Nike: The Sustainability Journey

September 1, 2018

Nike was a multinational corporation headquartered in Beaverton, Oregon[i].  Its growth since its founding in 1964 was remarkable, climbing to $49 million in 1982 from just $60,000 ten years earlier[ii] and then to $9 billion by the mid-1990s[iii].  By 1998, 40% of the athletic footwear market was controlled by Nike.  Nike reached $20 billion in revenue in 2011 and, as of 2017, had a market cap of $29.6 billion and holds the title for the world’s largest supplier of athletic shoes and apparel. 

 

A key part of Nike’s growth strategy had always been to reduce costs by outsourcing all manufacturing and to divert the savings to marketing, starting with celebrity endorsements like Michael Jordan decades ago to, more recently, Colin Kaepernick.  Phil Knight was rather explicit in his effort to reduce costs, indicating that not only was the goal to remove manufacturing from its in-house activities, he intended to move manufacturing to the low-cost parts of the world.  Nike started outsourcing to Japanese manufacturers but then migrated rather quickly to South Korea and Taiwan.  As these countries grew wealthier, they pushed their suppliers to move operations to lower cost regions like China and Indonesia.

 

Labour unrest began to reach unprecedented levels in Indonesia in the early 1990s just as Nike concentrated most of its production there[iv].  Stories of multinational company labour abuses started to creep up, leading to an emergence of labour organizations working to support and communicate the growing number of demands from factory workers.  Nike was the main target for labour organizations as they were criticized for paying below-subsistence wages that prohibited workers from meeting their basic needs[v].

 

By 1992, criticism of Nike started to come back home.  Harper’s magazine published the soon to be famous comparison between workers’ wages and Michael Jordan’s endorsement contract where it was revealed that it would take an Indonesian Nike factory worker 44,492 years to make the equivalent of Jordan’s endorsement contract[vi].  During the 1992 Barcelona Olympics, a Portland newspaper published a number of critical articles of Nike and a small band of protestors spread information during the Olympics about Nike’s labour abuses.  The criticism then went national in 1993 when CBS interviewed Indonesian workers who revealed that they were paid 19¢ an hour.  Slavery conditions were also evident as women workers were only allowed to leave factory gates on Sundays and needed a permission letter to do so.  By the middle of the 1990s, senate representatives in the US sought out legislation to address the issue of overseas labour abuse.  Suggesting that the US Congress had a role to play, representative George Miller from California, stated, “Parents have a right to know that the toys and clothes they buy for their children are not made by exploited children.”[vii]

 

Nike’s Response I

 

Although Nike faced increased criticism, they were clear in their response in the early 1990s that labour conditions of contractor factories could not ever be Nike’s concern or responsibility.  The company’s general manager in Jakarta, in response to labour violations stated, “I don’t know that I need to know”[viii].  To this point, Nike’s view was as follows: “without an in-house manufacturing facility, the company simply could not be held responsible for the actions of independent contractors”[ix]. A conversation between Michael Moore and Phil Knight went as follows[x]:

 

Moore: Twelve year olds working in [Indonesian] factories? That’s O.K. with you?

Knight: They’re not 12-year-olds working in factories... the minimum age is 14.

Moore: How about 14 then? Does that bother you?


Knight: No.

 

Yet with unprecedented criticism of this view, Nike realized that although they didn’t own the factories that made their products, they needed to do something.  They hired Dusty Kidd into its public relations department to draft a series of regulations for contractors.  These regulations were morphed into a code of conduct and memorandum of understanding and attached to all new contracts created for Nike contractors. When criticism emerged that this was insufficient, they then hired Ernst and Young to conduct formal audits of its factories.  Yet because Nike would ultimately be paying the firm to conduct the audits, activists questioned their objectivity. 

