Nike Case Study

Nike is a company in the shoe and apparel industry. Its business strategy focuses primarily

around low-cost innovative sports gear sold at optimal pricing. Nike’s operations include 490

factories in 52 countries. Nike operates through outsourcing its shoe and apparel manufacturing. 4

It has a trusting relationship with its shoe manufacturers, even though its shoe factories are

independent contract manufacturers. Nike has a relationship with many of its shoe manufacturers

due to consistent partnerships and able to quickly negotiate the testing and turnaround of

different shoe innovations. While Nike’s shoe manufacturers remain stable and constant through

the years, its apparel manufacturers are constantly changing based on costs, style demand, etc.

Because of the fluctuating nature of the apparel industry, Nike’s relationship with its apparel

manufacturers is not as trusting and consistent as its relationship with its shoe manufacturers.

This leads to difficulty regulating the operations within the third-party manufacturers. Because of

this, Nike was hit with a series of corporate social responsibility scandals throughout the 1990s

that shaped its company's image for a time. Currently, there is no regulation for company

accountability to their third party subcontractors, but there is an expectation that companies

operate through ethical procedures even within third party contracting. In this case study review,

we will look at three separate corporate social responsibility scandals in Nike’s history, how

Nike responded to the scandals, and how its responses were followed up.

One of the early Nike social responsibility scandals involved low wages in Indonesia. In the

early 1990s, various NGOs and labor activists began reporting on the low wages being paid to

the workers in a factory owned by one of Nike’s Korean contractors. Because of Nike’s

increased presence in Indonesia, its relationship with those contractors was increasingly

scrutinized. Many of the workers at the factories were not even being paid the minimum wage of

$1 a day because of “hardship” exemptions that the government granted to factories who claimed

inability to pay minimum wage. The minimum wage of $1 a day was estimated by the

government to cover around 70% of the needs for an individual as it was. Initially, Nike ignored

the reports, claiming they were not responsible for the management of its independent third-party

contractors. As the scandal became increasingly harmful to its image though, Nike instructed its

contractors to stop applying for the minimum wage exception. As more time passed and it
became clear that simply instructing its contractors to stop applying for minimum wage was not

enough to be considered socially responsible, Nike increased its corporate social responsibility

efforts. Nike promised to raise its contractors wages above minimum wage to

$26.00-$37.50/month and to monitor its third party contractor wages. Overall, in the case of 5

Indonesia, Nike had a rough start but over time incorporated its corporate social responsibility to

its company strategy.

Nike’s next large CSR scandal took place in Pakistan. One of the highest quality producers of

soccer balls is located in Sailkot, Pakistan. Around 70% of the world’s high quality soccer balls

are made in Sailkot. “Homework” is a practice that was popular in the area in the 1990s and led 6

to many well-known human rights issues. In 1996, Life magazine published a photograph and an

article of a 12 year old boy hand-stitching a soccer ball. The photo and article caused a wave of

criticism against Nike for employing child labor. According to the vice president of compliance

at Nike at the time, Dusty Kidd, Nike was already working with the supplier to eliminate the use

of homework and to become more accountable for its employees. After the wave of criticism hit,

Nike signed the Atlanta Agreement, implementing a program to eliminate child labor from the

soccer ball through International Labor Organization (ILO) monitoring, social protections, and

training of other-income generating activities. Also in accordance with this agreement, any plant

caught employing a child is required to remove the child, but continue paying its wages up to

when they reach working age. According to ILO reports, many of these companies continue

employing children and production has moved to the less regulated surrounding areas of Pakistan

in order to go around this regulation.

The third global scandal for Nike involved health and safety problems in Vietnam. In 1997, an

Ernst & Young report paid for by Nike was leaked to an NGO and subsequently made public.

This report showed that Nike’s Tae Kwang Vina factory had Toulene concentrations from 6-177

times the acceptable standards in certain sections of the plant. Toulene is a chemical that causes

various skin and eye irritations along with liver and kidney damage and central nervous system

depression. The scandal was made worse when it was brought to attention that the UN

Ambassador, Andrew Young had visited the plant recently before the report yet had not

mentioned any health problems. To combat the negative publicity Nike was receiving for all of

its CSR scandals, it formulated a code of conduct to be followed by all of its supplier factories.

