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The Path to Corporate Responsibility

by Simon Zadek

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Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

1

Article Summary

2

The Path to Corporate Responsibility

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

11

Further Reading

Companies don’t become

model citizens overnight.

Nike’s metamorphosis from

the poster child for

irresponsibility to a leader in

progressive practices reveals

the five stages of

organizational growth.

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The Idea in Brief The Idea in Practice

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When it comes to corporate social responsi-bility, most companies don’t become model citizens overnight. Take Nike: When protest-ers railed against sweatshop conditions at its overseas suppliers, Nike claimed, “It’s not our job to worry about other countries’ labor conditions.” Later it grudgingly hired high-profile firms to verify enforcement of labor codes. But these firms had little auditing ex-perience, and protests persisted.

As Nike discovered, getting defensive or merely complying with public demands for responsible practices won’t protect your company’s brand—

or

solve social ills. How to do well

and

do good? Zadek recom-mends this approach: shift your mind-set from safeguarding your reputation to rein-venting your business in ways that make a

real

difference to society.

By moving beyond defensiveness and com-pliance, Nike ultimately became a leader in progressive business practices. No longer an object of civil activism, it’s a key partici-pant in major civil society initiatives.

How can your organization become a good corporate citizen? Zadek suggests that every com-pany must navigate through these stages:

TOWARD CORPORATE RESPONSIBILITY

Stage What Companies Do Why They Do It Example

Defensive:

“It’s not our job to fix that.”

Deny existence of prob-lematic practices, or re-sponsibility for address-ing them.

To defend against at-tacks that could affect short-term sales, re-cruitment, productiv-ity, and the brand.

Royal Dutch/Shell denied its respon-sibility for emissions created by the production and distribution of its en-ergy products.

Compliant:

“We’ll do just as much as we have to.”

Adopt a policy-based compliance approach as a cost of doing busi-ness.

To mitigate the erosion of economic value in the medium term be-cause of ongoing rep-utation and litigation risks.

Nestlé came under fire for the health dangers of its infant formula: activ-ists claimed that mothers in devel-oping countries would mix the pow-der with contaminated water. Nestlé communicated the hazard in its mar-keting messages to new mothers—rather than trying to educate them about how to ensure their babies’ overall nutrition.

Managerial:

“It’s the busi-ness, stupid.”

Give managers respon-sibility for the social issue and its solution, and integrate responsi-ble business practices into daily operations.

To mitigate medium-term erosion of eco-nomic value and achieve longer-term gains.

Nike realized that complying with agreed-upon standards in its global supply chains would be impossible if it didn’t also change its daily opera-tions. These changes included elimi-nating procurement incentives that encouraged buyers to circumvent code compliance to hit targets and secure bonuses.

Strategic:

“It gives us a competitive edge.”

Integrate the societal issue into their core business strategies.

To enhance economic value in the long run and gain first-mover advantage over rivals.

Automobile companies know that their future depends on their ability to develop environmentally safer forms of transportation.

Civil:

“We need to make sure everybody does it.”

Promote broad indus-try participation in cor-porate responsibility.

To enhance long-term economic value and realize gains through collective action.

Alcohol purveyor Diageo and other top alcohol companies know that re-strictive legislation will come unless they involve the whole sector in pro-moting more responsible drinking practices.

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The Path to Corporate Responsibility

by Simon Zadek

harvard business review • december 2004 page 2

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Companies don’t become model citizens overnight. Nike’s

metamorphosis from the poster child for irresponsibility to a leader in

progressive practices reveals the five stages of organizational growth.

Nike’s tagline, “Just do it,” is an inspirationalcall to action for the millions who wear thecompany’s athletic gear. But in terms of corpo-rate responsibility, the company hasn’t alwaysfollowed its own advice. In the 1990s, protest-ers railed against sweatshop conditions at itsoverseas suppliers and made Nike the globalposter child for corporate ethical fecklessness.Nike’s every move was scrutinized, and everyproblem discovered was touted as proof of theorganization’s irresponsibility and greed. Thereal story, of course, is not so simple.

