Nike: corporate citizen.

The evolution and impact of Nikes labor practice reforms

As the power of states declines in the modern era of globalization and because of
powerful lobbying for less government intervention in social services and health care,
corporations are increasingly expected to take on additional responsibilities in the
communities in which they operate. Nike Inc. is the largest marketer of athletic apparel and
footwear in the world. Its business model, pioneered within the sports apparel industry in
the 1960s, of outsourcing manufacturing of its products to developing countries for
marketing and sails in North America and Europe for large profits, has become standard
business practice for the industry. The object of this paper is to discuss the role of the
multi- national corporation within the context of globalization by using Nike as a case
study to better understand the expectations of society, the extent to which companies can
successfully comply with these expectations, and determine the conditions under which
optimum corporate citizenship can be achieved.
The examination will chronologically trace Nikes journey through these steps
and evaluate the work it has done to improve its labor conditions, by reviewing Nikes
rise in the apparel industry, its business model, charges of abuse in its labor practices,
Nikes early response to these criticisms, observers continued criticisms, and Nikes bid
to be the industry leader in corporate responsibility. It will then present an overview of
organizational learning, the 5 stages through which a company passes through as it
learns to handle increased corporate social responsibility, and show how this applies to
the case of Nike.
Nikes experience shows that serious efforts at corporate responsibility can improve
labor conditions. However, the most significant improvements carry with them a real
financial cost. As Nikes initial response to its critics demonstrates, corporations will only
make the necessary investments in social responsibility if the cost of not doing so will be
greater than the cost of doing so. Consequently, some important but costly reforms, such as
a significant increase in wages, are unlikely.
The Birth and Growth of Nike
When Phil Knight and Bill Bowerman founded Blue Ribbon Sports (BRS) in 1964
most athletic footwear was produced in the United States and Germany. Knight saw that
cheep appliances were being manufactured in Japan. He decided to use the same approach
to break into the athletic footwear industry by investing in design, development, marketing
and design, and contracting with Onitsuka Tiger of Japan to manufacture its sneakers. BRS
changed its name to Nike in 1978. During that decade, the cost of manufacturing in Japan
rose and Nike searched for new locations for its production.
The companys success came in part from its ability to consistently find low cost
labor to make its products. In the 1980s, the Korean government offered financial incentives
to companies to develop Koreas footwear industry. By 1982, 86% of Nikes athletic
footwear came from Korea and Taiwan. Eventually, costs rose in those countries as well
and Nike moved again -- this time to Indonesia, Vietnam, and China. In 2002, the 700
factories manufacturing for Nike employed 500,000 workers in 51 countries. Only 22,658
people were direct employees of Nike, and most of these were in the United States.
While keeping labor costs low, Nike was able to invest in innovative product designs
and marketing itself. By hiring high-profile celebrities athletes like Michael Jordan as

company spokespeople, Nike became one of the most recognizable brands in the world.
Having originated from a $500 investment from Knight and Bowerman nearly 40 years
prior, Nike made $9.5 billion in revenues in 20021.
Growing Criticism of Nikes Labor Practices
This manufacturing system allowed for the low production costs that helped propel
Nike to the top of the athletic footwear and apparel industry and, in fact, became the
blueprint for other companies, such as the German-owned Addidas, to follow. By the
1990s, it also began to draw attention from critics concerned with the labor conditions in its
factories. Media reports and investigations from labor activists exposed a range of abuses
in factories producing Nike products. Three instances of such abuses follow. They are not
meant to be a comprehensive catalogue, but rather examples to highlight the type of
concerns critics had regarding Nikes practices.
Low wages in Indonesia. In the early 1990s, the Indonesian minimum wage was 2,100
rupiah, the equivalent of US$1. Shoe manufacturers, including those making Nike sneakers,
petitioned the government for an exemption to the minimum wage law, saying that to pay it
would be a hardship. While many workers relied on this wage to raise families, the
Indonesian government estimated that the minimum wage covered just 70% of the basic
daily needs of one individual. There were also reports of verbal abuse and intimidation in
the factories making Nike shoes.
When the low wages and abusive conditions in the Indonesian factories received
coverage on network television and major newspapers in the United States, Nike first
responded by explaining that they did not own the factories they were designers and
marketers and that launching an investigation into the accused factories would be outside
of their scope2.
Child labor in Pakistan. Nike labor conditions received major media attention again in
1996 when Life magazine published a photograph of a 12-year-old boy stitching a soccer ball
with a visible Nike swoosh and other prominent brand logos. The photographs gave
ammunition to activists, now often parents, students, and educators, who blew them up to
use as anti-Nike posters3.
This was a critical event for the companys understanding of the globalization,
international labor standards, and corporate responsibility, according to Maria Eitel, the
Vice President and Senior Advisor for Corporate Responsibility at Nike4.
Health and safety problems in Vietnam. In 1997, a memo from the respected accounting
firm, Ernst and Young, was leaked to the New York Times, which described hazardous
conditions. Toulene, a chemical solvent linked to damage to the liver, kidney, nervous
system, and eyes, was found present at a Nike factory in Vietnam and proper protective gear
was not provided to workers.
This factory has been visited by the civil rights activist and US ambassador to the
UN Andrew Young, whose Nike-sponsored report made not mention of the violation.
1

