Corporate Ethics and Accountability
by Jon Entine
I was attending a conference on social investing in Boston this spring when a spirited debate erupted over lunch. It was about what constitutes a socially responsible business, not a topic expected to get ones blood boiling. But this day, the discourse was particularly fierce, probably because the sub-text of the debate was about integrity, and that's always a hot topic.
To everyone at my table, or at least to everyone but me, the corporate world divided into so-called ethical corporations with "good intentions" and most of the rest of the world. These "evil" corporations were led by businessmen ascribed the most selfish of motivations, a desire to grow their companies. As such, they risked being dismissed as mere "capitalists," a characterization among this group akin to being labeled a pro-life activist at a NOW convention. No one, it seemed, wanted to talk about what I wanted to discuss, which was which companies turned out quality, affordable products or services, treated their trading partners and employees fairly, and generally kept their noses clean. Instead, the talk focused on such sexy subjects as world peace, spirituality in business, and the worldwide battle of good and evil.
Who were the "bad" guys? According to group consensus, corporations that manufacture weapons (which helped the United States defeat Iraq in the Gulf War), refine oil (for planes and cars) or, the worst of all offenses, test their ingredients according to accepted international standards to ensure the safety of consumers.
The good guys? Many of the companies cited by my lunch companions pay their workers near-minimum wage, are strongly anti-union, have an unhappy workforce, and/or make luxury products at pricey premiums. No matter that in marketing their products these ethical business superstars frequently confuse their intentions and reputations with their not-so-lustrous corporate actions.
While reflecting on my inability to make any headway with this table of social visionaries, my thoughts turned to Mark Twain, always a good source for irony in the midst of hubris. "The secret of success is honesty and fair dealing," he once said. "If you can fake these, you've got it made."
Are good intentions enough? No one took kindly to my observation that corporations and individuals can be idealistic in intent while the consequences of their actions are not particularly ethical. I wanted to talk about organizational structures, internal auditing, corporate governance, and other snore-inducing subjects. This just wasn't sexy, and it didn't result in the kind of rhetorical flourishes and promises of social change that this group embraced as the Holy Grail of socially responsible business. The lunch ended as unproductively as it began.
What Does "Ethical" Mean?
The sobering reality is that the socially responsible business movement may promote corporate behavior that is neither progressive nor particularly ethical. Business ethics is based on broad principles of integrity and fairness and focuses on internal stakeholder issues such as product quality, customer satisfaction, employee wages and benefits, and local community and environmental responsibilities?issues that a company can actually influence.
The corporate responsibility movement, on the other hand, has come to elevate a social and political agenda that draws on notions of liberal propriety and correctness that date to the 1960s. Truisms of social responsibility include the embrace of environmentalism, antiwar pacificism, human rights, animal rights, sexual rights, women's rights, and other -isms that few disagree about in principle. For instance, military production and animal testing are negative screens while the use of "natural" products or campaigning for Third World rights demonstrates a higher ethical standard. Academics, the media, and social investment firms have uncritically promoted these fashionable standards.
Unfortunately, applying these ambiguous litmus screens is more than just problematic; these categories can promote a not-so-thoughtful social agenda of questionable ethics. The business ethics community has some soul searching ahead of it. Is it about outward-focused social vision, as represented by many vocal leaders? Or is it about ethics?putting out a quality product at reasonable prices; treating employees, vendors, franchisees, and investors fairly; acting responsibly toward the local environment and community; and, most of all, embracing transparency in operations and accountability to critics, internal and external?
Easier in Theory Than in Practice
Ethics, like democracy, is a lot easier in theory than in practice. As an example, let's look at the proliferation of codes of conduct and mission statements that have been drafted in the wake of the Kathie Lee Gifford fiasco over foreign sweatshops. The Gifford scandalette, as helpful as it has been in shining needed light on the complicated issue of foreign sourcing, may also leave us with a not-very-progressive legacy if we're not careful.
