NIKE CASE STUDY

Nike has long been plagued by allegations that it oversees sweatshop conditions in its
factories abroad. The allegation is made against the company whether the factories are Nike
owned and operated or merely contractors producing shoes and clothing on behalf of the
firm:
Even after ten years of campaigning against Nike over alleged abuse of workers in
“sweatshops” of its developing world subcontractors, NikeWatch and its cohorts are still
going strong. This reinforces how much harder it is to restore a reputation than to lose it.
Nike is still demonized by many despite impressive sustainability initiatives, including
workplace monitoring.
Once an image is established, it is difficult to dislodge from the minds of the public.
Questions about Nike’s sweatshops have even dogged the famous athletes that represent the
company wherever they go. The goal has always been to balance diplomacy with capitalist
instinct. Dan Le Batard calls it “sole-selling” and compliments Michael Jordan’s ability to
have walked the fine line ever since he joined forces with Nike:
It’s why [Jordan] famously recused himself from opining on controversial Jesse Helms in his
home state of North Carolina because, in his words, “Republicans buy sneakers, too.”
In 2003, the issue of Nike’s overseas operations rose to the level of the U.S. Supreme Court
in a case brought against the company by a private citizen from California, Marc Kasky.
Kasky challenged Nike’s claims that it does not operate sweatshops in Southeast Asia, that it
pays its workers there competitive wages, and that they enjoy better-than-average working
conditions. Nike v. Kasky originally emerged out of an exchange of opinions between the
New York Times columnist Bob Herbert and Nike CEO Phil Knight in 1996 and 1997.
Herbert had written two op-ed articles criticizing the conditions faced by Nike laborers in the
company’s Southeast Asian factories. He then contrasted these conditions with the huge
salaries enjoyed by Knight and other Nike executives and also the company’s stable of
wealthy athletes who are paid to endorse Nike products. The contrast was all the greater due
to the extreme poverty of Nike’s factory laborers:
More than 90 percent of the Nike workers in Vietnam are girls or young women, aged 15 to
28.… A meal consisting of rice, a few mouthfuls of a vegetable and maybe some tofu costs
the equivalent of 70 cents. Three similarly meager meals a day would cost $2.10. But the
workers only make $1.60 a day. And … they have other expenses.… To stretch the
paycheck, something has to be sacrificed. Despite the persistent hunger, it’s usually food.
Herbert accused Nike of running the “boot camps” with military efficiency, and only “one
bathroom break per eight-hour shift is allowed, and two drinks of water.” Herbert labeled
this hierarchy a “pyramid of exploitation,” with Nike executives at the top and the
company’s factory workers at the bottom.
Nike quickly responded to the provocation with a letter from Philip Knight to the New York
Times defending the company’s operations in Asia:
Nike has been concerned with developing safe and healthy work environments wherever it
has worked with contractors in emerging market societies.
Mark Kasky was a consumer, completely unrelated to the issue, who happened to read this
exchange. Under California law, anyone can sue a company for “false and misleading
advertising.” With the help of a large law firm (Milberg, Weiss, et al.), which has a
reputation for suing large multinational corporations and collecting large settlement fees,
Kasky decided to intervene. He argued that Nike, using press releases, op-ed articles, letters
to the editor, its own Web site, and other media, has made false and misleading statements in
describing the working conditions in its overseas factories where its athletic shoes are made.
Putting aside the merits of the case, which were never conclusively decided, this
confrontation shows the difficulty for a company in trying to shake a negative label. It also
shows the potentially significant costs (both financial and in terms of negative publicity) that
can result from operations deemed to be less than socially responsible. The initial ruling
broadened these consequences to any company conducting business in California. It also had
the effect of forcing many companies to review their public pronouncements on CSR-related
issues and remain quiet on some issues of public interest, whereas they might previously
have been encouraged to engage in public debate. More worrying for businesses, perhaps,
was the extent of the penalty that could have been imposed:
Kasky seeks a court order requiring Nike to disgorge its California profits attributable to [the
contested] statements. Under the California law, truth is not a defense to a charge of business
fraud if the challenged statements are misleading in context.
A press release announcing that the Nike v. Kasky case had been settled amicably was
released by Nike on September 12, 2003:
The two parties mutually agreed that investments designed to strengthen workplace
monitoring and factory worker programs are more desirable than prolonged litigation. As
part of the settlement, Nike has agreed to make additional workplace-related program
investments (augmenting the company’s existing expenditures on monitoring, etc.) totaling
$1.5 million. Nike’s contribution will go to the Washington, D.C.-based Fair Labor
Association (FLA) for program operations and worker development programs focused on
education and economic opportunity.
As a result,
shares of Nike fell 11 cents, to $55.68, in trading Friday on the New York Stock Exchange.