Nike’s business model—to market high-endconsumer products manufactured in cost-efficient supply chains—is no different fromthat of thousands of other companies. But theintense pressure that activists exerted on theathletic giant forced it to take a long, hard lookat corporate responsibility faster than it mighthave otherwise. Since the 1990s, Nike has trav-eled a bumpy road on this front, but it hasended up in a much better place for its trou-bles. And the lessons it has learned will helpother companies traverse this same ground.

Over the past decade, I have worked withmany global organizations, including Nike,as they grappled with the complex challengesof responsible business practices. This experi-ence has shown me that while every organiza-tion learns in unique ways, most pass throughfive discernable stages in how they handlecorporate responsibility. Moreover, just as or-ganizations’ views of an issue grow and ma-ture, so does society’s. Beyond getting theirown houses in order, companies need to stayabreast of the public’s evolving ideas aboutcorporate roles and responsibilities. A com-pany’s journey through these two dimensionsof learning—organizational and societal—invariably leads it to engage in what I call“civil learning.” (To map this process for yourorganization, see the sidebar “The Civil-Learning Tool.”)

Organizational Learning

Organizations’ learning pathways are complexand iterative. Companies can make greatstrides in one area only to take a few steps

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backward when a new demand is made ofthem. Nevertheless, as they move along thelearning curve, companies almost invariablygo through the following five stages.

“It’s not our job to fix that.”

In the

defensive

stage, the company is faced with often unex-pected criticism, usually from civil activistsand the media but sometimes from directstakeholders such as customers, employees,and investors. The company’s responses aredesigned and implemented by legal and com-munications teams and tend to involve eitheroutright rejections of allegations (“It didn’thappen”) or denials of the links between thecompany’s practices and the alleged negativeoutcomes (“It wasn’t our fault”). Think ofRoyal Dutch/Shell’s handling of the contro-versy around carbon emissions. For years, thecompany—along with the rest of the energysector—denied its responsibility for emissionscreated by the production and distribution ofits energy products. Today, Royal Dutch/Shellacknowledges some accountability. But unlikesome of its competitors, the company contin-ues to resist environmentalists’ demands thatit accept responsibility for emissions from itsproducts after they have been sold.

“We’ll do just as much as we have to.”

At the

compliance

stage, it’s clear that a corporatepolicy must be established and observed, usu-ally in ways that can be made visible to critics(“We ensure that we don’t do what we agreednot to do”). Compliance is understood as acost of doing business; it creates value byprotecting the company’s reputation and re-ducing the risk of litigation. Until recently,for example, much of the food industry hasunderstood “health” as the avoidance of le-gally unacceptable “nonhealth.” When Nestlécame under fire for the health dangers of itsinfant formula—activists claimed that moth-ers in developing countries would end upmixing the powder with contaminated water,thereby compromising their children’s health—its response for many years was to shift itsmarketing policies to make this hazard clearto new mothers rather than, for example,trying to educate them generally about waysto ensure their babies’ overall nutrition. Thecurrent public debate on obesity highlightsthe same dynamics—food companies’ in-stinct is to simply aim for compliance, whilethe public clearly wants a far greater commit-ment from them.

“It’s the business, stupid.”

At the

managerial

stage, the company realizes that it’s facing along-term problem that cannot be swattedaway with attempts at compliance or a publicrelations strategy. The company will have togive managers of the core business responsi-bility for the problem and its solution. Nikeand other leading companies in the appareland footwear industries increasingly under-stand that compliance with agreed-upon laborstandards in their global supply chains is diffi-cult if not impossible without changes to howthey set procurement incentives, forecast sales,and manage inventory.

“It gives us a competitive edge.”

A companyat the

strategic

stage learns how realigning itsstrategy to address responsible business prac-tices can give it a leg up on the competitionand contribute to the organization’s long-termsuccess. Automobile companies know thattheir future depends on their ability to de-velop environmentally safer forms of mobility.Food companies are struggling to develop adifferent consciousness about how their prod-ucts affect their customers’ health. And phar-maceutical companies are exploring how to in-tegrate health maintenance into their businessmodels alongside their traditional focus ontreating illnesses.

“We need to make sure everybody does it.”

