What does American Apparel’s bankruptcy mean for responsible business?

This week’s announcement of American Apparel’s bankruptcy and subsequent filing for Chapter 11 protection could spell the end of a unique experiment in responsible business.

Although it has been a fixture along with global retailers such as Zara, Gap, and H&M on high streets across the world for the past decade or so, American Apparel is unlike virtually all of its counterparts in the apparel industry when it comes to responsible business. While other global clothing companies outsource their production to suppliers in emerging economies, American Apparel has steadfastly stuck to a made-in-America philosophy, promising that its clothes are ‘sweatshop free’.

According to the company, the average American Apparel stitcher earns more than $2,000 month, along with a range of employee benefits including subsidized health insurance, an on-site medical clinic, subsidized public transport, and English classes. By contrast, according to the ILO, garment workers in key Asian export countries Vietnam and Cambodia earn around $80 monthly while the minimum monthly wage for garment workers in Bangladesh is a rock bottom $39.

Given that American Apparel’s competitors therefore enjoy such drastically lower labour costs by sourcing from overseas, it may come as little surprise to many that the company is facing major financial difficulties. How could it even have hoped to compete with the likes of its fast fashion rivals Zara and H&M when its cost profile is so unfavourable? Isn’t it simply inevitable that it would eventually go bankrupt?

The answer to that question is not as obvious as it may seem.

The company itself has often acknowledged that its approach is, as it says on their website, “not the easy road to travel”. Nonetheless, it claims that its vertically integrated business model offers efficiencies because everything is completed in-house, and furthermore it enables better quality control and provides for a faster response to the rapid changes in the fashion industry. According to the company, its approach is not only more ethical, but more financially responsible too.

There is some truth to these claims, but even so, it is hard to square them with the huge differences in production costs enjoyed by their rivals. There is little doubt that American Apparel’s ethical stance has, and continues to, put it at a major cost disadvantage in an increasingly price conscious category.

Of course, higher labor costs are not in themselves necessarily such a problem, providing either that the company can enjoy cost advantages elsewhere, or that its customers are willing to pay for a premium for the additional value they bring. Again, American Apparel can make something of a case here. It spends considerably less on marketing than many of its competitors by producing advertising in-house and adopting a highly controversial, sexualized approach that garners much greater attention than is warranted by its ad spend. Also its core customer base of hip teens and 20-somethings do typically applaud its sweatshop free position, at least in so far as they have heard about it - the company has generally eschewed an explicit ethical positioning in favour of a “sex sells” approach to marketing. The problem is that however much some of their customers might support a made-in-the-USA philosophy, there is little evidence to date that a sufficiently large slice of the mass market fast fashion category is willing to pay the extra $5 or so that a t-shirt produced in the US costs just to assuage their consciences.

Despite the numbers not quite seeming to add up, until just a few years ago, American Apparel did seem to make it all work. Throughout the 2000s it was seen as offering something unique in a crowded and quite bland retail space – a combination of the edgy aesthetic, clever marketing, and a seeming alignment of values with its core customer base helped inspire a cultish devotion that quickly took off. By the mid 2000s the company was expanding rapidly across the world, transforming from a predominantly manufacturing-based company to a global retail giant almost overnight. It was a lauded US success story.

And despite the cost issues with its made-in-the-USA approach, it was not labor costs that ultimately brought on American Apparel’s downfall - but they have played a role in preventing it getting back on its feet.

So if not labor costs, what did cause the crash? Although it was clearly a combination of factors, the fact that its rapid international expansion coincided with the 2008 financial crisis probably changed the course of the company more than anything else. With markets shrinking, the company quickly found itself mired in unsustainable debt, with a major cash flow problem. A run-in with the immigration authorities in 2009 then led to severe staff shortages and supply hold-ups, while a hike in global cotton prices subsequently drastically cut into the firm’s profitability. Compounding the problem, its competitors responded to the new market realities by stripping out costs and forcing down prices. This left American Apparel with a shrinking customer base ready to pay for its now seemingly overpriced basics.

