Adidas: Responsible Management Review 2018 PDF

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Assessment 2 – Case Study Analysis Responsible Management Audit: Adidas AG Module: Contemporary Issues for Business & Society MSc International Operations and Supply Chain Management Stephen Espie 1/8/2018 Contents Executive Summary ..................................................................

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Assessment 2 – Case Study Analysis

Responsible Management Audit: Adidas AG Module: Contemporary Issues for Business & Society

MSc International Operations and Supply Chain Management

Stephen Espie 1/8/2018

Contents Executive Summary................................................................................................................................. 2 Introduction ............................................................................................................................................ 3 Human Rights .......................................................................................................................................... 4 Labour Rights .......................................................................................................................................... 5 Environment ........................................................................................................................................... 6 Anti-corruption ....................................................................................................................................... 7 The Call for Transparency in Supply Chain Management ....................................................................... 8 Responsible Management Audit: Key Criticisms .................................................................................... 9 Governance ........................................................................................................................................... 11 Conclusion ............................................................................................................................................. 14 References ............................................................................................................................................ 16 Appendix A: Evidence Portfolio ............................................................................................................ 19

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Executive Summary Over the last three decades, supply chains have become increasingly fragmented within consumer industries, especially in the garment industry, making it increasingly difficult for firms like Adidas to know of the real working environments that exist at its supplier sites. Furthermore, anti-sweatshop campaigns and media investigations have provided evidence of disturbing working conditions, where factory workers as well as children, have been exploited and forced to work under threatening conditions. The demand for ethical consumer goods and services has been showing radical growth and with the internet and social media redefining the global landscape, consumers frequently purchase products specifically because of their ethical reputation. This has led to increased pressure on corporate companies such as Adidas to improve its operational strategy and become more transparent. This Responsible Management Audit, looks to determine whether Europe’s largest sportswear manufacturer, Adidas endeavours to comply with the Ten Principles proposed by the United Nations Global Compact and takes meaningful steps to improve performance, or if the firm simply uses Corporate Social Responsibility Reports as a reputation management tool.

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Introduction United Nation Global Compact (UNGC) is a United Nations initiative launched in July 2000, which promotes responsible business practices and encourages businesses worldwide to abide by a set of ten ‘universally accepted’ principles in areas concerned with human rights, labour, the environment and anti-corruption (Figure 1). The UNGC has become the world’s largest corporate social responsibility enterprise, with approximately 9,727 companies and over 4,000 non-business participants across 162 countries (United Nations, 2017). The main aim of the UNGC initiative is to address the ethical problems associated with corporate activities, by providing a platform for companies to conduct business responsibly and assist them in aligning their operations and policies within the Global Compact principles (Rasche, 2009). Furthermore, the UNGC supports companies to take strategic actions to advance broader societal goals and encourages them to produce collaborative solutions to the most fundamental challenges facing both business and society (Kell, 2012). The UNCG requires its signatories to produce an annual public report known as a Communication of Progress (COP), which provides a description of practical measures an organisation has taken in implementing the four principles and to what extent these measures have been successful. This report enables firms to communicate their social, environmental and financial activities with key stakeholders, as they are made freely available on the UNGC website (United Nations, 2017). Public reports now total over 49,000 submissions since the initiative began and there has been significant growth not only in volume of submitted reports but also in sophistication in recent years (United Nations, 2017). This is mainly due to the demand by key stakeholders such as investors, governments and society at large. COPs enable these groups to make 3

decisions based on the information contained within these communications as they reveal specific visions and attitudes towards sustainability of a particular organisation (Dawkins & Lewis, 2003). Figure 1: The Ten Principles of the UN Global Compact

Source: United Nations Global Compact; Network Bulgaria 2016. Pg. 13

Human Rights Human rights are considered basic, undeniable rights that are inherent to all human beings without exception (Human Rights Act, 1998). The notion of human rights is derived from the 18th century British philosopher John Locke, who conceptualised the idea of ‘natural rights’ or moral privileges that all humans should be granted, and which should be upheld and ultimately protected (Crane & Matten, 2016). Human rights include but are not limited to all civil, political, economic, social and cultural rights, with the belief that all humans, irrespective of their gender, age, race, religion or nationality should be allowed to universally enjoy (Nowak, 2005). 4

The human rights approach has had a very profound effect in forming the law and statues of modern democratic society (Levy & Patz, 2015). The importance of this should not be underestimated as these basic rights have become enshrined within the Universal Declaration of Human Rights, delivered in 1948 by a group of global representatives of differing cultures and backgrounds. This document has led to a unified worldwide standard in the rights of citizens and has become the blueprint to the way business must approach the ethical treatment of human rights (McCrudden, 2008). The ten principles of the UNGC further highlights the significance in this area, which lists human rights as its first two principles that companies must follow (Figure1). The respect and protection of these rights, largely shapes how society and essentially potential consumers view the values of corporations and multinationals (Goswami & Ha-Brookshire, 2015).