In the final

civil

stage, companies promote col-lective action to address society’s concerns.Sometimes this is linked directly to strategy.For instance, Diageo and other top alcoholcompanies know that as sure as night followsday, restrictive legislation will come unlessthey can drive the whole sector toward re-sponsible practices that extend well beyondfair marketing. Among other activities, thesecompanies have been involved in educationalinitiatives that promote responsible drinking.Likewise, energy companies understand thattheir industry has to grapple with the some-times unethical ways in which governmentsuse the windfall royalties they earn from oiland gas extraction. So they are supportingthe UK’s Extractive Industries TransparencyInitiative, which urges governments to reportthe aggregate revenues they derive from re-source extraction. Some organizations lookeven further ahead and think about metas-trategy: the future role of business in societyand the stability and openness of global so-ciety itself.

Simon Zadek

(simon@accountability.org.uk) is the CEO of AccountAbility, a London-based institute that promotes accountability for sustainable develop-ment, and a senior fellow at Harvard University’s John F. Kennedy School of Government in Cambridge, Massachu-setts. An anthology of his writings on corporate responsibility,

Tomorrow’s History,

was recently published by Greenleaf.

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Societal Learning

A generation ago, most people didn’t thinktobacco was a dangerous health threat. Justa few years ago, obesity was seen as a combi-nation of genetics and unhealthy lifestylechoices—certainly not the responsibility offood companies. Today, ageism is rarely seenas a corporate responsibility issue beyond com-pliance with the law—but in an era of dra-matic demographic shifts, it soon will be.

The trick, then, is for companies to be ableto predict and credibly respond to society’schanging awareness of particular issues. Thetask is daunting, given the complexity of the is-sues as well as stakeholders’ volatile and some-times underinformed expectations about busi-ness’ capacities and responsibilities to address

societal problems. Many civil advocates, forinstance, believe pharmaceutical companiesshould sell lifesaving drugs to the poor at re-duced prices; after all, the drug companies canafford it more than the patients can. The phar-maceutical industry has claimed over the yearsthat such price limits would choke off its re-search and development efforts. But today,drug companies are exploring how to sustainR&D while pursuing price reductions in devel-oping countries and how to integrate the pre-vention of illness into their business models.

Danish pharmaceutical company Novo Nor-disk has created a practical tool to track soci-etal learning on some of its core businessissues—animal testing, genetically modifiedorganisms, and access to drugs. The drug-

The Civil-Learning Tool

The civil-learning tool is intended to help companies see where they and their competi-tors fall on a particular societal issue. It can help organizations figure out how to develop and position their future business strategies in ways that society will embrace.

The tool factors in the two different types of learning, organizational and societal. When an issue is just starting to evolve, companies can get away with defensive actions and deflections of responsibility. But the more mature an issue becomes, the further up the learning curve an organization must be to avoid risk and to take advantage of opportunities.

As the tool makes clear, there is a point where the risky red zone turns into the

higher-opportunity green zone. The ques-tion for most companies is, “Where is that line for my organization?” The answer de-pends on a host of factors, and a company’s actions can actually shift the line in its favor. A company might step way out in front of an immature issue while most of its rivals are still in defensive mode. Cases in point: BP’s aggressive stance on publishing the amount of royalties it pays to host governments; Rio Tinto’s adoption of a human rights policy when most companies would not go near the idea; and Levi Strauss’s groundbreaking “terms of engagement,” which set out the company’s responsibilities to workers in its global supply chains.

Additionally, events in one industry can af-fect companies in a different industry or or-ganizations in the same industry that are fac-ing different issues. For example, the heated public debate about the pricing of drugs in poorer communities has created a broader debate about the fundamentals of intellec-tual property rights and the merits of a pre-ventive approach to health at a time when the pharmaceutical industry makes its money from treating illnesses. Similarly, the emergence of obesity as an issue for the food industry has been accelerated by both rising health care costs and the devastating impact of litigation on the tobacco industry.