At this point, it’s ethical sourcing strategy probably did hold it back from cutting costs as ruthlessly as its competitors. A retrenchment of its retail operations, several attempts to refinance its debt, and some last minute angel investors held off bankruptcy until now, but with the company unable to turn a profit since 2009, it has simply not been enough. Even the ousting of controversial founder and CEO Dov Charney last year did little to engineer a turnaround in fortunes. This week’s announcement seems to be merely the next chapter in the ongoing battle to resuscitate a severely sick patient.

So what does the rise and fall of American Apparel mean for responsible business? The bottom line is that the company’s strategy just about worked while times were good and the economy was strong - and probably even added to its distinctive appeal. But in more difficult circumstances the challenging economics of domestic production reduced the company’s ability to compete effectively in the marketplace. With better timing, deeper pockets, or just a little more luck, catastrophe probably could have been avoided, but even then American Apparel showed some alarming financial mismanagement and some clear unwillingness to adapt its formula despite shifting marketplace dynamics. As the company says, “Manufacturing in America requires risk taking and long-term investment,” but as with many aspects of responsible business, it takes great skill and foresight to maintain the alignment of ethics and profits over time.

Photo copyright Emily Burnett. Reproduced under Creative Commons Licence

Who will be the business ethics winners and losers at the London Olympics?

Corporate involvement in the Olympic Games continues to expand in size and significance. This year, the 2012 London Olympics will boast sponsorship on hundreds of millions of dollars in corporate sponsorship and tie-ins. But as the corporate money flooding into the Games increases, so too do the attendant ethical risks. For all the advantages of being associated with one of the world's greatest and most watched sporting events, it also puts you at the mercy of activists and other critics ready to use the Games' huge pulling power to target big brands. Adidas, BP, Dow Chemical, McDonald's and Rio Tinto are all currently in the firing line regarding their involvement in the London Games. So the big question for the companies is: come closing ceremony time, who are going to be seen as the ethics winners and who will be the ethics losers?

 Four years ago, the 2008 Beijing Olympics also brought to the fore some major ethical risks for the Games' sponsors, mainly because of the potential for being tarnished with the human rights and environmental pollution problems facing hosts China. This time around, it is less the hosts than the companies themselves, accused of anything from using their sponsorship to greenwash their more unsavory practices (BP, Dow), to corrupting the ideals of the Games (McDonald's), and exploiting sweatshop labor to produce official Games sportswear (adidas).

The most tangible of these criticisms regards the sweatshop allegations. Over the years, adidas has worked hard on its ethical supply chain practices, and was one of the forces behind the Sustainable Apparel Coalition initiative. But having already dropped off one list of the most ethical companies this year, the accusations of poor labor practice in the factories producing the official kit for the Great Britain Olympic team will no doubt strike a significant reputational blow to the company.

Let's be clear here. It's unlikely that adidas is actually an outlier amongst apparel companies. A decent investigation into pretty much any global brand's supply chain could probably surface some major failures to live up to their impressive sounding codes. Not because they don't want to meet their commitments, but because there are always going to be suppliers that cut corners given the low cost, high flexibility model of production foisted onto them by the big brands. Adidas becomes a useful target though because of it's high profile in the Olympics. That's the risk that comes with the territory these days. Nike got it right 4 years ago when they published their special report on their Chinese operations months before the Olympics took place thereby taking any sting out of any likely exposé.

As for the so-called green washers, they also shouldn't be too surprised about the controversy they have sparked. BP as an official "sustainability partner" for the Olympics? Wouldn't it make sense to get your sustainability reputation back before wrapping yourself in such a cloak? Maybe they think that at rock bottom the only way you can go is up. But public trust needs careful nurturing if you are going to restore it after a major catastrophe. Not symbolic gestures.

If anybody should know how hard it is to rebuild public trust, it's one of the other Olympics sponsors currently in at the losing end of the PR battle, Dow Chemical. The beef with Dow goes back to 1984, and to a company that they didn't even acquire until 2001, Union Carbide. That the compensation question for Union Carbide's role in the Bhopal tragedy should still be rumbling on is testament to the importance of dealing effectively with legacy ethics issues. Here we are nearly 30 years later with Dow's banner role in the Games being the subject of front page news in India, the UK and elsewhere.

