Nike Corporation: Jumping the Hurdles of Social Responsibility Disclosure Teaching Note The Nike case is intended to promote classroom discussion and instruction regarding the obstacles to effective public relations practices and the necessary steps to overcome those obstacles, not to commend or condemn Nike’s course of action. Apart from the many strategic questions the case raises regarding Nike’s approach to a threatening business problem, the case offers two important questions relating to contemporary business issues: first, was Nike ethical in the way it communicated its practices, and second, in what manner should companies best disclose social responsibility information to the public? The following teaching note provides the background information, viewpoints, and research necessary to facilitate classroom discussion and debate regarding possible answers to these two questions. The teaching note first discusses the ethical implications of Nike’s public relations strategy. The ethics section is followed by an analysis of the emerging field of corporate social responsibility (CSR) accounting and auditing, an area that might provide answers for companies with challenges similar to those Nike encountered. ETHICAL CONSIDERATIONS When Nike began using traditional advertising methods to broadcast its production practices in response to activist criticism, it began to tread an ethically challenging path. Traditional advertising ethics are insufficient when applied to corporate social responsibility disclosure because the role of “company” intertwines with the role of “citizen,” which is held to a higher ethical standard. Corporate citizens are companies acting in behalf of a social interest, which may or may not affect revenues. These socially beneficial actions raise the ethical standard for such companies because of purportedly altruistic intentions, which is entirely different from the sole profit- generating purpose of a corporation. The ethical expectations of corporate citizens are thus more demanding than those for businesses without social interest, especially in the way corporate citizens communicate their philanthropic practices. The ethics of corporate social responsibility disclosure have historically been some of the most difficult to reconcile with shareholder expectations and activist demands (Browne and Haas, 1974; Filios, 1984, 1986; Robertson and Nicholson, 1996; Gelb and Strawser, 2001). Every company must put its best foot forward at all times in advertisements and reports to remain competitive in the marketplace, but the jagged line between optimism and deceit is often difficult to distinguish. Maintaining integrity becomes more challenging when a company must report less attractive details or respond to criticism. The problem that faces many companies engaging in public dialogue is how to ethically, legally, and effectively disclose information while maintaining a positive image (Argenti & Forman, 2002). Much recent literature has analyzed the ethical issues associated with CSR disclosure and traditional advertising. Davenport (2000) argues that companies have an ethical obligation to stakeholders to initiate and engage in genuine dialogue regarding corporate social responsibility. Furthermore, Gelb and Strawser (2001) argue that increased CSR disclosure in itself is a form of socially responsible behavior, and that by offering more information to the public, companies better meet their responsibilities to stakeholders. These researchers do not, however, discuss the ethical implications of companies that act inconsistently with CSR promises or that use CSR reporting for the sole purpose of improving revenue. Robertson and Nicholson (1996), however, write that merely expressing noble company objectives and information is insufficient; when a company puts forth statements regarding its corporate social responsibility, it has an obligation to perform in accordance with what it says. When companies’ behavioral actions contradict their statements of intent, a type of “hypocrisy” exists for the inconsistent company (Robertson & Nicholson, 1996). Nike’s decision to advertise good corporate conduct as a reaction to negative public perceptions about its practices raises serious ethical concerns. Mary Stoll (2002) clarifies this issue, writing that the ethics of marketing good corporate conduct have much higher expectations than what we find morally permissible in marketing products. Typical product marketing often employs creative license and exaggerated claims to create desire in potential customers for goods and services. Although these persuasive tactics rely more on imagery than information, and sensationalism before logic, one might argue that some mild deception in product marketing is relatively harmless when our society acknowledges the use of puffery. Stoll argues, however, that the marketing of favorable corporate conduct must be held to a much higher standard of responsibility than product advertising. Product ads are created to appeal to the emotions and impulses instead of reasoned discussion by portraying incomplete information geared towards one perspective. However, making judgments on an entity’s moral actions and decisions requires careful decision making and access to all relevant facts; thus, many of the practices used in typical advertising are wholly inappropriate for marketing corporate conduct. Additionally, the ethical implications are exacerbated if the desired effects of advertising responsible conduct are solely to improve the bottom line. Promoting good conduct solely for profit is unacceptable because it exploits something of much higher value, right conduct, to promote something of