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maker’s approach can be adapted and used byany company facing any number of issues.(See the exhibit “The Four Stages of Issue Ma-turity.”) In the early stages, issues tend to bevague and their potential significance wellbelow conventional thresholds used by thefinancial community to determine materiality.These issues are often first identified througha company’s interactions with nontraditionalsources of knowledge, such as social activists.As one senior business manager explains,when he deals with nongovernmental organi-zations, “I see the future of our markets, ourproducts, and this business.”

As issues mature, they become absorbedinto mainstream professional debate and even-tually into practice. Once leading companiesadopt unconventional commitments and prac-tices around certain societal issues, laggardsmust either follow suit or risk the conse-quences. In 1991, when Levi Strauss publiclylaunched its “terms of engagement”—which

defined the labor standards for Levi’s busi-ness partners and was one of the world’s firstcorporate-conduct policies—every other com-pany in its industry looked the other way, argu-ing that labor standards in other people’s fac-tories weren’t their responsibility. When theBody Shop adopted human rights policies inthe mid-1990s, most mainstream companiesdeemed its practices unfeasible. And when BPCEO Sir John Browne acknowledged in his in-famous Stanford Business School speech thatBP had a co-responsibility to address the chal-lenges associated with global warming, he wastaking a leadership role and betting that otherswould have to follow—as indeed they did.Each of these actions played a big part in drag-ging the rest of the players in the industrytoward common approaches to responsiblebusiness practices.

How Nike Just Did It

Nike’s story illuminates better than most thetensions inherent in managing corporate per-formance and societal expectations. In the 1990s,the company was blindsided when activistslaunched an all-out campaign against it be-cause of worker conditions in its supply chain.There’s no doubt that Nike managed to makesome extraordinary errors. But it also learnedsome important lessons. Today, the company isparticipating in, facilitating, convening, and fi-nancing initiatives to improve worker condi-tions in global supply chains and promotecorporate responsibility more generally.

From Denial to Compliance.

Nike’s businessmodel is based exclusively on global outsourc-ing. Simply put, the company has rarely pro-duced a shoe or a T-shirt outside of its designstudio. By the time the company was singledout in a 1992

Harper’s Magazine

article for theappalling working conditions in some of itssuppliers’ factories, almost all of its competi-tors were using a similar sourcing model.Labor activists in the early 1990s were exert-ing enormous pressure on premium-brandcompanies to adopt codes of conduct in theirglobal supply chains. These groups targetedNike because of its high-profile brand, not be-cause its business practices were any worsethan its competitors’.

The company’s first reaction was defensive.“We said, ‘Wait a minute; we’ve got the bestcorporate values in the world, so why aren’tyou yelling at the other folks?’” one of Nike’s

The Five Stages of Organizational Learning

When it comes to developing a sense of corporate responsibility, organizations

typically go through five stages as they move along the learning curve.

whatstage organizations do why they do it

defensive Deny practices, To defend against attacks to their outcomes, or reputation that in the short responsibilities term could affect sales, recruitment,

productivity, and the brand

compliance Adopt a policy-based To mitigate the erosion of economiccompliance approach value in the medium term because as a cost of doing of ongoing reputation and litigationbusiness risks

managerial Embed the societal To mitigate the erosion of economicissue in their core value in the medium term and management to achieve longer-term gains by processes integrating responsible business

practices into their daily operations

strategic Integrate the societal To enhance economic value issue into their core in the long term and to gain first-business strategies mover advantage by aligning

strategy and process innovations with the societal issue

civil Promote broad To enhance long-term economic industry participation value by overcoming any first-in corporate mover disadvantages and to realize responsibility gains through collective action

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senior managers recalls. “That was a stupidthing to do. It didn’t get us anywhere. If any-thing, it raised the volume higher.” The com-pany realized it couldn’t just shut out thenoise. It eventually responded to activists’ de-mands for labor codes and, after further pres-sure, agreed to external audits to verify whetherthese codes were being enforced.

Nike hired high-profile firms or individualsto conduct the audits, which were initially one-off events. But these companies and individu-als had little actual auditing experience orcredibility in labor circles, and the approachbackfired. Statements such as former UN Am-bassador Andrew Young’s casual conclusionsthat all was well in Nike’s supply chains werepublicly challenged and subsequently provedto be flawed or overly simplistic. Consequently,many labor activists believed Nike’s early,

failed attempts at building credibility wereproof of insincerity.