The most highly touted solution to U.S. manufacturers' sourcing of goods from low-wage countries?corporate codes of conduct on sourcing?frequently ends up doing far more harm than good. As well-meaning as these codes and mission statements purport to be, promises that companies cannot hope to implement?or that cause more harm than good if they are implemented?divert attention from the need for structural changes in the relationship between consuming nations and raw material suppliers. The real benefits of many well-publicized codes have gone to the companies who are embarrassed into drafting them, not the people they were designed to help.
Take Starbucks, the boutique Seattle-based coffee retailer, as an example. To earn enough to afford a pound of Starbucks' coffee, a Guatemalan worker would have to pick 500 pounds of beans, about five days of work. As you choke on your scone, note that this story has a twist: in a glittering ceremony in New York recently, Starbucks was awarded the International Human Rights Award by the Council on Economic Priorities (CEP) at its annual "Corporate Conscience" awards ceremony.
How does a company under attack for exploiting cheap, foreign labor by activist, environmental, and church groups become the belle of the socially responsible ball? During 1994, Starbucks suffered embarrassing grassroots protests because it sourced beans from export houses that paid Guatemalan workers below a living daily wage, about $2.50 a day. The company is no worse than the average wholesaler, but it has a better-than-average reputation as a new-breed, values-driven corporation. So when protesters leafleted Starbucks stores and targeted its annual meeting, a peace plan was offered. Last year, Starbucks became the first company in the agricultural commodities sector to announce a "framework" for a code of conduct.
There are more than 30,000 farms in Guatemala, one of 20 coffee-supplying countries. Starbucks was targeted not because it could change the labor status quo--it is a bit player in the coffee business--but because of its high public profile. The increasingly visible protests left Starbucks with little choice but to pass its code, and it cost the company little. We were "prodded" into it, notes David Olsen, Starbucks' senior vice president, diplomatically.
But according to Alice Tepper Marlin, CEP's executive director, the mission statement alone was enough to earn Starbucks its honor. How has Starbucks enforced its code? "We've done nothing yet," acknowledges Olsen. "It's a slow, incremental process." Very incremental. Starbucks' promised review of plantation conditions is being carried out by the Guatemalan coffee growers association, the very organization accused of perpetuating the low wages. First condemned for labor practices it could not hope to change, Starbucks is now praised for actions it has not yet taken.
What can Starbucks accomplish with its code, putting aside its obvious goal of quieting protests? "Codes are a start," says Eric Hahn of the US/Guatemala Labor Education Project. "But only if it's part of a bigger strategy of industry monitoring, which is one of the few tools available in an international, deregulated economy. Otherwise it's just a balm to consumers."
This is not to suggest that codes are entirely meaningless. As Kathie Lee Gifford has learned, promises focus attention. But solutions rest with accountability, and there doesn't appear to be any here. Starbucks has no practical ability to oversee conditions and says it cannot risk punishing violators.
The Apparel Industry
There is also the labyrinthine social and political climate in impoverished countries to consider. In a follow-up article to the Gifford Story, New York Times reporter Larry Rohter visited Honduras where clothes used to be made for Gifford.1 The apparel assembly plants in Central America employ "slave labor" and are "monstrous sweatshops of the New World Order," according to the National Labor Committee, the New York-based group that publicized the issue. But Honduran union leaders universally resent the moralizing of U.S. labor activists who, like the National Labor Committee, are funded by organized labor committed to preserving American jobs.
According to Honduran labor leaders, maquiladoras are increasingly unionized and offer wages two-to-three times the minimum wage. These are prime jobs in an economy in which almost half of the population can find no work at all. Labor shortages at these jobs have helped bump up wages throughout the economy.
Even the bugaboo of child labor is more complicated than it seems. Honduran adolescents are legally allowed to work at 14 with parental permission, and most are desperate to help their families. The frenzy sparked by the Gifford spectacle has led to the dismissal of hundreds of legally hired adolescents. Rather than returning to school, which is not an option for most families who cannot afford to feed and clothe their children, adolescents buy documents to work at even lower pay or in some cases peddle their bodies. When confronted with the consequences of their highpowered campaign, the New York labor group offered little solace: "Obviously, this is not what we wanted to happen."