Locke, Richard M., The Promise and Perils of Globalization: The Case of Nike, Industrial Performance
Center, MIT. http://web.mit.edu/afs/athena.mit.edu/org/i/ipc/www/pubs/articles/02-008.pdf
2
ibid, p. 10
3
Klein, Naomi, No Logo, Flamingo Press, Great Britain, 2001, p. 328
4
Locke, Richard M., The Promise and Perils of Globalization: The Case of Nike, Industrial Performance
Center, MIT. http://web.mit.edu/afs/athena.mit.edu/org/i/ipc/www/pubs/articles/02-008.pdf, p. 11

Therefore, to many this revelation exposed a credibility gap between Nikes statement about
the conditions in its factories and the reality5.
By 1998 Nike stock price was beginning to suffer. After an annual growth of 34% in
1995, quarterly earnings were down 70%. By 1999, earnings were back up 70%.
Nonetheless, Nike realized that it had to take the problem, or at least the public relations
aspect of it, seriously6.
Nikes Code of Conduct, the Tour of Andrew Young and Critics Responses
Prior to 1992, Nike did not acknowledge any responsibility for the conditions in the
factories of its contractors. However, in 1992 it published a Code of Conduct to be posted
in all factories making Nike products and signed by the employers. The Code stated the
Nike was built on the principals of trust, teamwork, honesty, and mutual respect and those
traits were expected of it business partners. Nikes partners, the Code said, shared Nikes
commitment to:
1. Management practices that respect the rights of all employees, including the right to free
association and collective bargaining
2. Minimizing our impact on the environment
3. Providing a safe and healthy work place
4. Promoting the health and well-being of all employees7
Critics argued that the Code was often left un-enforced and that posting it in
factories with illiterate workers was little more than window dressing. After continued
pressure, Nike has raised the minimum age employees in footwear to 18 years of age (16 for
apparel and sports equipment) in 1998, and required its footwear facilities to by OSHAs
standards for indoor air quality.
To further assure the public of the suitable conditions of its facilities, Nike
dispatched Andrew Young to factories in developing countries to report on the conditions
there. In response, activist Marc Kasky sued Nike, claiming that Nikes statements in
letters to the editor and advertisements about Youngs report were erroneous and
constituted false advertising. Nike argued that its speech was protected by the First
Amendment. The California Supreme Court ruled that Nikes statements constituted
commercial speech and therefore false-advertising laws applied to them. Kasky v. Nike
was settled out of court after the US Supreme court sent the case back to trial, but the
California courts ruling stands8 .
Nike Attempt to Become the Leader in Corporate Responsibility
Even before the Kasky case, Nike determined it could only counter the accusations
of its critics and protect its brand image by becoming the industry leader in corporate
5

ibid, p. 13.
Klein, Naomi, No Logo, Flamingo Press, Great Britain, 2001, p. 378
7
Locke, Richard M., The Promise and Perils of Globalization: The Case of Nike, Industrial Performance
Center, MIT. http://web.mit.edu/afs/athena.mit.edu/org/i/ipc/www/pubs/articles/02-008.pdf p. 34
8 Nike, Inc. et al. v. Kasky, Marc
, http://docket.medill.northwestern.edu/archives/000704.php
6

responsibility. In 2000, Nike created the Corporate Responsibility and Compliance Depart,
which combined Labor Practices (1996) and Nike Environmental Action Team (NEAT)
(1993) and in 2001 the compliance department was transferred into the apparel division to
maintain the connection between production and compliance decisions.
In an attempt to ease the atmosphere of suspicion around Nikes corporate practices,
Nike has published a number of documents to explain its efforts in corporate responsibility.
Nike published its first Corporate Responsibility Report for fiscal year 2001. Nike released
the report, it says, in an attempt to assess and communicate the impact of how the
company runs its business. The report contains sections addressing factory monitoring,
child labor, and wages. It also includes a defense of the disparity between the high cost of a
Nike shoe and low wage paid to employees. Doubling the wage of employees, the report
said, would result in a substantial increase in the cost and therefore a decrease in sales:
the ultimate product cost would be affected by increases in wage-based costs (such
as benefits or taxes) and cost-based expenses (such as duties and insurance). These
increased costs would have to be passed on to consumers in the form of higher
prices. Since the market for athletic footwear responds to the laws of supply and
demand, higher prices would likely mean fewer units sold. Of course, Nikes
shareholders would earn less money. But lower sales also mean fewer jobs and lower
earnings for Nike suppliers, employees and factory workers.

Nikes campaign to justify its business practices continued with the publication of
fiscal year 2003-03 Community Investment Report, which detailed the ways Nike targets the
3% of its pretax profits to charities with the goals of increasing participatio n of young
people in physical activity to improve their lives, and investing in innovative solutions to
the challenges of globalization faced by women and girls.

Organizational Learning
While each company has unique experiences as it learns to adjust to societys
demands for its social practices, most companies travel through five distinct phases as they
respond to these demands9. The first response is Its not our job to fix that. The
company is defensive and surprised by the criticism. The legal or communications team
responds that either the allegations are false, or that they are not the fault of the company.

Zadek, Simon, The Path to Corporate Responsibility, 2004