Companies frequently resist accepting newresponsibilities because they see how risk-takingorganizations are criticized for their efforts todo just that. But the pressure on Nike was sointense that it couldn’t afford to wait until thewhole sector advanced. Labor activists’ demandsfor action were cascading into Nike’s core andhighly profitable youth markets in North Amer-ica and Europe. So in 1996, Nike “went profes-sional” in creating its first department specifi-cally responsible for managing its supply chainpartners’ compliance with labor standards. Andin 1998, Nike established a Corporate Responsi-bility department, acknowledging that actingresponsibly was far more than just reachingcompliance; it was an aspect of the business thathad to be managed like any other.

The Four Stages of Issue Maturity

Pharmaceutical company Novo Nordisk created a scale to measure the maturity

of societal issues and the public’s expectations around the issues. An adaptation of

the scale appears below and can be used by any company facing any number

of societal issues.

stage characteristics

latent • Activist communities and NGOs are aware of the societal issue.

• There is weak scientific or other hard evidence.• The issue is largely ignored or dismissed by the

business community.

emerging • There is political and media awareness of the societal issue.

• There is an emerging body of research, but data are still weak.

• Leading businesses experiment with approaches to dealing with the issue.

consolidating • There is an emerging body of business practices around the societal issue.

• Sectorwide and issue-based voluntary initiatives are established.

• There is litigation and an increasing view of the need for legislation.

• Voluntary standards are developed, and collective action occurs.

institutionalized • Legislation or business norms are established.• The embedded practices become a normal part of

a business-excellence model.

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Managing Responsibility.

By the turn ofthe millennium, Nike’s labor-complianceteam was more than 80 strong. The companyhad also hired costly external professionals toaudit its roughly 900 suppliers. Even so, newrevelations about Nike’s failure to adhere toits own labor codes constantly came to light.Many outsiders took this as proof that thecompany still lacked any real commitment toaddress labor standards. Those inside Nike’swalls were incredibly frustrated by their fail-ure to move past this ongoing crisis. After aparticularly painful documentary on Nikeaired in the United Kingdom, the CEO assem-bled a team of senior managers and outsidersled by Nike’s vice president for corporate re-sponsibility, Maria Eitel. The team was in-structed to leave no stone unturned in figuringout how to get beyond the company’s contin-ued failure to effectively comply with its ownlabor codes.

The team’s review didn’t focus on the behav-iors of factory managers and workers, as many

previous studies did; the group considered is-sues at the factory level symptoms of a largersystemic problem. Instead of looking down thesupply chain, the team studied the upstreamdrivers. After six months, it concluded that theroot of the problem was not so much the qual-ity of the company’s programs to improveworker conditions as Nike’s (and the indus-try’s) approach to doing business.

Like its competitors, Nike offered perfor-mance incentives to its procurement teamsbased on price, quality, and delivery times. Thisstandard industry practice undermined Nike’smany positive efforts to comply with its owncodes of conduct; it had the unintended effectof actively encouraging its buyers to circum-vent code compliance to hit targets and securebonuses. And there were other tensions be-tween Nike’s short-term financial goals and itslonger-term strategic need to protect thebrand. For instance, the company’s tight inven-tory management often led to shortages whenforecasting errors were made. That created ur-gent short-term needs for more goods to satisfymarket demand, which drove procurementteams to take what they could get. Often, thiswould force suppliers to cut corners to pushthe envelope on delivery times, which woulddrive up overtime in the factories—exactlywhat Nike’s labor code was trying to prevent.To cap it all, when something went wrong andNike’s reputation took a hit, the procurement,marketing, and inventory management teamsweren’t the ones that suffered financially. Thebrand shouldered the burden, and the legaland other costs were charged to the corporatecenter, not to those whose behavior hadcaused the problem in the first place.

