audit
nntil
and recently, Nike also employed Safety, Health, Attitude of
a
ironment SHAPE) tool used quarterly by contract factoriesManagement, People
to determine their
ompliance with
ance with
Nike's Code Leadership Standards. In 2007 the tool was changed to a
 n u m e r i c
score by itsele.
was insufficiecnt ASt
500 that a

s e l f - e v a l u a t i o n
as

factorics
Nike
lelt

an
aveCrage
ol
l.//
times per ycar

Htke et
factory its
visits

mates
that it
Factory Transparency

became
the first compan to respond tos
the name
Nike
In 2000 disclose and locations
requests
to publicly
factories
duced licensed collegiat
that producco
denm
making.Nike products could
"Nike became the
first tracted

A
factory
contract

as thirty d
fferent schools. By disclos be producing producs.
company to
respond to for many
as
believes it
can be more successfu osing
at
its suppy
Nike
student requests
to publicly
and
chain,
changes
making
and making
factories,
once issues have been
Overed no only
also on an industry-wide
rics, but diso
nonitoring
disclose the names
in its
own

by asing its own supply

basis
locations of its
contracted company
hopes that
other companies
to do the same, Thain chain, itehe
should work as a motivatorcompany al
ge
factories that produced
feels that
transparency
for contracalsn
licensed collegiate products." factories.
Those with high compliance rankings
dent that
business will come their way, Conti
represented, contract C..

With multiple
brands, and many
to follow. This task is notan
universities
actories must
company'a
code(s) of conduct
ict each ot
easy one,as
decide which of conduct c a n contradict codes her. Nike has
standards for the varying corporate ories to comply with its code ot
c o n t r a c t factor
Theonduct by
make it easier for
attempted to Fair Labor Association.
with that of the
that its code aligns comna
guaranteeing
a
standardized code of
conduct followed all by companies in the
hopes that eventually compliance and better workin
can be implemented,
creating widespread
industry i n c r e a s e its transparency and ac
taken dramatic steps to
Nike has
ditions. Even on the company to improve its ctand
as

have continued to put pressure

activists
andards
ability,
and practices. the Balanced Scorecard for its suprien
Nike also has program it calls
implemented a
used to better assess factory comp
a lettered grading system
The Balanced Scorecard is financial factors, the Balancai
ance with the code of
conduct. Rather than simply assessing
environmental standards of factories. Thisss
Scorecard also measures labor, health, and
tem gives the company a reliable method for rewarding high-performance, compliantfar
which need to be addressedequl
ries. The card cost, delivery, and quality, all of
measures
for the work in factories to flow smoothly. The Balanced Scorecard gives factories incentio
to improve working conditions, and Nike rewards those that show improvement.

Corporate Responsibility Committee

n oraer to become a leader in corporate responsibility, Nike established a t
orporak
recommen

to make
Responsibility (CR) Committee to review policies and activities and munt

dations to the board of directors regarding labor and environmental pra

affairs, philanthropy, diversity and equal opportunity, and environmela Teemem

initiatives. The board is actively involved on the committee; at least two t obei t to
lity ponsibili,
Ar
bers must be from the board of directors. Nike
expects corporate reDc onsb
grated into the executive level as well. Nike's Vice President of Corporae 'Corport
example, reports directly to the CEO of Nike. These leaders help to
that co
c
responsibility is considered at every level of the company.
m e
o f .
Nikes
ared,
als to i
west goals
new funds are
Phi lant
increase its CSR
mobilize
lized
hropy is by
s01
t toa
f , olobal movement based on the
courag he use of
building
and human asocial
encoura

sports as power of and social network "where innova-

is
to

anflict resolution, a
means ot sport to capital
unleash is
al
urk witlh equity, andempoweri ng human exchanged in sup
across the
income youth, minorities,trauma relief.indiNike
viduals potential. Nikes
and
ftualior Because
Ni is sports require and young
Aucation, Nike partners building skills
with various
forming partnerships
araduct donations, access to safe
in
women who live
conflict
spaces. good coaches,
in
acce to and other these areas. The company safe
d youth
greater
sport programs. support
y also
,m y a n y
s
strives
invest in its own localWhilele
to invest in through 2011 to give awarded
contributingof to the global underprivi
e: Hilversum,
nmessCe;| Hollandd; communities
Laakdal, community, the
With Belgium; and other places
Portland, Oregon,
V k ec o r p o r a ffices are lo
located.
and
to build a n
improve its rela
a
continued focus on around the worldMemphis.
ationships
nd to create top-quality, innovative
with
consumers, tocorporate responsibility,
where
Nike
products. achieve a
high-quality supply
h211,

NEW CHALLENGES IN THEFUTURE

0 tar
e Nike's efforts have seemed to pay off, as it has
and corporate image in the past few seen considerable
years. As a result of its improvement in its
outation

ared in Fortune's 010

201 list of "The World's Most positive changes. Nike
Pct admired apparel company and was ranked 24 Admired
Companies as the number
e mo
overall. Nike was also listed at num-
23 in CR (Corporate Responsibility) magazine's "Best
er.