Labour Rights Labour rights, founded on such matters as freedom, dignity and capability are entitlements specific to a worker and can be applied collectively or to an individual (Crane & Matten, 2016). These rights include but are not limited to the right to freely choose employment; fair conditions in the workplace which can cover a wide variety of issues from a just wage to equal opportunities (Edwards, 2011). Employees also have the right to join trade unions and to be represented by them as well as being protected from discrimination and unfair dismissal (Robinson, 2010). Deakin and Wilkinson (1998) identified three key requirements on this topic of interest, first being the need for a clear contract between employee and employer, recognising the employment relationship as a distinct object of regulation, and promoting control through labour laws. The second precondition is centred on ‘labour standards’ such as minimum 5

wages, basic health and safety procedures (substantive standards), facilitating negotiation or representation of workers/employers (procedural standards) and enabling career progression (promotional standards). Lastly, Deakin and Wilkinson (1998) highlighted the importance of putting such laws and standards in place, stating that employment tribunals and trade unions must act accordingly to enforce and uphold conditions of employment. The International Labour Organisation (ILO) embraced the Declaration on Fundamental Principles and Rights at Work and is the basis of the labour principles within UNGC (Figure 1). The declaration represents political commitment by governments to promote and safeguard basic workers’ rights; it has also acquired new importance in the world of business and has increasingly become a reference in the context of corporate social responsibility (CSR) (International Organisation of Employers, 2006). The declaration has been recognised as an instrument for addressing social justice and generating decent work by supporting improvements in the workplace beyond legal requirements. Companies that uphold labour standards are likely to have greater access to skilled, productive talent and reduce any risk of reputational damage and legal liability (Crane & Matten, 2016).

Environment The UNGC emphasises the need for businesses to be mindful of and take steps towards sustaining the environment through responsible efforts (United Nations, 2017). The Rio Declaration on Environment and Development, commonly known as the Earth Summit produced a document intended to advice countries in future sustainable development initiatives (Palmer & Nursey-Bray, 2007). This declaration was signed by over 170 countries and the international community gathered together on two occasions to

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examine the headway made in realising the principles set out in the document (Kates et al., 2005). While the Earth Summit did in fact raise awareness, evidence shows that little progress had been achieved. The UNGC highlights the importance for business to realise their responsibility and that of all stakeholders to protect and strive to further improve their environmental footprint (Cetindamar, 2007). The three principles on sustainable environment embodied in the UNGC originated from the Rio Declaration and encourages the advance and spread of technologies which are more environmentally friendly so that future generations can enjoy the same experience and standards of this generation (United Nations, 2017).

Anti-corruption Corruption can take many forms that can include bribery, embezzlement and extortion and when professionals abuse their positions for personal gain, the efficiency of a business suffers (Stanford Graduate School of Business). To help address the issue of corruption, member states of the United Nations (UN) introduced the United Nations Convention against Corruption (UNCAC), which came into force December 2005. The treaty was designed to implement several anti-corruption measures, which focus on prevention, law enforcement; international collaboration, asset recovery and information exchange (United Nations, 2017). In 2016, the Institute of Business Ethics revealed bribery, corruption and facilitation payments were the most common issues of unethical practices reported. Furthermore, recent results taken from the Corruption Perceptions Index 2016 showed that the ratings of most countries declined rather than improved, with a global average of less than 50. Corruption is clearly widespread and even more so in those countries at the lower end of 7

the index (Transparency International, 2017). The UNGC maintains that all business should take a firm stand against any form of corruption and appeals for a collective action on the matter, as they believe the scale of the issue is too complex for any organisation to confront alone (United Nation, 2017).

The Call for Transparency in Supply Chain Management Since the 1980’s supply networks have become increasingly complex especially in consumer industries such as the apparel industry, as a result, lead firms such as Adidas, Nike and Puma are left with an increasingly arduous task of being able to trace suppliers within their own production, let alone have any comprehension of the working conditions that may exist at a particular site (Bostrom et al., 2012; Egels-Zanden, 2007). Currently, through technological advancement and with social media redefining the global landscape, consumers and the public now have greater access to information concerning a wide selection of corporate sustainability practices (Wagner et al., 2009). As such, questionable practices have been brought to light through anti-sweatshops campaigns, resulting in reputable damage to large corporations (China Labour Watch, 2010). These campaigns have attempted to hold firms such as Adidas, GAP and Nike accountable for horrifying conditions under which workers laboured (Powell and Zwolinski, 2012). The ethical consumer market has been showing significant growth in recent years as customers do not want to be associated with any organisation with questionable corporate practices and as a result are beginning to boycott particular products and even brands (Ethical Consumer Markets Report, 2016; Harrison et al., 2005). To satisfy stakeholders, improve brand image and maintain sales, companies increasingly look to communicate their sustainability efforts by publicising CSR or COP reports on their 8

social, environmental and financial activities (Gray et al., 1988). Although this level of disclosure and transparency can drive performance, it can also be argued that such forms of CSRs are merely employed as a reputation management tool (RMT) rather than appropriately addressing unethical practices (Kavitha and Anita, 2011). The following section of this report looks to examine how well Adidas, Europe’s largest sportswear manufacturer, operates and executes its CSR objectives.