Nike realized that it had to manage corpo-rate responsibility as a core part of the busi-ness. Technically, it was relatively easy to re-engineer procurement incentives. The reviewteam proposed that Nike grade all factoriesaccording to their labor conditions and thentax or reward procurement teams based onthe grade of the supplier they used. But com-mercially and culturally, it wasn’t so simple.Nike’s entrepreneurial culture extended frombrand management to procurement. Anychallenge to that spirit was considered bymany as an affront to a business model thathad delivered almost continual financial suc-cess for three decades.

Nike’s resistance to shifting its procurement

Being Good Doesn't Always Pay

There is no universal business case for being good, despite what we might wish. Civil regulation, attacks by NGOs to damage corporate reputations, and the like rarely cause measurable, long-term damage to a fundamentally strong business. In the short term, which is what most investors focus on, variations in financial performance are usually attributable to business funda-mentals such as design, cost of sales, and market forecasting.

Nike has been highly profitable the past three decades—a period in which it was also subjected to continuous and vocifer-ous opposition to its business practices. Consider the global media coverage of the company’s alleged malpractices and the widespread anti-Nike protests at North American universities (a core market seg-ment for Nike). Yet institutional investors have shown a startling disinterest in Nike’s handling of its labor standards.

The high-profile, two-year case of activ-ist Marc Kasky versus Nike brought the company before the California and fed-

eral supreme courts for allegedly misrep-resenting the state of labor standards in its supplier factories. Even now, after an out-of-court settlement, the case raises the specter of further legal action against Nike and others based on similar claims of commercial misstatements. Yet the case has barely raised an eyebrow from the mainstream investment community. Coping with such challenges, it seems, is simply an acceptable overhead cost of doing business.

That’s not to say, however, that re-sponsible business practices cannot pay. As with any business opportunity, the chances to make money by being good must be created, not found. Reinventing one’s business isn’t easy. And doing so in socially responsible ways involves a major shift in managerial mind-set—from a risk-based, reputational view of corporate responsibility to one focused on product and process innovations that will help to realign the business and the market according to shifting societal concerns.

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methods cannot be dismissed as some irratio-nal distaste for change. It knew that constrain-ing its procurement teams would involve realcosts and commercial risks. And the hard real-ity was that Nike’s efforts to secure adequateworker conditions delivered little to the finan-cial bottom line in the short term—which wasthe sole focus for the bulk of the company’smainstream investors. (For more on the busi-ness implications of doing good, see the side-bar “Being Good Doesn’t Always Pay.”) Nike’schallenge was to adjust its business model toembrace responsible practices—effectivelybuilding tomorrow’s business success withoutcompromising today’s bottom line. And to dothis, it had to offset any first-mover disadvan-tage by getting both its competitors and suppli-ers involved.

It has turned out to be a long and rocky pathfor Nike and other companies working to getthe labor piece right. Several multistakeholderinitiatives were launched that focused on thedevelopment of credible and technically robustapproaches to compliance. Most well-known inthe United States are the Fair Labor Associa-tion (FLA), which was initially established withsupport from the Clinton administration as theApparel Industry Partnership, and the SA8000standard, which evolved with help from partiesoutside the United States. The multistake-holder Ethical Trading Initiative (ETI) emergedfrom the United Kingdom. Each initiative hasdistinct characteristics, involves diverse compa-nies, and associates with different NGOs, labororganizations, and public bodies. But all havebroadly responded to the same need to de-velop, monitor, and comply with now com-monly accepted labor standards underpinnedby UN conventions.

Responsible Business Strategies.

Nike’s un-derlying business strategy wasn’t static as itmoved up the corporate responsibility learn-ing curve. The prevailing trade agreement inthe apparel industry, the Multifiber Arrange-ment (MFA), was nearing its end. The MFAhad established country-based garment im-port quotas to the all-important U.S. market.The growth of Nike’s apparel supply chainsduring the 1990s was partly driven by costgrazing—the ongoing search for lower prices.But the MFA had reinforced that need to grazebecause companies had to search the worldfor spare quota. The MFA also inhibited busi-nesses like Nike from making longer-term pro-

curement commitments to their suppliers andthwarted the stable conditions needed to ad-vance opportunities for brands to invest intechnological and managerial progress.

