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Remarks by David Brady
Bowen H. and Janice Arthur McCoy Professor of Political Science and Leadership Values

Global Business and Global Poverty Conference
Stanford Graduate School of Business
May 19, 2004

Introduction by John McMillan
The next speaker, David Brady, is the Bowen H. and Janice Arthur McCoy Professor of Political Science and Leadership Values here at the Graduate School of Business. He is also co-director of the Stanford National University Of Singapore Executive Program, professor of political science in the School Humanities and Sciences. He is deputy director of the Hoover Institution and he is co-director of the Social Science History Institute. Basically around Stanford Brady is everywhere. I don't have time to list the various topics on which he's written, but his research focuses on the American Congress the party system and public policy. He has won awards both for his teaching and for his research, and I should add that he is a great provider of public good. He's the kind of person that an academic institution needs in order to function well. His chair title is "Professor of Political Science and Leadership Values," and leadership and values is what David Brady provides to Stanford.

Remarks by David Brady
I'm going to talk about three things: What are the pressures facing companies today? What are notions of corporate citizenship and social responsibility and role that ethics might play? and then finally talk about one company's experience on the road to corporate citizenship. That, of course, is Nike.

So let me begin with the pressures facing companies. You can do something because it's the right thing to do. Even if a company does know the right thing, there are pressures that will come to bear that the company will have to respond to anyway. That's what makes Nike a pretty interesting case. At least in the beginning of the debate over offshore working conditions, Nike's feeling was, it's not our problem. The problem lies elsewhere. I'll come back to that later.

How do you reason with this set of dilemmas and what is the notion of corporate social responsibility? You had John Browne just talk about the business of business is business. You have to make a profit. That's part of it. You have to be consequentialist and of course, the quintessential person on that issue is Milton Friedman. Friedman's conception of a corporation is, of course, perfectly clear—that shareholders are the principals, the managers of corporations are the agents, and there are markets for control, (labor and research markets and product and service markets). Managers are supposed to maximize profit subject to laws and ethical custom. This system is perfectly ethical. The practices derived from that are profit maximization consistent with laws and ethical customs, and finally the consequences are that you end of with maximum aggregate well-being, which of course loops back to the principals. It's a perfectly legitimate, ethical system.

What then is the problem? What does it mean to say you're subject to laws and ethical custom if you're operating in a developing country? You're subject to the laws of the country you're in and the ethical customs of the region. Particularly in developing areas, no world government tells you what you should do. In some sense managers are on that front in the gray area of multiple standards and multiple customs and where it's unclear exactly what the law is. While in most developed countries I think Friedman is a perfectly good starting point, it is problematic in a global world because of the points that I have just made.

Now another alternative, one more favored by Europeans, is this notion of stakeholders. The corporation is somehow responsible to its stakeholders that include customers, shareholders, and society at large. Managers are to consider and balance legitimate interests of shareholders. In some sense this is an improvement because it recognizes there are all these different constituencies and managers are responsible in some sense to them. The problem is that there isn't a lot of guidance for how to do this. Managers like it because it gives them all sorts of room to maneuver, but there's no per se set of rules. It's a little unclear exactly where corporate citizenship and corporate responsibility take you except that we live in a new world in which it is now exceedingly important to get those things straight. Now one thing that's happened is that activists, are starting to turn away from government where they haven't been as successful as they like, and they've started to turn towards these market strategies, which work these ways:

  • Selecting the issue, i.e., working conditions in overseas factories
  • Setting campaign objectives, i.e., change practices or raise costs
  • Selecting the target
  • Communication strategies to attract the news media
  • Tactics, including damaging a target's reputation, brand or image; boycotts; focusing on one firm at a time
  • Implementation

I want to then turn to this special question of special issues and operating and developing countries. These pose problems as John Browne pointed out to you earlier.

  • The government may not have the means or expertise to address some matters of importance
  • Institutions may not be in place or enforcement may be lax
  • Poverty may mean people cannot take care of their own interests or defend or exercise rights
  • Education may be limited
  • Rights not well protected
  • Excess supply of labor can lead to choices made in desperation
  • Activists and advocacy groups may not be present
  • Corruption may be present and in some cases pervasive
  • The country may not be a democracy and citizens may lack political sovereignty.