lower value, money. Furthermore, if good conduct is deceptively advertised, the situation would be doubly repugnant because the company would deceive consumers with pretensions of responsible conduct to repair a reputation damaged by prior misdeeds (Stoll, 2002). A related consideration is the ethics of alternative methods of social disclosure, such as through responsibility reports and codes of ethical conduct, as these methods are often used by companies to report information regarding their practices. Stoll (2002) suggests that the reporting of good corporate conduct should coincide with openness to external audits, which help ensure a more complete record of company activity and provide third party credibility to the assertions. Additionally, much research has been conducted regarding the morality and effects of corporate codes of ethics, a common way companies express social responsibility intentions. However, Mark Schwartz (2002) writes that for codes to be considered ethical, they must uphold certain criteria, such as being accessible to all employees and being carefully enforced and monitored. Some companies have used codes of ethics more for image and publicity rather than for utility in the workplace, which defeats the presumed purpose and is less acceptable from an ethical standpoint. However, if standards are enforced and made known to employees, a code can be seen as an ethical addition to a company (Schwartz, 2002). These considerations must be taken into account when discerning the ethical conduct of a company engaging in these types of reporting activities. Nike’s decision to use a PR campaign to repair its sordid social image is entrenched within these ethical issues. For a PR campaign promoting a socially responsible image to be considered ethically acceptable, the company would need to reconcile its use of product advertising techniques with the need for complete, impartial information clearly stating both sides of the issue. Additionally, the PR communication should be motivated by more than just a desire for revenue, such as a desire to meet stakeholder expectations and promote greater transparency, although many have argued that there is nothing morally wrong with improving revenues as a result of independent responsible activity (Robertson and Nicholson, 1996; Gelb and Strawser, 2001; Stoll, 2002). Finally, the company would need to be forthright with the public, and should seek other methods of disclosure apart from advertising that are more conducive to a full discussion. The following section of the teaching note shifts topics to discuss CSR accounting and auditing, a field many have suggested could provide the solution to companies seeking to effectively provide more transparent information to the public. CSR STATEMENTS AS A POSSIBLE SOLUTION The Nike article presents a major dilemma that corporations must hurdle when communicating with the public: how should a company report on its operations to answer critics’ accusations and meet consumers’ needs, while still complying with legal restrictions and ethical demands? The remainder of this article will consider how audited CSR statements, created in accordance with standardized, accepted principles, could help companies solve these dilemmas. Corporate social responsibility statements would be reports in which companies doing business in the U.S. could be required to disclose specified information regarding their manufacturing conditions or sustainable development practices, just as they must disclose specified financial information in their 10-Ks and balance sheets. These statements, like their financial counterparts, would be independently audited and would be included in the company’s annual report. Social auditing would let companies know what they must assess (the criteria) and give them the analytical skills to do so (metrics and indicators) (Davenport, 2000). The reporting company would be liable for misstatements in these documents, but in a predictable, structured manner following legal guidelines established beforehand that everyone would understand. During the past three decades, researchers have discussed the merits of issuing formal CSR statements of some kind to provide clear, complete knowledge to stakeholders and the public at large (Bowman and Haire, 1975; Filios, 1984; Robertson and Nicholson, 1996). Filios (1984, 1986) writes that firms would benefit by establishing a standardized terminology and classification system regarding social cost and benefit items to help regulate CSR reporting. Robertson and Nicholson (1996) promote CSR disclosure in formal mission statements with specific goals and monitoring activities as a powerful way to give unity of purpose to individuals within the company and increase public opinion without. Sillanpää (1998) states that audited CSR reports help companies generate increased understanding of their corporate identity and gain greater confidence from stakeholders. The article now discusses some specific, contemporary reasons CSR statements would benefit companies within the context of the Nike case. REASONS TO REQUIRE CSR STATEMENTS The need for a standardized reporting procedure among all multinational companies has increased in recent years for several reasons. First, globalization has played a major role in influencing the ambiguity of business practices and the difficulty of consistent reporting among companies. The growth of the global marketplace has been remarkable. In the early 1990s, 35,000 multinational corporations worked with 170,000 foreign affiliates. Before the end of the decade, 60,000 multinational companies had accumulated more than 500,000 foreign affiliates and produced one quarter of