The MFA’s expiration on January 1, 2005,will accelerate the consolidation of supplychains. With disperse supplier relationshipsand no quotas to destabilize, experts argue, thescene is set for changes in the apparel industrythat will be as significant as the advent of glo-balized supply chains themselves, which was amajor factor in Nike’s original success.

It’s not just that there will be fewer andlarger suppliers. Intensified competition is push-ing apparel makers to shorten the time be-tween design and market even as they continueto cut costs. The industry will probably moveto some form of lean manufacturing—shiftingaway from traditional top-down managerialstyles toward greater worker self-managementthat delivers more flexibility and productivity.Some estimates suggest possible manufac-turer cost savings of up to 25%.

In terms of worker conditions, the move to-ward lean manufacturing could reduce thetotal number of people employed, especially iffewer, more stable supply chains lead to ad-vanced production technologies. But the shiftcould also improve conditions for the remain-ing workers over time. Because lean manufac-turing requires employees to learn new skills, itwould put upward pressure on wages and im-prove management’s behavior toward workers.Clearly, Nike and its competitors will soonhave new opportunities to create value andnew ways to align those opportunities with re-sponsible business practices. The challenge isto manage the transition to a post-MFA worldin a responsible fashion.

Nike’s 2004 acquisition of the athletic ap-parel and footwear brand Starter also affectsNike’s strategy in terms of corporate responsi-bility. Starter is sold at large retailers such asWal-Mart, Kmart, and Target, and the acquisi-tion is a key element of Nike’s growth strategyas the company reaches the limits of organicgrowth in some of its core markets. Now that ithas entered the world of value-channel eco-nomics, Nike must concern itself with highproduct volumes and low margins while alsomaintaining its commitment to its labor codes.

Although it is a king-size operator in themarket for premium goods, Nike has far less le-verage in the market for value items, in which

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it must deal with retailers like notorious cost-squeezer Wal-Mart. Furthermore, value cus-tomers focus on price and are generally less re-sponsive to ethical propositions—particularlythose involving faraway problems like workerconditions in Asia or Latin America. Nike’spublic position on these issues is clear: It iscommitted to maintaining its labor compliancestandards in all product lines and in all supplychains. But the business model underlyingvalue-channel economics requires that Nikefind new ways to keep its social commitments.Part of Nike’s response to this challenge hasbeen to argue for regulated international laborstandards, which would offset any possiblecompetitive disadvantage that Nike wouldincur if it had to go it alone.

Collective responsibility simply makessense. After the acquisition of Starter, Nikesent out letters to stakeholders explaining itsapproach: “Whatever the channel where Nikeproducts are sold, we have a growing convic-tion that it is essential to work with others tomove toward the adoption of a common ap-proach to labor compliance codes, monitor-ing, and reporting to help ensure broader ac-countability across the whole industry. Thiswill take time, but through these efforts andwith the active participation of all the majorplayers, we believe we can further contributeto the evolution of supply chain practices, in-cluding in the value channel.” Nike recog-nized that its long-term success required it toexpand its focus from its own practices tothose of the entire sector.

Toward Civil Action.

Nike has been involvedin various initiatives designed to bridge corpo-rate responsibility and public policy, startingwith the FLA in 1998. In July 2000, CEO PhilKnight attended the launch of the GlobalCompact, UN Secretary-General Kofi Annan’smultistakeholder initiative designed to en-courage responsible business practices. Knightwas one of the 50 or so chief executives ofcompanies, NGOs, and labor organizationsfrom around the world who were at the event.He was the only CEO of a U.S. company in at-tendance; since then, many more U.S. organi-zations have associated themselves with theinitiative. At the launch, Knight announcedNike’s “support of mandatory global standardsfor social auditing,” asserting that “every com-pany should have to report on their perfor-mance” against these standards. His proposal

meant that Nike’s suppliers and competitorswould have to share the financial burden of se-curing a regulated level of worker conditionsin global supply chains. When the social per-formance records of all the companies weremade public, Knight believed, Nike would berevealed as a leader, which would help protectthe brand.

