Business Best Practices
Multinational corporations have experienced withering criticism for employing children in Asian factories. On the surface, this practice appears to be unethical. But is it?
When we study supply chain management, I engage my students in a discussion of this topic. Here is the scenario:
Industrial size textile factory in developing country, workers on lunch break
“Major corporations with overseas subcontractors (such as Ikea in Bangladesh, Unilever in India, and Nike in China) have been criticized often with substantial negative publicity, when children as young as 10 have been found working in the subcontractor’s facilities. The standard response is to perform an audit and then enhance controls so it does not happen again. In one such case, a 10-year-old was fired. Shortly thereafter, the family, without the 10-year-old’s contribution to the family income, lost its modest home, and the 10-year-old was left to scrounge in the local dump for scraps of metal.” —adapted from Principles of Operations Management
A student of mine from India said that the decision to hire the child was ethical; and the judgment to fire him was unethical. My student defended his position by stating that Americans do not understand the depth of poverty in India. In many circumstances, families rely on child labor, so that the family can survive. When he grew up, there was no compulsory education, so working did not deprive Indian school-age children from going to school. [In 2009, the Indian parliament legislated a compulsory education law for elementary school children.] Other students of mine who have grown up in developing countries—such as China and Bangladesh—have agreed with this line of reasoning.
After all, during the 19th century, the U.S. was once a developing country. For many years, we condoned the practice of employing children in the workplace. Once our standard of living improved—and universal, public education became a realistic objective—we passed child labor laws that prohibited this practice. So, in the present, does showing outrage at Ikea, Unilever and Nike amount to hypocrisy?
It is useful to examine public policy decisions through the lenses of utilitarianism. This philosophy states that, in all situations, you should act in a way that generates the greatest benefit for the greatest number of people. Everyone’s interests are considered equal. Thus, if utterly poor families are only able to survive when the children can work, it is unethical to prevent them from doing so. By permitting child labor, we are promoting the greatest good for the greatest number of people. The family remains intact as a result of the income received, while U.S. and European consumers obtain inexpensive goods from their retailers.
Although the philosophical justification for child labor is convincing, major corporations cannot withstand the negative publicity associated with these practices. Just this week, Apple indicated that they are going to have an independent firm audit its suppliers, because of criticisms over conditions at its overseas factories. So, from a public relations perspective, not a moral perspective, we cannot condone this practice.
Several years ago, Nike initiated a compromise solution. Children worked in their Vietnamese factories, but the company also provided them with food and a free education.
Do you think that it is ethical to employ underage children in factories located in developing countries? If a multinational corporation also provided educational opportunities, would that be acceptable?
Unethical mortgage origination practices precipitated a $25 billion settlement with banks over alleged foreclosure abuses, including the use of forged and shoddy paperwork, a practice known as “robo-signing.” The deal will provide financial relief to an estimated one million at-risk borrowers, as described in today’s Wall Street Journal. This is a step in the right direction: holding the financial institutions accountable for the dubious practices that they perpetuated. However, millions of mortgages owned by Fannie Mae and Feddie Mac are not covered under the deal, thereby excluding more than half of the nation’s mortgages. Moreover, the real culprits in causing the worst economic crisis since the depression are not just the banks. The government, non-bank lenders, and Wall Street are also responsible.
Paying money—rather than aggressively prosecuting wrongdoers—is never a good idea. Specifically, the settlement is poor compensation to the public for the unethical practices and crimes that were committed against it. In 2001 and 2002, members from senior management at Enron and WorldCom were prosecuted and convicted for performing various criminal acts against their stakeholders. Why have we not prosecuted the wrongdoers who precipitated the current financial crisis?
The immoral acts that I am referring to are well documented in the book Reckless Endangerment, written by Gretchen Morgenson and Joshua Rosner. Since today’s settlement pertains to mortgages, let’s look at some of the shenanigans that surrounded these products. In 2004, lenders came up with two new types of toxic loans:
1) interest only mortgages, where borrowers simply had to pay off interest, but not principle. As a result, borrowers didn’t build up any equity.
2) negative amortization loans where the borrower paid as much interest as he wanted—any amount not paid off was simply tacked on to principle.
These two products accounted for just 6% of loans in 2003, but by 2005 they represented 29 percent of the market. They were particularly profitable for the lenders: Countrywide made 5% profits on every interest only loan between $100,000 to $200,000. Wall Street’s investment banks made even more money, by subsequently packaging them into investments called CDOs (collateralized debt obligations). Ratings agencies—such as Moody’s and Standard & Poors—then rubber stamped the securities as being AAA rated; however, they didn’t look under the hood to see what was really there. Moody’s could earn as much as “$250,000 to rate a mortgage pool with $350 million in assets, versus $50,000 in fees generated when rating a municipal bond issue of a similar size.”