The case symbolized a growing desire among consumers that large corporations act, both
overseas and at home, in ways that are transparent and acceptable in terms of standards
applied by consumers in the companies’ home markets. From the corporate perspective,
however, it also highlights the difficulty for companies that are trying to implement effective
CSR policies within their organizations. Many commentators argued that the litigation has
already had negative consequences that are detrimental to the general good and public debate
of issues of public interest. If the effect of any court decision is to leave companies feeling
that it is better to say nothing than defend themselves in public and also to pull back from
any effort to engage the communities within which they are based and improve corporate
practices, then, arguably, the decision has done more harm than good:
The potential affect of the [California Supreme Court’s] ruling is devastating. Nike has
shelved any plans to produce social responsibility reports in the near future because any such
statement can now be attacked on the basis of being an advert for the company.
In responding to any accusations made against it, any company should be able to answer
freely and honestly, to the best of its ability, without having to worry that if what it says is
slightly wrong, taken out of context, or misunderstood in some way, that it is going to be
prosecuted. It is also true, however, that the case has opened Nike’s eyes to the danger of not
ensuring all aspects of its operations are considered responsible. Following the decision, the
company was much more sensitive to potential criticism, a position that is reflected in day-
today decisions and policy implementation:
Because of intense criticism … over the past half-decade, companies like Gap, Reebok, and
Nike are generally alert to labor issues. Many now monitor factories, and … physical
working conditions have improved as a result. “After we started working with Nike, we had
to change our philosophy,” says Philip Lo, the [Yng Hsing tannery in Taiwan’s] vice-general
manager. “They have strict requests about how you treat safety, health, attitude,
environment.” Nike is so sensitive to potential criticism that when the company learned of
Fortune’s visit to Yng Hsing, it immediately informed the tannery that unless it passed a
hastily arranged inspection, it would be removed from Nike’s supplier list.
Since the Kasky case, Nike appears to have been genuine in its attempts to overhaul its
supply chain practices. In particular, Nike has implemented a shift in its approach to its
employees (whether direct employees or the employees of contract firms):
Nike, the world’s biggest sports shoe and clothing brand, is to strengthen efforts to combat
potential abuses of the 800,000 workers in its global supply chain with a push to promote
labour rights, including the freedom to form and join trade unions.
The shift seems to be more than cosmetic—an emphasis on promoting positive change,
rather than simply avoiding potentially damaging crises:
Hannah Jones, Nike’s vice-president for corporate responsibility, said the brand was now
placing a greater effort on promoting “systemic” change in its supply chain, which would
include strengthening the ability of factory workers to speak out on their own behalf about
problems.
The ongoing program of repositioning its brand on issues of social responsibility appears to
be paying off for Nike. In many areas of CSR, the firm is now recognized as promoting best
practice:
Since facing criticism over workplace abuses in the mid-1990s, Nike has become a standard-
setter for efforts to improve supply chain conditions and other companies have followed its
lead on corporate responsibility.
In general, factory audits conducted by independent, third parties are increasingly being used
by firms. They are perceived as a solution whereby Western firms can continue to operate in
low-cost environments, local employees can continue to benefit from their presence, and
NGOs can receive some assurance that the local employees are not being abused. Best
practice, pushed by firms such as Nike and Gap, dictates that firms should work with
contractors to improve conditions when violations occur and, in persistent cases, sever ties:
The decision to sever ties with Sialkot, Pakistan-based Saga sports follows a six month
investigation by Nike and a local monitoring group that found Saga was illegally outsourcing
manufacturing to local homes. … Nike also found multiple labor, environmental and health
violations at Saga factories. … According to Nike, the company gave Saga a detailed plan
for overhaul. … After several conversations, Nike said that while outsourcing diminished,
other labor violations seemed to increase, prompting the termination.
Others argue that binding international standards are the most effective means of securing
improvements. Although, such agreement among different nation-states is notoriously
difficult to secure, a compliance-based regime is susceptible to avoidance, and regulation can
quickly become stifling. A potential alternative is competition among firms. Once sufficient
factories
are established in local communities and a locally determined definition of work conditions
that are acceptable to local workers becomes established, then a likely consequence of
competition among factories to secure employees will lead to improved conditions for all:
In September, 2005, the Guangdong [China] Provincial Labour and Social Security
Department published the first blacklist of 20 “bloody” companies that were defaulting on
employees’ wages. Besides receiving media attention, the blacklist was also distributed to
local job fairs. Among the 20 companies, 12 paid their workers in full by December when
the department publicized its second blacklist.
What is clear is that outsourcing is not going away. Instead, the issue continues to evolve as
CSR issues become ever more prominent in the strategic decisions firms take, seeking to
locate operations in the geographic region offering the best mix of employee skills and costs.
What is important from a CSR perspective is to ensure firms adhere to their legal and social
obligations and that it is best practice, rather than worst practice, that is recognized and
rewarded by consumers.
QUESTIONS FOR DISCUSSION
1. What is the problem Nike encountered in this case? Why?
2. What is Nike's loss?
3. To avoid losses, what should Nike have done at the beginning?
4. What has Nike done to overcome this crisis?
5. What CSR issues should companies pay attention to when entering the global market?