In early 2004, Nike convened high-profileplayers from the international labor, develop-ment, human rights, and environmental move-ments at its Beaverton, Oregon, headquarters.Their willingness to attend was itself a testa-ment to how far Nike had progressed—from atarget of attack to a convener of erstwhile crit-ics. Even more notable was the fact that thetopics discussed weren’t specific to Nike’s oper-ations. The conversations focused on the po-tential negative fallout from the MFA’s demise.

The end of the agreement raises the chal-lenge of how to assist countries with garmentindustries that may be suddenly rendered farless competitive in international markets. Forexample, a significant portion of the export-oriented garment industry in Bangladesh is atrisk. Today, that sector employs upward of twomillion people and accounts for 75% of thecountry’s foreign-exchange earnings. Similardata for countries in Latin America, Africa, andAsia highlight the potentially disastrous socialand economic fallout if the transition to a post-MFA world is botched.

The MFA is ending partly because of the lob-bying by NGOs and governments of key ex-porting countries; they argued that the agree-ment was a barrier to trade for developingcountries. Even though companies will bedownsizing, relocating, and consolidating in re-sponse to the MFA’s demise, the business com-munity was not a significant player in thistrade change and, in fairness, cannot be heldresponsible. However, the public is already fo-cusing on which companies are laying offworkers and with what effects. Nike is one of afew companies that believe, regardless of howthis situation arose, they must be part of thesolution if they don’t want to be seen as part ofthe problem.

So Nike has joined a group of organizations—including companies such as U.S. retailer theGap and UK retailer Asda; NGOs such asOxfam International and AccountAbility; labororganizations such as the International Textile,Garment, and Leather Workers Federation;

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and multistakeholder initiatives such as theETI, the FLA, and the Global Compact—to ex-plore how such an alliance could help to ad-dress the challenges of a post-MFA world. Thisalliance might be well placed to advise govern-ments and agencies like the World Bank onways to develop public programs to assistworkers in the transition; establish a frame-work to guide companies in their realignmentof their supply chains; or lobby for changes totrade policies that would confer benefits to fac-tories and countries that took labor issues intogreater account.

Nike is, of course, a business, and as such isaccountable to its shareholders. But the com-pany has taken significant steps in evolving astrategy and practice that shifts it from beingan object of civil activism to a key participantin civil society initiatives and processes.

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In dealing with the challenges of corporate re-sponsibility, Nike has come to view the issue asintegral to the realities of globalization—anda major source of learning, relevant to its corebusiness strategy and practices. That learningprompted the company to adopt codes of

labor conduct, forge alliances with labor andcivil society organizations, develop nonfinan-cial metrics for compliance that are linked tothe company’s management and its broadergovernance, and engage in the internationaldebate about the role of business in societyand in public policy.

As Nike’s experience shows, the oftentalked-up business benefits of corporate re-sponsibility are, at best, hard-won and fre-quently, in the short term, ephemeral or non-existent. When accusations arise, it’s easy forcompanies to focus on the low-hangingfruit—employee morale, for instance, or theimmediate need to defend the brand. Butmaking business logic out of a deeper sense ofcorporate responsibility requires courageousleadership—in particular, civil leadership—insightful learning, and a grounded processfor organizational innovation.

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Further Reading

A R T I C L E

The Virtue Matrix: Calculating the Return on Corporate Responsibility

by Roger Martin

Harvard Business Review

December 2002Product no. R0203E

Many companies avoid adopting socially re-sponsible practices for fear they will erode profits and therefore competitive position. This article helps you assess the potential return—in terms of shareholder value

and

so-cietal value—of various types of socially re-sponsible conduct. According to Martin, be-havior that contributes to your company’s profit-making strategies and that

may

add to shareholder value by impressing customers, employees, and competitors generates the

most

corporate virtue. Why? If they succeed, other companies imitate them until they be-come the norm.

For example, when Prudential Insurance let customers with AIDS tap their life insurance policies’ death benefits to pay for medical ex-penses, the move generated so much good-will that competing insurers followed suit. Be-havior that initially seemed radical became business as usual.

To do well

and

do good, form a coalition of corporations to tackle big social or environ-mental problems. Publicize your firm’s suc-cesses. You’ll stimulate further innovation by other firms.