- 1 Levi Strauss & Co. and China
Levi Strauss & Co. and China
From: Case Studies in Business Ethics 5th ed. Al Gini (pp. 294-298)
The market that is the people's Republic of China consists of more than 1 billion consumers and offers low production costs, but its human rights violations have long been condemned by international bodies. In 1993 Levi Strauss & Co. (LS & Co.) faced one of its more difficult decisions in a long corporate history. Would it continue to conduct business in this enormously promising market or honor its relatively high ethical standards and withdraw?
Levi Strauss: History and Ethical Stance
Founded in the United States in 1873, LS&Co. enjoyed consistent domestic growth for generations and began overseas operations during the 1940s. The company became the world's largest clothing manufacturer in 1977 and achieved $2 billion in sales by the end of the decade. Having offered stock to the public during the 1970s to raise needed capital, management decided fourteen years later to reprivatize in a $2 billion leveraged buyout, the largest such transaction to date. Management's reasons included its heightened ability to "focus attention on long-tem interests (and)… to ensure that the company continues to respect and implement its important values and traditions." By 1993, LS&Co. Produced merchandise in 24 countries and sold in 60.
LS&Co. has been a leader among U.S.-based corporations in recognizing the importance of business ethics and community relationships. Two 1987 documents developed by management summarize the unique values operating at LS&Co. The Mission Statement… affirms the importance of ethics and social responsibility, while the Aspirations Statement… lists the values intended to guide both individual and corporate decisions.
CEO Robert Haas frequently explains the importance of the Aspirations Statement as a way employees can realize the company Mission Statement and otherwise address factors that did not receive adequate consideration in the past. Efforts to take the values seriously have led to specific changes in human resources policies and practices. For instance, LS&Co. extends liberal domestic partner benefits, offers flexible-work programs, and has established child-care voucher programs. A series of classes for senior managers focuses on the Aspirations Statement. The company has also earned a reputation as an industry leader in facing controversial social issues. It was one of the first companies to establish programs to support AIDS victims.
In 1990, the company closed a Dockers' plant in San Antonio, Texas, transferring production to private contractors in Latin America where wages were more competitive. LS&Co. provided a generous severance package for the laid-off workers that included 90-day notice of the plant closing and extended medical insurance benefits. LS&Co. also contributed $100,000 to local support agencies and $340,000 to teh city for extra services to the laid-off workers. Despite these efforts, the company received serious criticism for relocating the plant.
Ethical Standards for International Business
In early 1992, LS&Co. established a set of global sourcing guidelines to help ensure that its worldwide contractors' standards mesh with the company values. A group of 10 employees from different areas of the company spent nine months developing the guidelines. The group used an ethical decision-making model that ranked and prioritized all stakeholders to help design the guidelines. The model examines the consequences of each action and suggests a decision based on a balance between ethics and profits.
The ensuing guidelines, "Business Partner Terms of Engagement"… cover environmental requirements, ethical standards, worker health and safety, legal requirements, employment practices, and community betterment. Contractors must: provide safe and healthy work conditions, pay employees no less than prevailing local wages, allow LS&Co. inspectors to visit unannounced, limit foreign laborers' work weeks to a maximum of 60 hours, and preclude the use of child and prison labor.
In addition, the company established "Guidelines for Country Selection"… These guidelines cover issues beyond the control of one particular business partner. Challenges such as brand image worker health and safety, human rights, legal requirements, and political or social stability are considered on a national basis. The company will not source in countries failing to meet these guidelines.
The question would soon be raised: Does China meet these guidelines
Human Rights and Labor Practices in China
China is ranked among the world's gravest violators of human rights, although Chinese officials do not regard their actions as such. The U.S. State Department says that China's human rights record falls "far short of internationally accepted norms." Two more egregious violations include arbitrary arrest and detention (with torture that sometimes results in death). Despite laws prohibiting arbitrary arrest and providing limits on detention, a commonly referenced clause states that family notification and timely charging are not required if such actions would "hinder the investigation." Judicial verdicts are believed by many observers to be predetermined.
Chinese prison conditions are deplorable, and a long-standing practice holds that all prisoners, including political, must work. Chinese officials say that the fruits of prison-labor are used primarily within the prison system or for domestic sale.
Personal privacy is severely limited in China. Telephone conversations are monitored, mail is often opened and examined, and people and premises are frequently subjected to search without the necessary warrants. China has also engaged in forced family planning, with monitoring of a woman's pregnancy occurring at her place of employment. Official rights to free speech and assembly are extremely restricted, as the world witnessed during the Tiananmen Square massacre in 1989.
Regarding labor conditions, China's leaders have refused to ratify the 10 guidelines prohibiting the use of forced labor for commercial purposes established by the International Labor Organization Convention. Although China has regulations prohibiting the employment of children who have not completed nine compulsory years of education, child labor is widespread, especially in rural areas. Surveys show a recent increase in the dropout rate among southern Chinese lower-secondary schools, presumably because the booming local economy lures 12-16-year-olds away. At the time of LS&Co.'s deliberations regarding China, no minimum wage existed and safety conditions were found to be "very poor."