A couple of years later, amidst stubborn criticism of Nike’s response, Phil Knight, in a press release, announced the formation of a Labour Practices Department and praised Nike’s recent initiatives regarding fair labour practices, such as their participation in President Clinton’s Apparel Industry Partnership, membership in the organization Business for Social Responsibility, and ongoing dialogue with concerned non-governmental organizations.  “Every year we continue to raise the bar,” said Knight. “First by having Ernst & Young audits, and now with a group of Nike employees whose sole focus will be to help make things better for workers who make Nike products. In labor practices as in sport, we at Nike believe ‘There is No Finish Line.’”[xi]

 

Deep down though, executives inside Nike felt that the criticism they were hearing was amplified rhetoric from radical activists and troublemakers who intentionally sought out highly profitable firms and, in Nike’s case, tried to generalize isolated instances of factory behaviour across the entire network of factories.  To executives, these radical activists didn’t quite understand, or just chose not to understand, how good contract factories really were. Echoing this view was a quotation from their 1997 Annual Report, which read:

 

"Nike is not here to create a new world order. We are not here to eliminate poverty and famine or lead the war against violence and crime. Our critics say that the world is going to hell in a Nike sports bag. Then, again, our critics, for the most part, aren’t athletes"[xii].

 

To push back against activists, Nike hired Andrew Young in 1996, a respected civil rights leader and former mayor of Atlanta, to conduct an independent evaluation of its Code of Conduct.   Using a full-page advertisement in major newspapers, Nike presented one of Young’s main conclusions: “It is my sincere belief that Nike is doing a good job... But Nike can and should do better.”[xiii]  But critics were outraged by the report’s research methodology and conclusions and the fact that it was filled with glossy photos and large typeface mimicking an advertisement.  But most important to critics was that Young did not address the issue of factory wages. In response, Young explained, “I was not asked by Nike to address compensation and ‘cost of living’ issues which some in the human rights and NGO community had hoped would be a part of this report.”[xiv] Then he went on:

 

“Are workers in developing countries paid far less than U.S. workers? Of course they are. Are their standards of living painfully low by U.S. standards? Of course they are. This is a blanket criticism that can be leveled at almost every U.S. company that manufactures abroad... But it is not reasonable to argue that any one particular U.S. company should be forced to pay U.S. wages abroad while its direct competitors do not.”[xv]

 

From an economic standpoint, one could argue that Nike was actually helping developing countries progress, providing jobs and wages to people who previously had neither.  But in the public view, the social comparison between a Vietnamese Nike factory worker making $1.67 per day to make sneakers retailing at $150 was too difficult to shake[xvi].   But more important than that was that the Young report was blasted for its factual inaccuracies and deception and was summed up by Stephen Glass in a 5-page article in the New Republic that: “This was a public relations problem, and the world’s largest sneaker company did what it does best: it purchased a celebrity endorsement.[xvii]” Even Nike’s proponents criticized them. Business Week stated of Nike:

 

“Too few executives understand that the clamor for ethical sourcing isn’t going to disappear with the wave of a magic press release. They have protested, disingenuously, that conditions at factories run by subcontractors are beyond their control... Such attitudes won’t wash anymore. As the industry gropes for solutions,”[xviii]

 

Hitting a wall

 

In the midst of a $76 stock price and record future orders, it seemed that despite these issues, Nike was invincible.  But all that changed in 1998 when Nike suffered from a serious image problem. Anti-Nike rhetoric made its way to US campuses, where activist movements positioned Nike as a symbol of corporate greed and exploitation. Alongside young consumers who chose Adidas over Nike at the checkout till, activists at colleges and universities demanded that all contracts be considered null and void until labour practices were fixed. In late 1997, activists protested Nike’s $7.2 million endorsement deal with the University of North Carolina and in early 1998, an assistant soccer coach at St. John’s University, James Keady, quit his job saying: “I don’t want to be a billboard for a company that would do these things"[xix].