Although many clothing companies, such as Nike, KMart, JC Penney, and Reebok, have rushed to pass sourcing codes, few make the effort to examine the complexity of these issues. Of the high-profile retailers, Levi Strauss and The Gap have distinguished themselves by devoting considerable resources to identifying the first link in the supply chain (the shops that supply their suppliers) and bringing direct pressure to establish minimum wage standards and working conditions.
The Never-Never-Land of Good Intentions
Celebrating "good intentions" when complex social problems are at issue and not understood goes to the heart of the corporate ethics conundrum. Rewarding noble posturing also obscures meaningful progress by "messier" companies. While many highly praised "New Age" firms have been found lacking in critical areas of accountability and honesty of marketing, some of yesterday's most vilified companies have quietly moved to the forefront of corporate responsibility. Despite their regular appearances on "dishonorable" lists, controversial multinationals such as Monsanto, DuPont, or Gillette offer fair wages and benefits, have launched impressive affirmative action practices, are addressing complicated environmental issues, actively engage their community responsibilities, give many millions of dollars to charity, and sell quality, competitively priced products and services.
Reforms can reduce litigation expenses, lighten regulatory pressures, and improve company morale. Frequently they can result in considerable savings in their own right. Selling necessary products with an eye to a broader definition of stakeholder responsibilities is not politically sexy, but it can promote positive social change.
When comparing these environmental and social reforms with the cosmetic code at Starbucks or other boutique retailers, one has to wonder how they rack up so many "good business" honors. A more basic question is why do so many "socially responsible" awards go to companies that sell commodity goods to affluent consumers at eyepopping prices?Starbucks, for example, where mark-ups exceed 1,000 percent?
When asked why Starbucks was honored, CEP's Marlin says, "We want to reward positive role models." Dare one suggest that CEP should have waited until Starbucks did more than pass a "framework for a code of conduct," as admirably symbolic as it may be? According to Starbucks, its code has had no effect on the way it does business in Guatemala or dozens of other countries.
Awarding "A"s for visionary rhetoric shifts focus away from corporate governance and behavior to the nevernever-land of good intentions. It's a dangerous trend that companies promote Thoreau-like mission statements without organizational commitments to implement those ideals. Character demonstrated by actions, not by intentions, is the only reliable measure of corporate ethics.
Raising the Ethical Parapet
Socially responsible business, by promoting boutique social issues and using simplistic litmus tests, encourages cynicism. Can we break out of this ideological box and raise the ethical parapet? This special issue of At Work moves us beyond the concept of corporate responsibility to its expression. How are companies manifesting social and environmental responsibility? In what ways can they be influenced to become better in this arena?
Our first articles describe the steps taken by the chemical industry and one of its member firms, Velsicol Chemical Corporation, to become accountable to local communities and to the environment. Then David Mager draws from 20 years of experience to tell how socially and environmentally responsible behavior benefits the bottom line.
Richard Adams' description of the new retail chain he has founded, Out of this World, illustrates how it is possible to incorporate the means for corporate accountability to multiple stakeholders into the design and operation of a company.
We conclude with two articles that examine the principal avenues owners can take to influence corporate behavior in a positive direction: ethical investing and pension fund activism.
The corporate world cannot be divided easily into "good guys" and "evil companies." Companies are dysfunctional families writ large. Mistakes, sometimes whoppers, are built into life, including the life of corporations. Self-scrutiny and accountability are essential. The measure of a company's integrity is not how loudlyit beats its own breast, or whether it blunders, but its respect for its stakeholders and its responsiveness to problems.
1"In Honduras, 'Sweatshops' Can Look Like Progress." New York Times, July 18, 1996, p. A1.
The above article appeared in appeared in the September/October
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