There's already been a high profile resignation from the watchdog supposed to monitor the sustainability of the 2012 Games as a result of the company's sponsorship deal, whilst over in India, the Government itself has now launched a diplomatic offensive against the company after it failed to persuade the London Olympics Committee to drop the firm as a sponsor. There has even been talk of a national boycott of the Games by India, but this currently looks unlikely. 

Let's get this one clear too though. Dow is no evil corporate monster, and has been doing some fine work in the sustainability space. But it does have a legacy problem still to deal with. And until it reaches a more easy relationship with key opinion formers in India (which, frankly seems unlikely in the near future given all that has happened ..... and when the response of the CEO to the current troubles is that any opposition to their sponsorship is "beyond belief"), it should just steer clear of huge global events like the Olympics. Any PR firm worth it's salt should know that. The $10m sponsorship money could have been spent in much more effective ways. Why take the risk of stirring up old problems - and more than that, give them a global airing - when you don't need to? Hubris, insensitivity, poor research, or just bad PR? It would be interesting to find out.

The bottom line is that the Olympics offers great opportunities for corporations to connect with a global audience. But those opportunities do not come risk free. Companies need to have their reputations in their best possible condition before they take such a plunge. And they need to have the PR department, the CSR team, risk management, and the senior leadership working together from the get go to minimize any damage.  Just ask any Olympic athlete. Winning at the Games is all about preparation, dedication, commitment, and having the right team in place to get you there. Business should be no different.

Photo by the|G|™. Reproduced under Creative Commons Licence

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Down-under, are things upside down?

Last week we talked about executive pay and bonuses. If you read or watch the news today in Australia you will come across an entirely different story though. In a time when bankers have to be told off by governments to stuff their pockets, CEOs get stripped of royal titles for their reckless actions or presidential hopefuls turn out to be ruthless maximizers of personal wealth – this story sounds like a fairytale.

Ken Grenda, the owner of a bus operating and manufacturing company in Melbourne has given all his staff a AUD 15 million bonus (US$ 15.3m), averaging $8,500 per employee with some receiving as much as $30,000! The background of the payout is a sale of the family-owned company which netted Ken some $400m. His rationale:

"A business is only as good as its people, and our people are fantastic. This is to recognise that. We have had people here who are second generation, and one fellow in the same job for 52 years. We have grown from just four bus routes ... in 1945 to operating 1300 buses in Melbourne, Adelaide and Perth. You only get there if you have good people."

Now that’s exceptional. And good on Ken and his family – sure enough. The facebook page of the event is full of praise, amazement and disbelief. It is indeed a gesture which is rare, if not unprecedented in today’s economic climate.

It makes you think though. Ken’s rationale, above, is perfectly sound. Especially in a service company, the personnel at the customer interface, such as bus drivers, can make all the difference. In a time, when bonuses have become a common instrument for people at the top, there is no good reason to exclude workers from the same thinking.

Recently, The Guardian has published a piece on the intellectual heritage of the current situation of excessive bonuses. It is really hard to understand why Michael Jensen and his colleagues, when suggesting share-price related remunerations for top management, never thought to include the lower ranks.

The real question here though seems to be why those performance related elements have to be just this discretionary, pseudo-feudal benevolence of a rich guy. It’s a great gesture of philanthropy, as some bloggers say, but if employees are really so vital to a company’s performance why not make it a right of the employee? After all, $15m of $400m is not all that much. What would be a fair share? And who should decide about that?

As we have commented earlier in this blog, there is a funny bifurcation in the debate on CSR and industrial relations.  From a CSR perspective we should praise the Grenda family; but from an industrial relations perspective we might ask the question why – if what Ken Grenda says above is true – the employees should not have a right to their share in the growth of the company’s value to begin with?