Morgenson & Rosner described the entire process as being akin to a drug deal where the mortgage originators were drug pushers hanging around the school yard. The ratings agencies were the narcotics cops looking the other way. And the brokerage firms were the overseers of the cartel providing the capital to the “anything goes” lenders.
A coke dealer—who cuts their product with impure substances—knows the harmful effect that the drug will have on clients. Similarly, wall street firms that packaged impure, sub-prime loans into mortgage pools knew, well before their customers did, that the loans inside the CDOs had begun to go bad. The authors describe how in the third quarter of 2006, the traders at Goldman Sachs made bets against the same securities that their brokers were selling to their clients!
It has almost been four years since Bear Stearns fell, only to be followed six months later by the denouement of Fannie Mae, Freddie Mac, Lehman Brothers and the American International Group. The settlement announced today represents progress, but it is inadequate recompense to the taxpayers. The leadership of the institutions that engaged in unethical practices must be held accountable. After all, they were primarily responsible for creating the current, financial morass that we are struggling to work ourselves out of. Justice will be served only when the government redresses the larger wrongs that were committed against society.
How do you weigh in on this issue?
There is a glaring lack of ethics in terms of Apple’s supply chain management practices, as suggested by the New York Times. Many Asian suppliers are violating basic ethical principles. Here are some of the questionable practices cited:
- Horrendous occupational safety violations
- High suicide rates due to stressful working conditions
- Long working hours: repetitive 60-hour, 7-day weeks
- Employment of children as young as 15 years-old
Although Apple has responded to problems in its Asian supplier base by conducting supplier audits, the worlds’ largest company—in terms of stock market value—has been reluctant to put its foot down. The fate of a 22 year-old college graduate, Lai Xiaodong, is a case in point. He moved to Chengdu in southwest China to take a job at Foxconn, an electronics supplier that employs 1,000,000 people. He was quickly promoted to oversee a team that polished iPad cases. This process 
generated dust, which is a known safety hazard. Mr. Lai and 3 teammates died from a ghastly explosion, which also injured 14 other workers. After the accident, which seared 90% of Mr. Lai’s body, Apple contacted “the foremost safety experts in process safety,” and assembled a team to make recommendations to prevent future accidents. In December, 2011—7 months after Mr. Lai was killed—another iPad factory exploded due to aluminum dust. As a result, 59 workers were injured; and 23 hospitalized.
I was initially shocked after reading about the story of Mr. Lai, and Apple’s apparent lack of commitment to correcting poor worker-safety practices. Although allowing unnecessary accidents—resulting in worker injuries and deaths—cannot be condoned, we must take a more nuanced view regarding Apple’s predicament, from both a historical and cultural perspective.
In a supply chain management class that I recently taught, we discussed the ethics associated with the use of child labor in developing countries. One of my students grew up in India. He indicated that poverty in India is severe, and compulsory education is not mandated by law. To survive in this environment, some families require that their children work. Were we to impose our ethical values and prevent children from working in Indian factories, we would be depriving Indian families of sorely needed income. It is easy—but wrong-headed—to believe that our ethics and moral values are superior to the moral values held by other societies.
The reasons against using child labor are not moral as much as they are practical ones. It is bad business to permit children to build Apple’s products, if young people are simply being used as a means to an end. Consumers in the west will no longer think that it is “cool” to own i-Phones, if they have been built by Chinese teenagers. How many parents would want to be part of a 21st scene, taken from a 19th century Dicken’s novel?
In Viet Nam, Nike has implemented an innovative solution to this dilemma. Although some of Nike’s Vietnamese suppliers employ children, they also provide employees with a regular wage, free or subsided meals, free medical services and training and education. Nike, as well as western consumers, benefit from low labor costs. At the same time, the workers improve their standard of living and also receive access to education.
Regarding the various safety issues that were described by the New York Times, one has to put them into a cultural context. I recently interviewed an executive who lived in China for 13 years, setting up factories and growing American businesses. During the course of our conversation, he made the point that public safety is non-existent. When walking down the street, you have to always be on the lookout for possible hazards. There may be a big hole in front of you, which is not blocked off with barriers. Or, there could be an electrical wire dangling at eye-level. If unaware, you could walk right into it. If a lack of public safety is the norm in China, how can one expect the private sector to be any different? Would we be correct to impose our ethical standards—as relates to public safety—onto the Chinese? Specifically, should we preach that barriers should be placed in front of Shanghai’ s sinkholes?
Getting back to Apple, from a business perspective, the company must enforce strict, safety practices for all of its suppliers; otherwise, more articles—such as today’s scathing indictment in the New York Times—will appear, tarnishing Apple’s brand. Only by adding teeth to Apple’s supplier responsibility reports and recommendations, will the company avoid future, public relations disasters.