Take the issue of occupational safety. If you operate in Europe, the United States, or Japan, there are agencies like OSHA with regulations. It's pretty easy to deal with the gray areas when it's not clear what a manager should do. In developing countries, that gray area is almost everything and there generally governments dictate actions. The question then is how to think about it? My experience with executives is they are—as John Browne pointed out in the previous talk—consequentialists. You have to make a profit, there are cost and benefit, you have to do the analysis. But implicitly there is a sense of fairness running through the thinking of most corporate executives and the people who talked today. The question they have is, for instance, what's fair for the environment? what's fair for the people who are least off? what's fair for the workers in these developing countries? I have met very few business executives that I would say were in any sense unethical. We need to be consequentialists, have cost benefit if we're a business, and ask how much do we worry about the poor? Is that worth 8 percent, 10 percent, 12 percent? how safe do we make the factory? How much do you go above the fact that the people are better off than they would have been by virtue of the fact that they now have a job and there is a factory there.

It seems to me that reasonable people can differ as to where they draw the line and how much are they willing to pay out of profits, etc. to achieve these ends to bring about fairness and therefore there is no single way to apply across the board. Each company, in each particular situation, has sort of a unique situation and they have to reason that through for themselves. I don't have, nor do they have a universal solution.

Nike is a classic example of this. In the mid-80s, Nike was a successful American company viewed as a basketball shoe manufacturer and had been quite fortunate to get Michael Jordan as a spokesman. They did very well in the United States but they wanted to go global. To do this, they had to solve the supply chain problem. Nike chose not to own any of their own factories but rather to have contracts with manufacturers over very long periods of time, continually moving to the lowest cost country.

In 1991, for example, about 40 percent of all Nike shoes were made in Korea. In 1992 Nike had no companies, no shoes made in Viet Nam and today about 17 percent are made in Viet Nam. They kept their producers and moved to different countries. A problem arose in Viet Nam where the companies are run by the Koreans who just manage the Vietnamese workers. Nike's multi-cultural issue was could the Korean supervisors learn enough Vietnamese to tell the Vietnamese workers what to do, or could the Vietnamese workers learn enough Korean to do. Nike solved that problem.

The second problem it solves is Nike learned how to market globally, It decentralized in the Latin America, Australia, wherever it wanted to sell product, got into soccer and became, as you know, one of the most known brands in the world. Suddenly they were a world force, and that's precisely what got them into the trouble.

At the time they became the target of criticism over working conditions they were the largest firm with 500,000 workers. The issues raised were: oppressive working conditions, overtime six hours a day, claims of failure to comply with minimum wage laws, human rights, and forced labor. When (Business School professors) John Roberts and Joel Podolny first started the course on Globalization, all the critics talked about was 'well if you selling a pair of shoes for $140.00, why if the worker is making $2.00 a day, why can't you just double their wages? Would $4.00 out of $140.00 be that much? As economists, Roberts and Podolny argued that you don't want to distort the economy as has happened in Cuba where if you are a doctor or a engineer you could make more money in a weekend working in a hotel in Havana patronized by Westerners than you could all year being a lawyer or doctor. It seemed highly likely that $2.00 extra a week or a day was going to distort the economy. So there was among those of us who were thinking about it, some real problem as to why they don't they pay a higher wage. That's a sensible fear or living wage versus a market wage and I'm going to come back to that.

What are the lessons? It seems to me that moral concerns are important in and of themselves. They motivate action in the firm's environment if one cares about why the firm's doing what it's doing. Sometimes firms are moral or they are socially responsible because there is a market niche. If the Body Shop can do what it does and sell its products based on the fact that it's green and socially responsible, that's fine.

A second motivation is because they're under duress. Now the reason Nike ultimately tried to change things was because it was under pressure from these activists. The third reason was that Nike's management somehow decided it was the right thing to do. Companies should be concerned about moral reasons in and of themselves. Nike saw this issue as just a straightforward business issue while Nike's activist opponents cast it in terms of moral issues; the $2.00 a day was unfair and the overtime work is immoral. For the activist it is a moral concern and it is important. For corporations they have to rely on their solutions to these problems because of principled reasons.

At the beginning of the debate, Nike assumed that this was a public relations problem, they just don't understand what good guys we are. They viewed themselves as a rebellious firm doing good in the world and the fact is they really could not believe they were getting hit like this. Nike assumed it was a public relations problem and said "Listen, we really don't own these factories so it's not a problem. As soon as we just hire a few more PR people they'll understand and the problem will go away." The bottom line is your attention should go to the heart of the issue.

The first question you have to ask is: Nike assumed they had no responsibility. Do they? The answer is yes they do, and they do because the boundaries of responsibility can extend beyond the boundaries of the firm. I think John Browne was perfectly clear on that point when he talked about responsibilities in different areas.

Other moral reasons. Although the Indonesian government or the Vietnamese government might be better positioned to say what the right wage is or what Nike should do, those governments aren't going to do it and Nike's in the next best position to deal with that so they're obligated to. And if human rights are being violated, everyone has the duty to prevent that. Insofar as you concerned about justice, surely the workers in those countries are the ones who are least advantaged and Nike could be said to be well-positioned to improve their conditions subject to of course the consequentialist sorts of reasons we talked about.