the global output (Florini, 2003). The majority of these companies do business in low-wage, low-regulation countries where the sophistication of the governments has not increased as fast as the demand for cheap capital. This has allowed rich-country firms to capture the profits of low production costs without acknowledging associated social costs (Florini, 2003). Companies committing social abuses are beyond the regulation of scattered governments, but these companies are not beyond the discrimination of informed customers. CSR statements would create a playing field of transparency and comparability between global companies and allow customers and investors to compare accurate, categorized information according to specific criteria. Second, formal CSR statements would encourage companies to improve transparency by providing a safe vehicle to disclose information while further distinguishing CSR reporting from traditional advertising. Because legal guidelines could be clearly established with CSR statements, companies could provide much more information to the public with greater confidence. In addition to the legal implications of traditional advertising, a greater emphasis on clear, consistent disclosure would further deemphasize flashy reporting methods and could set a precedent for a humble approach to CSR reporting. From an ethical standpoint, this would certainly be the most appropriate approach because transparent, direct reporting is less deceptive and would provide more complete information to stakeholders (Stoll, 2002). Mike Lawrence, executive vice-president at Cone, a communications and marketing agency based in Boston, said “We say it's better for people to 'find you' than to broadcast your visibility in social responsibility, but if you're going to broadcast it, then you must do it humbly…, You should never claim that the company is 'perfect' when you do choose to make public claims about social responsibility” (Murray, 2003). Third, current CSR reporting is mostly piecemeal, anecdotal, and generated without third party credibility. Although the trend in CSR reporting is optimistic, a KPMG survey indicated that only 44 percent of the non-financial Fortune 250 companies produce an annual report of their performance (Reynolds, 2001). However, each of these companies reports according to its own standards, codes, and measurements–mitigating the accuracy and comparability of the statements (Davenport, 2000). Furthermore, less than 20 percent of these reports were verified by an independent party, essentially limiting the statements to glorified marketing schemes for those companies succeeding in any area of CSR (Reynolds, 2001) Additionally, although the increasing desire for a common CSR standard is optimistic, the fact that dozens of noble entities have created their own CSR standards–such as the UN Global Compact and the Social Accountability 8000–has further muddled the issue (Reynolds, 2001). The analogy would be to offer companies a selection from among 50 sets of Generally Accepted Accounting Principles to prepare their income statements. Only a requirement for audited CSR reports under a standard set of principles would allow for credibility, consistency, and comparability. Fourth, customers and investors are demanding more CSR information from companies, and current research suggests this information strongly influences purchase and investment decisions. A national consumer survey in 1996 indicated that almost 80 percent of shoppers would avoid a retailer selling garments made in sweatshops (McCabe, 2000). Although in practice consumers purchase less discriminately than they indicate on surveys, much of this apparent divergence may be due to lack of common, reliable CSR information. Furthermore, investors are dramatically increasing their use of CSR information for investment choices. Epstein et al. discovered that individual investors desired more CSR information than is currently provided (Epstein, 1994). The Social Investment Forum indicates that in 1984 about $40 billion in US assets under professional supervision underwent some sort of CSR screening. In 1995, the total was up to $639 billion, and by 2001 that total almost quadrupled to over $2.3 trillion (Florini, 2003). CSR statements could meet the needs of consumers and investors alike and provide the comparability and legitimacy needed to base more purchase and investment decisions on this information. Fifth, if companies were required to report CSR information—information used by the public for investment and purchase decisions—more companies would incorporate responsibility initiatives into their overall corporate strategy (Murray, 2003). Much recent research has strongly suggested that philanthropic initiatives be anchored in the strategy of the corporation and professionalized for greater accountability (Porter, 2002; Stormer, 2003; McAlister & Ferrell, 2002, Argenti & Forman, 2002), thus improving the substance behind any disclosure of responsibility (Murray, 2002). When companies align their social endeavors with causes fundamentally linked to their business expertise, they grant credibility to their philanthropic practices (Argenti & Forman, 2002, p. 200), which then allows CSR disclosure to be an extension of the company’s overarching social commitment. Empirically, when companies give strategically and carefully account for resources dedicated to social objectives, they professionalize the philanthropic functions within the organization (Argenti & Forman, 2002, p. 200). Greater professionalism and accountability in CSR helps focus the spending of social investing funds, encourages careful project management skills, and extends the monitoring