LS&Co. in China
This combination of government practices and labor conditions increased pressure within LS&Co. to rethink its decision to operate in China. In 1992, operations in the country generated some 10 percent of the company's total Asian contracting and 2 percent of worldwide contracting. Its Chinese operations produced approximately one million pants and shirts in 1993 and operated directly or indirectly through some 30 Chinese contractors. Over one half the goods produced in China were shipped to Hong Kong to be refined for sale in other countries. These contracts were estimated to be worth $40 million.
LS&Co. is only one of thousands of foreign firms operating in China. The other companies, especially prominent Fortune 500 companies with factories or manufacturing contracts in China, are cognizant of the human rights and labor conditions. Most of these companies lobbied President Clinton to renew China's Most Favored Nation (MFN) trading status, arguing that the continuing presence of U.S. companies would have a positive influence on reform. According to this viewpoint, investments made by companies such as LS&Co. could transform working conditions and thereby accelerate movement toward the social, economic, and political standards favored by the United States and other western countries.
Should Levi Strauss Stay or Leave?
In assessing the objectionable conditions in China, LS&Co. management felt it could not improve the situation because the violations were well beyond what could be remedied strictly through company communication and cooperation with contractors. At issue were practices that had to be addressed on a larger, national scale.
Leaving the country would expose LS&Co. to the high opportunity cost of foregoing business in a large emerging market. Some managers and employees felt the company would be supporting a repressive regime if it remained in China, while others argued that LS&Co. is a profit-making business enterprise, not a human rights agency. This latter group saw as positive management's acknowledged responsibility to society, but it felt the company also needed to consider its responsibilities to shareholders and employees. Some employees argued that staying in China would enable LS&Co. to improve conditions for Chinese citizens. But other stakeholders countered that remaining in China would violate the company's own guidelines about where it would and would not conduct business.
Important issues that complicated the decision include: the possibility that China might not accept LS&Co. back if the company left until conditions improved. If the company ceased production in China, it might be difficult for it to sell product there due to high tariffs imposed on imported apparel. But, some voices argued, continuing to manufacture in China would have a damaging impact on Levi's reputation possibly putting at risk its valuable brand image.
To address the many issues regarding LS&Co.'s continued operations in China, the company organized a China Policy Group (CPG). Composed of 12 employees who together devoted approximately 2,000 hours to reviewing the China situation, the CPG consulted human rights activists, scholars, and executives in its attempt to fully address the critical issues.
The group examined all the issues highlighted in Part A and found itself divided on the question. In March 1993, the CPG delivered a report to LS&Co.'s Executive Management Committee. On April 27, after a half-day of deliberation, this most-senior management group remained undecided over what to do.
Robert Haas Acts
Confronted by the indecision of the Executive Management Committee, LS&Co.'s CEO and Chairman, Robert Haas, ended the stalemate by recommending the company forgo direct investment in China and end existing contracts over a period of three years due to "pervasive violations of basic human rights." He maintained that the company had more to gain by remaining true to its ideals than by continuing to produce in China.
Reactions to the Decision
LS&Co. did not publicly announce its decision, but the news hit the airwaves with a speed and volume that surprised all involved. John Onoda, LS&Co.'s vice president of corporate communications, explained: "We never intended to get in the spotlight… It was leaked and got out in 20 minutes."
Many people were highly skeptical of the company's stated intentions. Some asserted it was only a public relations ploy engineered to make the company look good. "I don't see broad support of it," claimed Richard Brecher, director of business services at the U.S.-China Business Council. "[It] would be regarded much more seriously if Levi's had made a direct investment in China."
In one respect, Brecher is right. The company did not directly invest in China; it produced its merchandise through Chinese contractors. In fact, on the sales side, LS&Co. jeans continue to sell in China through Jardine Marketing Services. Moving production contracts to other countries in Asia raised costs between four and ten percent, depending on which location was chosen. LS&Co. recognized this cost and considers it the price it must pay to uphold its integrity and protect its corporate and brand images.
Vice President Bob Dunn explained, "There's the matter of protecting our brand identity. Increasingly, consumers are sensitive to goods being made under conditions that are not consistent with U.S. values and fairness." Linda Butler, director of corporate communications for LS&Co., iterated this sentiment when she affirmed that it was "better for us to honor our company's values." Some even believe that the decision may ultimately prove profitable to the company. As one person claimed, "In many ways, it strengthens the brand…. This is a brand that thinks for itself, and these are values which people who buy the brand want for themselves. They're a badge product for youth who want to say 'I'm different.'"
Impact in China
China's leadership showed no interest in the company's decision. One Chinese foreign ministry official was quoted, "At present there are tens of thousands of foreign companies investing in China. If one or two want to withdraw, please do." Coincidentally, the LS&co. decision-making process occurred as the United States considered extending China's MFN status. U.S. Trade Representative Mickey Kantor voiced his support for LS&Co. by stating, "As far as what Levi Strauss has done, we can only applaud it; we encourage American companies to be the leader in protecting worker rights and worker safety and human rights wherever they operate."
More recently President Clinton renewed China's MFN trading status without requiring steps to improve human rights. Clinton explained, "I believe the question… is not whether we continue to support human rights in China, but how we can best support human rights in China and advance our other very significant issues and interests. I believe we can do it by engaging the Chinese."
The position of the Clinton administration is that the United States should continue trading with China and hope that economic involvement will contribute to improvement in the conditions of Chinese citizens. As one might surmise from the case, LS&Co. takes a different position.