 

Eventually, student protests spread where Nike didn’t even have contracts.  Students who were once apathetic began occupying buildings at Duke, Georgetown, the University of Michigan and the University of Wisconsin, and staged sit-ins at many other institutions. A Wisconsin student and national movement leader stated: “It really is quite sick. Fourteen-year-old girls are working 100-hour weeks and earning poverty-level wages to make my college T-shirts. That’s unconscionable.”[xx] In response, university administrators were forced to institutionalize codes of conduct for any company providing products to the college or university.  As a result of all this, Nike succumbed to substantial financial losses. Profit in 1998 faced a record drop of 49.8% while revenue dropped in 1999 by 13%.  In the middle of 1998, Nike’s stock price was cut in half from a year earlier[xxi].  

 

Nike’s Response II

 

In a speech to the National Press Club in May 1998, Phil Knight admitted that “the Nike product [had] become synonymous with slave wages, forced overtime, and arbitrary abuse.”[xxii]  Knight announced that he was raising the minimum age of all sneaker workers to 18 and apparel workers to 16; expanding educational programs for workers, making micro loans available to workers, and imposing US grade clean air standards in factories.  For the first time, Knight and his company appeared ready to acknowledge the reality and to let go of their combative posturing. As someone internal to Nike explained. “Once Phil grasped that there were real problems,” she recalled, “he just said ‘we’re going to fix them and we’re going to raise the standards of the whole industry,’ and that was the goal.”[xxiii]

 

Nike helped found the Fair Labor Association (FLA), which was a nonprofit that brought together multiple stakeholders including business, universities, and non-governmental organizations.  It conducted independent assessments of Nike and competitor factories while providing training for workers and management. FLA, though, aimed to maintain a very delicate balance:

 

“And it is the right one. FLA works to be as independent as it can be, and as authentic as it can be in pushing and driving for higher standards, while also collaborating with companies. But I think this notion of uncomfortable collaboration is part of the solution. It is how you create scaled approaches through voluntary standards in the absence of adequate legal standards”[xxiv].

 

Together, stakeholders of the FLA aimed to create a common labor standard for minimum requirements across the industry.  But Nike and Adidas appeared to be doing most of the work and wanted other brands to join.  This was important because many factories were producing goods that spanned multiple corporate brands. 

 

Nike’s Response III

 

It wasn’t until 2011 that Nike began to evolve from a strategy of reactive crisis management in the supply chain to proactively taking steps to improve conditions from a broader sustainability perspective.  That is, their sustainability objectives spanned a number of ecological issues including waste and chemical use to social issues of supply chain worker rights and dignity to those economic issues of wages.  In stark contrast to their 1997 annual report above, their 2011 report stated the following:

 

I believe that any company doing business today has two simple options: embrace sustainability as a core part of your growth strategy, or eventually stop growing.

 

To this end, Nike’s Steve Castellanos felt that improving labor practices went beyond the wage issue.  It was important to make sure that workers felt respected and empowered.  Nike put factory management through human resource management (HRM) training and tried to communicate the value of having well-treated, empowered and engaged workforce. Castellanos added the objective of trainings was to move away from policing the factories:

The longer you stay in a policing formation and function, it is a self-fulfilling prophecy. You could build an organization of hundreds of auditors and policemen—but if you don’t ever start to develop skills and competency—then it will always be a policed kind of supply chain. For growth companies, that is a losing proposition: when you put police in place, you lose money. It is to our advantage to grow capability with our factory partners[xxv].

 

By 2013, although most observers and many activists agreed that Nike had made positive strides to improve sustainability and safety policies and practices, some factory labor conditions still raised concerns among some activists and other critics wondered why it took 15 years to reach this point.  On top of this, it appeared that Nike was falling behind in light of recent research that found that the supply chain in apparel had become so complex with a seemingly endless number of intermediaries that it was becoming increasingly difficult for Nike to trace their product to its source[xxvi].  Most importantly, however, was that critics felt that Nike was only making progress to the extent that it correlated with their profitability ambitions.  Nowhere in their discussions was a broader questioning of the fundamentals of their outsourcing business model, a question that would, on the one hand, throw into complete misalignment the goals of profit with the goals of a just and prosperous society.  Is the reconciliation of this tension not the role of business, some wondered[xxvii]? 