In conclusion, with global competition, superior supply chain management results in consumers receiving products at low prices. But our western ethical tastes are repulsed at stories of worker abuse. Apple must take strong, corrective measures against suppliers who use workers solely as the means to an end, namely, achieving low, production costs. In supply chain management, good ethics makes for good business.
MF Global may have disguised its debt levels to investors by temporarily reducing the amount of debt shown on its books at the end of the quarter before publically reporting its finances (source: WSJ). Every quarter, for seven consecutive quarters in a row, the debt was always lower at the end of the quarter. The debt levels at the end of the quarter were lower than the peak for each quarter by an average of 24%. Yet another shell game courtesy of Wall Street!
Although window dressing is legal, it is immoral, because it misleads investors who—based on publically reported information—believe that a firm is taking on less risk than what is really the case. Given MF Global’s bankruptcy earlier this week, investors must feel that they there were deceived.
I know the feeling. I bought some Lehman Bros. convertibles in 2008, based on published financial information. During that period of time, the company’s management team loaded up on a $85 billion portfolio of risky mortgage-backed securities. At the end of the quarter, the management team moved these securities off Lehman’s books, a practice that the New York Times described as a “shell game.”
It has been over three years since the Lehman Bros. bankruptcy, the largest in U.S. history. The SEC is considering a rule that would require financial companies to disclose more information about their borrowings, but has not taken action.
George Santayana, a famous philosopher, once remarked: “Those who do not remember the past are condemned to repeat it.”
Is it not time that we pass regulations that eliminate the unethical practice of window dressing that destroys the credibility of our financial system?
“We aim for sustained earnings growth in excess of 20 percent, powered by increased revenues and margin expansion. …[Tyco’s] model has produced consistently strong results for well over a decade.”
— Dennis Kozlowski, former CEO of Tyco International from page 18 of the 1999 Shareholders Annual Report
Last week, Dennis Kozlowski, the former CEO of Tyco International, was directed by a judge to forfeit all of his compensation earned during a nearly 7-year period beginning in September 1995. In his order, the judge said that the total compensation outstanding under the agreement is well over $100 million. (Source: WSJ)
The denouement of this once famous corporate executive is not surprising. Although BusinessWeek named Kozlowski one of the 25 outstanding managers of the year in 2002, for the previous decade he had beaten down his division managers. Year after year, each division President was expected to increase profits by 20%, regardless of circumstances. If there was a hiccup, namely, profits grew less than 20%, then the division President was subjected to intense pressure to perform. If, for a second year in a row the company again failed to meet the 20% growth hurdle-rate, then often the division President was fired. In one business unit, the division’s chief financial executive traveled hither and yon in order to find acquisitions that would bolster profits. He spent almost a year in Asia frenetically searching for an acquisition so that the business unit could achieve Tyco’s 20% goal. It was a very simple—yet brutal—system that everyone understood.
I realize that it is not unusual for corporations to have aggressive objectives for their senior managers. But usually there is a more collaborative relationship—integrated through some sort of strategic planning process—between corporate management and the divisions. In contrast, Tyco’s managerial process had an unrealistic, even coarse aspect to it. It reminded me of what W. Edwards Deming said years ago. Simply having [financial] goals—without a method for achieving the goals—is useless.
However, during Mr. Kozlowski’s reign (during which time, I had a consulting engagement with one of Tyco’s divisions), Tyco did produce seemingly impressive results. Between 1995 and 1999, ostensible net profits increased from $.2 billion to $2.6 billion, and the stock price rose from $7 per share to over $51 per share. But in 2002 Kozlowski resigned as Tyco’s CEO, and the stock price plummeted. Tyco’s foundations were built on sand, and when the winds blew, it toppled over. In June 2005, Mr. Kozlowski, the son of a police investigator, was convicted on 22 of 23 counts, “including grand larceny, conspiracy and securities fraud.” (Source: WSJ) He is now serving time in New York State’s Mid-State correctional Facility.
If a corporation’s mission is to simply maximize profits anyway possible, unethical decisions by managers will surely follow. At a minimum, top management must articulate the strategies that are required to achieve corporate financial goals. And, more importantly, the CEO must exercise virtuous character traits in order to lead the many stakeholders who are dependent on the corporation for their well being. On all counts, Mr. Kozlowski failed his many constituencies, and the company almost fell into bankruptcy. In his vision for Tyco, the jailed CEO had an ethical blind spot, which was his undoing. He did not realize that ethical behavior—on the part of the CEO–is good business.
Do you agree that corporate management is responsible for more than just meeting certain financial targets? Should the goal of the CEO be to simply maximize profits? Or are virtuous character traits important to running a company?