Corporate Citizens" in 2010.

he news has not all been good for Nike, however. In 2010 several
universities threat
d
ed
ta cancel their contracts with Nike over labor concerns among Honduran factorv
rkers. A year earlier, two of Nikes subcontractors had closed without notice. laving off
800 workers. Under Honduran labor law, the workers were owed over S2 million in sever
ACe pay along with other unemployment aid. Although Nike agreed to provide the workers
stated that the re-
with training and give them priority jobs at other factories, the company
Nike. One could that Nike
ponsibility for the situation rested with the suppliers,
notargue
Nike's actions did not
as reverting back to the
defensive stage of corporate responsibility.
universities to
tar to please the Worker Rights Consortium, who began urging
o enough Other labor watchdogs
with Nike until the labor dispute was settled.
ancel their contracts Do lt' to "lust
Nikes slogan trom "lust
changing
demonstrations outside Nike shops, agreement
the first to cancel licensing
its
aged Wisconsin-Madison was carrving
The University of that niake products
y t. conduct requires
companies capitulated
ith E , Stating that its code of their suppliers.
Nike eventually
Nike ex-
for
responsibility workers. Although

universityname to
versity name assume

fund to aid the

laid-off
Honduran

its actions as a
positive
deviation

adset aside a $1.54 million labor

activists see
tor other
companies

event, precedent
v e r the
enced bad publicity oove will set a
that this step
They hope both in
contract

industrystandards. Nikes supply

chain,
leader in CSR,
flaws in
blow. there are
still
Nike a s a

experts
herald
entorcement
ofabuses
This incident reve: veals that some
and rkets,
marke
Although detection

oversight. makes in foreign

3otiation and suppl Pplier
international
contractors

growth
strategy

SUse of ndreds ofinternat pursue

an
accelerated

plans
to
cult. Nike
502
PART 5: CASes

particularly in emerging economies, which makes increased oversight of its facto.

more of an ories even
imperative.
Indeed, Nike sees international expansion as essential for its continued profitabil.
one-fourth of Nike's sales come from developing countries. China in particular ren About
lucrative market for Nike, with profit margins of 37 percent compared to 23 percentinNrepresen
America. As a result of this high growth potential, Nike has announced plans to incren
sales inemerging economies from $3 billion to $3.5 billion by 2015. Nike is also taking
to portray
itself as a socially responsible company and increase its visibility; during the steps
World Cup, for example, Nike opened a facility in a low-inconme South African townshin
doubled as both a football training center and a clinic for AIDS testing and awareness
ess.
Corporate and social responsibility are not only changing Nikes image; they can alkak
be
good for its bottom line in a highly competitive industry. Nikes target audience hasbroadene
trom mainly male athletes tc female athletes and children as well. As Nikes target audien
ned
ence
widens, being perceived as an ethical company will help attract and retain new customers
Such an approach is requiring Nike to undertake socially responsible initiatives and
develop more sustainable products. For instance, Nike celebrated the World Cup while
simultaneously embracing sustainability with a new product: World Cup shirts made
from recycled bottles. According to Nike, each shirt requires less material and consists of
recycled polyester and eight recycled bottles. It is estimated that Nikes recycled shirts kept
over 550,000 pounds of polyester out of landfills. Nike is also creating innovative products
to increase consumers' healthy living (as well as the bottom line). Its Nike* shoes contain
sensors that can communicate with the wearer's iPod to track the person's consumption of
calories. Nike plans to develop more innovative and sustainable products in the future.
Nike itself admits that it has a long way to go in the area of corporate responsibility
including continuing to improve its monitoring systems. However, the company is being
rewarded for its efforts toward improvement thus far.

QUESTIONS
1. Why did Nike fail to address corporate social responsibility early on?
t
2. Evaluate Nike's response to societal and consumer concerns about its cone

manufacturing.
3. What are the challenges facing Nike in the future?