Companies working with Nike were obligated to sign its code of conduct as well as an agreement
to abide by the laws of OSHA. Nike also created new departments to combat its ever growing

global problems. Its compliance department was moved into its apparel branch to combat the

problems where most of them appear. It also created an incentive system for managers to

improve environmental and labor conditions through implementing a Manufacturing Index. A 7

manufacturing index provides measures for evaluating the environmental and social performance

of companies and acts as Nike’s measurement of corporate social responsibility for their third

party subcontractors.

In order to publicly be held accountable for the promises made regarding its global corporate

social responsibility, Nike designated internal employees as well as hired third parties such as

PWC to audit its supplier’s factories. Nike employs 85 people specifically designated for labor

and environmental compliance and conducts inspections by managers weekly or monthly

depending on the company size and use frequency. In the early 2000s, the world watched as Nike

embraced corporate social responsibility and went from the face of social corruption to an

accountable company that continued and even grew in success. Since these scandals, Nike has

been successfully monitoring its third-party suppliers and has eliminated petroleum based

chemicals in footwear productions. While there are still imperfections in Nike’s social

responsibility, it made its CSR position clear to the public through exponentially increasing its

social monitoring and reporting since the 1990’s.

Similarly, to Nike, Volkswagen (Hereafter known as VW) encountered a corporate social

responsibility scandal that brought its public image down. In September of 2015, the California

Air Resources Board began testing cars on the road. These tests led to the stunning discovery

that VW diesel cars emitted more than 40 times the regulation threshold for nitrogen oxide. An 8

investigation was launched by the EPA and it was discovered that VW had equipped its cars with

deceptive software to cheat through the inaccurate lowering of emissions during emissions tests.

Because of this, VW experienced immense economic downturn with a net loss of $1.4 billion.

Car sales, stock value, and company value all plummeted and VW was suspended from the Dow

Jones Index.

So how could a company with such a strong standing go through such a terrible scandal?

According to the case done by Jung and Park, it was “austere leadership styles, insular corporate

governance, and drawbacks from family feuds and nepotism,” that led to such a hostile corporate

environment. The CEO at the time, Ferdinand Piech, was notorious for having a toxic leadership 9

style that reflected an “at any cost” mindset throughout the corporate leadership. The board for

the company was ruled with a majority by the Porsche and Piech families who made all decisions

amongst themselves without consideration of other board members. Volkswagen had set its bets

on diesel when many companies were investing in technology. Finding it difficult to keep up

with the Obama administration’s environmental regulation, Martin Winterkorn, the interim CEO

changed the company focus to simply meeting the environmental standards at any cost.

Volkswagen faced many economic and political consequences through recalls and lawsuits. In

response to the scandal, VW changed its entire managerial system promising maximum

transparency. Before the scandal, the company published public CSR reports focusing on their 10

efforts in sustainability, diversity, and environmental [Link] this information was

published, it was not verified by outside sources. If the Volkswagen CSR was verified by third

parties, there is a chance that the auditors may have caught the defeat devices prior to the scandal

occurrence. If auditors tested the vehicles using different methods than Volkswagen, as the
California Air Resources Board did, they would have seen the extremely high output of nitrogen

oxide from the vehicles.

Since the scandal, it does not appear that VW is keeping up with the promises immediately

following it. In a recent article from Forbes, shareholders are demanding more transparency, but

VW is deflecting. Volkswagen reacted to the demand for an increase in transparency by 11

making promises and fixing the problem at hand, but how does that affect the public trust in the

company? Measuring public trust through stock pricing, its stock reached its 5 year peak on

April 10th, 2015 at a price of $253.20 prior to the scandal and bottomed out on October 2nd

2015 at 92.36 after the scandal was discovered publicly. The stock is currently around $163

which means that it is slowly climbing back from the scandal, but there is still clear hesitancy in

the market to bring Volkswagen’s pricing back to post-scandal pricing. While Volkswagen

implemented corporate social reporting even before its scandal, there was no third-party check to

verify the information. Because of this, even the implementation of its CSR was ineffective in

preventing this scandal.