It all points to the role of worker’s representation and collective bargaining. These used to be the classic tools to make sure that workers participate in a company’s overall prosperity. But Australia and New Zealand have seen the highest declines in trade union membership over the last two decades, between roughly 30 to 50%. In that sense then, Australian industrial relations are pretty similar to the rest of the world and Grenda's example more a one-off than something of a rule. Other solutions might be share ownership of employees, which apart from examples such as John Lewis (department stores, UK), Westjet (airline, Canada) or W.L. Gore (Gore-Tex, US) have remained exceptions.

In as much as gestures such as that of Ken Grenda deserve praise and respect as a single incident – they also raise these more general question of how sustainable this approach is. As critics in the Australian blogosphere point out, is this just the final golden handshake, before the new Brazilian owners of Grenda take over and expose workers to an entirely new game to make their new investment pay off?

Picture by Natinaal Archief, reproduced under the Creative Commons License.

Labour rights - back to the future?

While a lot of the topics we comments on in this blog are usually about either international events or the latest, contemporary developments, it is good to remember that some of the age old issues in business ethics are worth revisiting from time to time.

One of these is fair wages and the right to unionise. In North America these issues are currently high on the agenda as if we were still in the dark ages of capitalism in the 19^th century. This was nowhere more surprisingly evident than in last week’s instalment of ‘Real Time’ with Bill Maher. The show took off with an interview of Chesly ‘Sully’ Sullenberger. You remember, the pilot who landed his plane for lack of other options safely into the Hudson River in January 2009, after both engines had been struck by birds. Since then, Sullenberger, with his cool attitude and gigantic moustache not only reminded us what a real pilot should look like, but also became something of a hero.

What is interesting though is what he’s currently using his fame for. Before Congress, some time ago, he focused attention on some of the crucial ethical issues in his industry. The pay of most pilots and airline staff has dropped by around 40% and most employees – including Sullenberger – have lost their pensions when their airlines filed for Chapter 11 bankruptcy – as most large airlines in the US have done.

This silent infringement of workers’ rights has gone on for some time – but has received little attention.  One of the big events – next to celebrity campaigning by ‘Sully’ – that did draw the attention to this was the crash of a Colgan Air jet in Buffalo only a month after the New York incident in February 2009. Meanwhile, a PBS documentary unearthed some interesting details, such as that most commuter airlines, like Colgan Air (a subsidiary of Continental Airlines), pay their pilots below a living wage – between US$16 to 20,000! The documentary suggests that one major contributor to the air crash was pilot fatigue and working conditions. The co-pilot, for instance, had to sleep in the airport the night before because she felt unable to afford a hotel in Newark before starting work in the morning.

The interesting ethical issues here clearly point to the need to revisit and re-apply some stakeholder thinking to the airline industry. While customers have seen falling prices in air tickets in the last decades this seems to have largely taken place at the expense of employees. It is somewhat tragic that it took a plane crash killing all 49 people on board to alert the public to these imbalances.

Now, the issue of a living wage is something we often discuss in the context of so-called ‘developing’ countries. But these questions obviously also need to be addressed in many industrialized countries. In some ways, the US ‘leads’ the way here, especially with respect to the big controversy in recent weeks over new legislation, discussed in the states of Wisconsin, Ohio, Florida and New Jersey, which substantially cuts back the rights of public sector workers to organize and bargain collectively with their employers.

Sifting through the US papers these days, it is a little bit like good old class warfare all over again. Union membership, long in decline, is surging: the American Federation of State, Country and Municipal Employees (AFS) has grown from 900,000 to 1.4 million members in the last couple of years.

Academically, it is interesting to see that these bread-and-butter labour issues initially did not have their natural home in the business ethics curriculum. Rather, these things are mainly studied among ‘Industrial Relations’- or ‘Labour Process’ scholars, with their separate conferences, journals and textbooks. With the return of these issues to the fore, it is clearly also time for the business ethics and CSR communities to start looking closer to home. Ahead of the curve here is the Aspen Institute which has launched an initiative on Low Wage Workers. This involves a teaching module for use in MBA courses and a white paper looking at low wage work in the US economy. Let's hope it's the spur for further action that we need.

Photo by Rochelle Hartman, reproduced under Creative Commons Licence.