Responsible Management Audit: Key Criticisms Over the years, Adidas has received criticism, mainly in regards to poor working conditions discovered within its supply chain (Burke, 2000; China Labour Watch, 2008; Marks 2012; Rubenfire & Shahin, 2012). An investigation by the Guardian in 2000 revealed children as young as 15 years of age had been discovered working in a factory in Jakarta at one of Adidas’ manufacturing sites. It was understood children were working excessive hours, with pay well below the recommended living wage suggested by the ILO. The investigation also discovered in the previous year, a worker from a Bangkok production site, claimed to be working 12-hour shifts for £1 per day. That same employee who was part of a union movement, attempting to win more worker rights was eventually sacked and labelled as a troublemaker by factory management. In 2008, the Sunday Times issued an article titled ‘Adidas workers on £11 a week in China’, evidencing conditions that were in direct violation of Chinese law and the organisations’ own values. On a more serious note, between July and October of that year, due to terrible working conditions, four workers committed suicide at a Yue Yuen Industrial factory, one of the major design manufacturers of Adidas products (China Labour Watch, 2010).

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Adidas successfully secured the contract to become London Olympics and Team GB’s official sportswear partner in 2012, however shortly before the Olympic Games, an investigation by the Independent revealed widespread violations of workers’ rights within Indonesian factories. The report claimed female factory employees had to sacrifice their lunchbreak to prevent them from being locked in a room or slapped in the face for failing to keep up with production. Additionally, later that year, Adidas were guilty of mishandling severance payments of former Kizone workers (one of Adidas’ former suppliers) whose owner had fled the country after P.T. Kizone was declared bankrupt (Rubenfire and Shahin, 2012). The incident sparked huge controversy as Nike, which also had products produced by the Indonesian manufacturer paid out $1.5 million in compensation, whereas Adidas chose to offer food vouchers and job relocation services to former employees. These facts led to the President of the University of Michigan, Mary Sue Coleman to publicly express her concerns over the lack of response from Adidas, who at that time had a $60million partnership Adidas at that time (The Michigan Daily, 2012). Low wages, excessive overtime and abusive treatment of workers is a theme that regularly arises throughout the supply network of Adidas, despite the organisation having its own code of conduct (COC), which they term ‘fair play’ to showcase its own values, commitments and expectations towards ethical standards (Adidas Group, 2016). The American based organisation China Labour Watch (CLW), a society dedicated to promoting fairer employee rights of Chinese workers argued that even with corporate codes of conduct, government policies and legal enforcement, more needs to be done to end sweatshop manufacturing.

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Governance The CLW has monitored Adidas suppliers and has engaged in many discussions with the apparel giant regarding its’ labour conditions. Over the years CLW have produced official reports as well as press releases on the performance of over 10 different factories of Adidas, bringing to light many of the inadequacies previously mentioned. Following these reports, Adidas did acknowledge many of its failings, which prompted them to come up with its own action plan (China Labour Watch, 2010). In 2015, Adidas launched its’ new long-term business strategy designed to highlight its 5year commitment to meet society’s evolving expectations of business practices and its own values (Figure 2). The ambitious new framework expresses a real sense of ownership and responsibility in all areas of the firm’s operation, according to Herbert Hainer, Adidas Group CEO at the time “Be it spaces where sport is made, sold or played. In short, spaces of sport are endangered and we want to be their guardians” Figure 2: Sport needs a Space; Adidas Business Strategy

Source: Adidas Group; Sustainability Progress Report 2015, Pg. 11 Adidas has received many awards and recognition in recent years, in 2016 it was chosen for inclusion in the Corporate Human Rights Benchmark (CHRB), highlighting significant improvement in areas of its human rights policy, processes and performance. The 11

organisation was ranked favourably against 98 corporations, coming second in the apparel sector and fifth in the overall rankings (CHRB, 2016). The firm achieved improvements in Human Rights policy, through empowering workers within its supply chain, by refining its grievance systems and providing tailored training workshops to many of its strategic suppliers (CHRB, 2017). To be closer to workers, Adidas introduced the ‘Workers Hotline’, providing over 290,000 workers the opportunity to anonymously ask questions, make suggestions or express any concerns via SMS and is considered an effective way to allow factory management to respond quickly to any issues raised (Adidas, 2016). The firm also conducted a pilot survey to further improve employee satisfaction, which involved 500 participants (supervisors and workers) from three Indonesian factories. The survey provided an insight into workplace conditions and was used to help identify strengths and weaknesses, which revealed potential improvement opportunities. Although the survey only voiced the opinions of a small minority, it did produce positive learnings and the project is being rolled out to more than 80 factories across Asia this year. It is likely that these proactive measures used for inclusion and empowerment of supply chain workers, helped promote fairer working conditions, and led to the firm being ranked first in class by KnowTheChain evaluation of forced labour resource (CHRB, 2016). Adidas launched a new project in 2015 called ‘Women’s Empowerment Programme’ which look...