In many of these instances, global businesses would like to have a standard set, they would like to have a political entrepreneur, someone who could monitor practices, reward people who meet the standard and punish people who don't. In a sense, that is exactly what OSHA does, that's what the Environmental Protection Agency does, but there is no such animal globally.

So this part is the entrepreneurial story. President Clinton invited the parties to join in a private initiative to resolve conflict in the apparel industry. There was again strong disagreement among the participants on the living wage issue and union issues were being raised. Nike, along with some other firms, established the Fair Labor Association. The Fair Labor Association did not have monitoring capabilities so we are not yet at the point where there is a political entrepreneur to solve these problems by setting the standard of what's fair in occupational safety, etc.

Once Nike saw that saying it didn't own factories and was not responsible for the issues was not going to work they took responsibility and said, what shall we do to resolve this problem?

What did they do?

  • Created new leadership: Maria Eitel was hired as VP for corporate and social responsibility
  • Changed attitude–accepted responsibility and took an open, honest approach
  • Pushed responsibility for actions to the operating units (it had been centralized)
  • Created better procedures for screening new contractors
  • Made a public commitment to new policies.
  • CEO Phil Knight said in a speech "engagement has made us a better company."

I have been in the Vietnam factories, pre and post change. The factories were not bad prior to the change, but they are much better now. All the standards meet the U.S. standards for occupational safety and health. So for I would say there has been this great contrasting change between then and now.

When the issue originally came up, Phil Knight said:

"Good corporations are the ones that lead these countries out of poverty. When we started in Japan, factory labor thee was making $4 a day, which is basically what is being paid in Indonesia and being so strongly criticized today. Nobody today is saying 'The poor old Japanese.' We watched it happen all over again in Taiwan and Korea, and now it's going on in Southeast Asia."

This probably is true, but it wasn't enough. That's a Friedman-like answer and it's not enough because the pressure from the activists groups and people are concerned with the moral issues and that didn't work. Critics viewed the issue in terms of likes and justice, not the way Knight is viewing it. You have to be sensitive to how others evaluate your action and you have to reason about your responsibilities based on principle. And you have to do this before you come under attack cause it's a lot better than after you come under attack.

Question: How long did it take Nike?

Brady: I think it took them 1-1/2 years or so before they finally understood that it was not a public relations problem, maybe even 2-1/2 years. They hired Andrew Young and that didn't work. They didn't even bring Vietnamese translators along. There was a long stretch and it took about two years before they finally got serious. They're still working on it. It's not to say that everybody thinks they're great, but in my opinion any objective observer would say they're much better.

I do want to say one other thing, so thanks for that question. One thing we do know about is how you can reason ethically. You know about consequentialism and you can actually make some calibrations about what's fair and how far should we go to bring that about. By the way, on this issue of a living wage verses a market wage, Nike did in my view a very courageous thing. they hired Michael Spence, our former dean and a Nobel laureate, who is on their board; Gary Becker, another Nobel laureate, and Anne Krueger, a very distinguished developmental economist from Stanford and also World Bank. They spent 18-months working on this problem and finally decided that the best thing to do, in terms of the fairness issues was to pay slightly above market. Nike contributes to schooling also because what was the right thing to do for the country in the long haul—or even in the short haul. With the money they could have used on the easy solution—saying I will pay you 40 percent more in the market—they created schools, not just in the areas where the Nike factories are, but in other regions, and they're contributing to education which drives the economy.

We're pretty good at understanding that kind of ethical reasoning, not to say this is the right way or the wrong way, but you can tell when companies and people are on the right track. What we're not very good at, or what we don't know much about and one that this Center, in my view, is going to be a big help on, is how do you know that if a company is doing the right thing they are going to continue to do it? So with British Petroleum, how do we know that when John Browne leaves what British Petroleum has done will continue? How do you institutionalize these notions of corporate citizenship so that you continue to think about them, and how you continue to think about them and make sure that the discussions have operational consequences down the line.

Dale Miller, one of our Business School colleagues, is working on some really interesting research on this that uses this other concept of voice exit loyalty. The notion is that individuals feel they can voice a concern without consequence. They don't have to leave the company or be quiet out of loyalty. Miller has just begun researching how do you institutionalize that, but it looks pretty promising. That is a pretty exciting part of it to me because how you institutionalize these things is every bit as important as how you think about them and we're better at this point on how you think about them and not so good on institutionalizing them. We look forward to learning from companies who are that are already doing this and trying to see how they are doing.

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