of project outcomes, thus benefiting the interests served by the company while enhancing corporate reputation (Argenti & Forman, 2002, p. 201). CONCERNS RELATED TO REQUIRED CSR STATEMENTS This paper now considers some of the concerns or complications related to the requirement of audited CSR statements and the responses to those issues. First, some have suggested that the audits would be too expensive for corporations (Filios, 1984; Raynard, 1998). Although the additional audits would clearly increase accounting expenses, truly large costs would only be incurred by companies with the most complex and widespread manufacturing patterns. The vast majority of businesses operate in the US where the audit would be local and the expenses would be modest. Moreover, the argument about additional expense was certainly brought up when financial statements and audits were first introduced during the 1930s, but businesses adapted for the common good and these requirements are now seen as a usual cost of business. Second, one might argue that operating practices differ so dramatically between different industries that a common CSR standard would be impossible to implement across sectors. For example, applying a common environmental standard to a highly- automated engine factory and a uranium mine might prove to be difficult. The solution could be to establish different sets of industry-specific requirements based on sound ethical principles that apply to all businesses. A regulating body could be formed to enforce compliance and adjust the standards for fairness. Companies in similar sectors could then be compared, and an underlying ethical standard would prevail across all industries. Third, few, if any, professional services organizations are equipped or qualified to conduct CSR audits and help companies create CSR statements, although many accounting and PR firms are now preparing to offer these services (Murray, 2003). The problem lies in the credibility of the PR and accounting sectors with respect to social responsibility. Many are skeptical about the influence of PR firms in social responsibility reporting (Murray, 2003), and in a post-Kasky landscape, the dangers of applying typical advertising methods to CSR reporting abound. The accounting firm has historically been seen as the ideal institution to conduct CSR audits and determine the parameters of CSR reporting and terminology (Filios, 1984), but research as early as a decade ago suggests the public doubts the ability of accountants to conduct accurate audits in the realm of CSR (Epstein, 1994). Furthermore, as of the last few years, the demise of Andersen and other publicized corporate scandals pointing back to accounting practices has blighted the ethical credibility of accountants. The field is looking for new institutions and organizations to competently and ethically address the issues of corporate responsibility (Murray, 2003). This need could be filled by other institutions, such as the Fair Labor Association, which is one of many that have been actively involved with investigations of offshore operations and have expressed interest in widespread CSR auditing (Florini, 2003). Additionally, other types of consulting, investigating, and even law firms may quickly become qualified to create statements and/or conduct CSR audits as the market for these services continues to rapidly expand (Murray, 2003). Conclusion The Nike case illustrates the decisions of a company acting to remedy the problem of negative public image and aggressive criticism in an environment of legal uncertainty. The company responded to this criticism using multiple PR tactics, and as a result, entered an unusual forum that blended the relatively tolerant ethical standards of typical advertising with the stringent moral requirements of CSR reporting. This study makes no judgment of the honesty of Nike’s statements or integrity of its decisions, but instead presents the decisions as an example of the challenges inherent in communicating business practices to the public. As more companies enter the multinational arena, and the public becomes more aware of social and environmental conditions in developing countries, the need for sufficient, honest disclosure of corporate conduct will continually increase (Robertson and Nicholson, 1996). Laws and models surrounding the reporting of operating practices have yet to be established, but the Nike case has drawn out the underlying ethical considerations for disclosing this kind of information and has brought national attention to the need for better standards. Additionally, corporate America still needs to buy in to the idea of full disclosure of social responsibility practices. This will be accomplished as responsible companies, investors, and consumers continue the current trend of making social responsibility a priority in production, finance, and purchase decisions. Recent research indicates that moral operations are profitable, and many more investors screen companies each year for responsible practices before investing. As CSR disclosure continually receives more attention and legitimacy, the public and private sectors will recognize the need for national standards and prepare to accept them. As transparency increases, companies continue to confront challenging ethical decisions, and the study of Nike Corporation’s struggle through a public relations crisis can be helpful in illustrating some of the dilemmas and alternatives a company faces when disclosing information to the public. The fact that Nike has brought these ethical and legal issues to light provides us a definitive example to reference when assessing the risks involved with corporate communication.