 

 

Endnotes

 

[i] Levinson, Philip. "How Nike almost ended up with a very different name". Business Insider. Retrieved 2017-06-07.

[ii] David B. Yoffie, Nike: A (Condensed), HBS Case 391-238 (Boston: HBS Press, 1991), p. 1.

[iii] Both figures are for retail sales. Footwear 1999, (North Palm Beach; Athletic Footwear Association, 1999), introduction; Dana Eisman Cohen and Sabina McBride, Athletic Footwear Outlook 1999, (New York: Donaldson, Lufkin & Jenrette, 1998), p. 3.

[iv] Suhaini Aznam, “The Toll of Low Wages,” Far Eastern Economic Review, April 2, 1992, p. 50.

[v] Spar, D. (2002). Hitting the Wall: Nike and International Labor Practices.  Harvard Business School. 

[vi] Jeff Ballinger, “The New Free-Trade Heel,” Harper’s Magazine, August 1992, p. 64.

[vii] “Honduran Child Labor Described,” The Boston Globe, May 30, 1996, p. 13.


[viii] Adam Schwarz, “Running a Business,” Far Eastern Economic Review, June 20, 1991, p. 16.

[ix] Spar, D. (2002). Hitting the Wall: Nike and International Labor Practices.  Harvard Business School.

[x] Phil Knight, Nike CEO, talking to Director Michael Moore in a scene from documentary film The Big One, 1997.

[xi] “Nike Establishes Labor Practices Department,” PR Newswire, October 2, 1996.


[xii] Paine, L., Hsieh, N., Adamsons, L. (2016). Governance and sustainability at Nike (A).  Harvard Business School Publishing. 

[xiii] Andrew Young, Report: The Nike Code of Conduct, (GoodWorks International, LLC, 1997) p. 27.


[xiv] Andrew Young, Report: The Nike Code of Conduct, (GoodWorks International, LLC, 1997) p. 9-11

[xv] ibid.

[xvi] Derek Calzini, Shawna Huffman, Jake Odden, Steve Tran, and Jean Tsai, Nike, Inc: Survey of Vietnamese and Indonesian Domestic Expenditure Levels, November 3, 1997, Field Study in International Business (Dartmouth, NH: The Amos Tuck School, 1997), p. 5.

[xvii] Stephen Glass, “The Young and the Feckless,” The New Republic, September 8, 1997, p. 22.

[xviii] Mark L. Clifford, “Commentary: Keep the Heat on Sweatshops,” Business Week, December 23, 1996, p. 90.

[xix] William McCall, “Nike’s Image Under Attack: Sweatshop Charges Begin to Take a Toll on the Brand’s Cachet,” The Buffalo News, October 23, 1998, p. 5E.

[xx] Nancy Cleeland, “Students Give Sweatshop Fight the College Try,” Los Angeles Times, April 22, 1999, p. C1.

[xxi] Macrotrends:  https://www.macrotrends.net/stocks/charts/NKE/nike/stock-price-history . Date Accessed: September 28th, 2018

[xxii] John H. Cushman Jr., “Nike to Step Forward on Plant Conditions,” The San-Diego Union-Tribune, May 13, 1998, p. A1.

[xxiii] Paine, L., Hsieh, N., Adamsons, L. (2016). Governance and sustainability at Nike (A).  Harvard Business School Publishing. 

[xxiv] Ibid.

[xxv] Schifrin, D., Carroll, G. Brady, D. (2013) Nike: Sustainability and labor practices: 1998-2013.  Stanford Business

[xxvi]  https://www.ft.com/content/2cf5bebe-9773-11e5-9228-87e603d47bdc

[xxvii] https://newrepublic.com/article/148368/ideology-business-school

 


 

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