Crane and Matten have left the building

This blog is no longer being updated. We had seven great years writing for the Crane and Matten blog but due to a variety of factors we decided it was time to move on. The site will continue to be hosted here though so that our backfile of articles is freely available.

We would like to thank all our readers for taking the time to read and engage with us on so many critical corporate responsibility issues over the years. We hope that you continue to do so. You can follow our latest thinking on Twitter at @ethicscrane and @dirkmatten. We also continue to post on the following blogs:

Andrew Crane is now Professor of Business and Society in the School of Management at the University of Bath, UK where he writes on the Bath Business and Society blog.

Dirk Matten is still the Hewlett Packard Chair in Corporate Social Responsibility in the Schulich School of Business at York University, Canada and is an occasional guest blogger for the Business of Society blog of Copenhagen Business School.

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

The Volkswagen diesel deception - 5 key questions

News about Volkswagen's (VW) emerging emissions test rigging scandal makes one wonder if there is ever a story in business ethics too preposterous to be true. But it certainly raises some interesting and important questions about the nature of corporate responsibility that demand some pretty quick answers.

In some ways, it is not a complicated story, and even the CEO Martin Winterkorn today admitted to the firms culpability and apologized. "We totally screwed up" the carmaker's US chief was also reported as saying. So, VW deliberately manipulated the software that manages their diesel engines so that the emission data in test mode appeared significantly lower (up to 40%) than in reality. And this is not just pretending the cars are more fuel efficient than they really are. The EPA clearly states that the substances whose level of emissions were concealed:

"penetrate deeply into sensitive parts of the lungs and can cause or worsen respiratory disease, such as emphysema and bronchitis, and can aggravate existing heart disease, leading to increased hospital admissions and premature death."

That wording alone should strike considerable fear into VW board. The company might face criminal investigations and court proceedings that might even compare the tobacco industry or the financial sector's travails. Already the company could be faced with fines up to $18bn and a massive recall with 11m cars thought to be affected.

From the perspective of corporate responsibility then the fascinating time has just started - how on earth could that happen? Here are a few questions to consider over the next few days and weeks as the scandal unfolds.

1. Embedding corporate responsibility and sustainability

Volkswagen is one of the European companies that really seemed to embrace 'Sustainability and Responsibility' from quite early on - and much ahead of many of its German rivals who relied on the social responsibilities of business being part of the traditional tightly regulated, corporatist consensus governing the national economy. How is it possible that a company committed to some of the core values of corporate responsibility could so blatantly cross the line into not only unethical but clearly illegal practice in a key area of its responsibilities? Is this just another greenwash case to fuel further cynicism about the CSR commitment of corporations?

2. Is it an industry phenomenon, or just one bad apple?

The debate about companies providing overly optimistic fuel consumption data is an old one, and a number of other companies have faced problems with overstating the frugality of their cars. VW's rigging of the tests takes the game to a whole new level, but does this mean it is an outlier or just the first one to get caught taking things too far?

3. What was VW thinking in terms of not getting caught?

It would be interesting to find out what the discussions within the company looked like when the software used to rig the tests were devised and implemented. VW must have been convinced they would not get discovered. What does this say about regulation of the auto motives industry, especially when they were eventually rumbled by a relatively unknown clean air group that was actually hoping to show that diesel cars were clean. Why did nobody within the company conceive that in a highly scrutinized industry, such as the global automotives industry, these practices would not get examined?

4. How far up the hierarchy did knowledge about these practices go?

When Amazon got into the headlines recently, Jeff Besos issued an immediate statement that he had non knowledge of the practices and did not approve of them. So how much did VW senior executives know? It is hard to imagine that this was just the work of some 'rogue engineers', but at the same time it is curious that VW has tried to protest its innocence for more than year since the falsified tests were uncovered, blaming a software malfunction - only eventually coming clean when the EPA threatened not to issue them with environmental certifications for their 2016 models. As one reporter noted, the VW CEO is a detail-oriented engineer himself: "It's difficult to imagine that a man who fixates on such minute details as the noise a steering column adjuster makes would know nothing about active manipulation of diesel emissions while he was in charge." So what does the scandal say about the corporate culture at VW and the role of its leaders in setting the ethical tone?

5. How can this happen in a quasi-public institution such as Volkswagen?

VW, from the outset, had a rather broad social mission. The company's mission has been from the outset to provide Germans with mobility. Even today, the social mission lives on: the company claims to "aspire to shape the mobility of the future – making it responsible, environmentally compatible and beneficial for everyone." It is even part-owned by the government of Lower Saxony, which still owns a controlling 12.7% share of the company. So this is not a company solely controlled by some profit maximizing hedge funds or other purely profit driven investors. The decision to try and cheat the regulators however has ended up wiping billions off the value of the company in a matter of days. So what should we conclude about whether ethics pays or not and whether social purpose can really be integrated into the corporate form? 

There are many more aspects to the story. At the end of the day, the 'green car' and VW's 'BlueDiesel' will maybe just count among the many ways car companies (and yes, the rest of us) try and disguise the fundamental ecological contradictions of our modern automotive civilization. But it will also be fascinating to watch the details of this story unearthing the kind of decision making prevailing at supposedly responsible companies. VW's original motto, 'Kraft durch Freude' or 'strength through joy', it certainly won't be though. 

Photo by John Matthies. Reproduced under Creative Commons Licence

Exciting Case Competition with Final Round in Davos 2016

Decarbonize Norway’s sovereign wealth fund
in this year’s Business for a Better World MBA case competition

Team registration is now open for the third-annual CK-Schulich Business for a Better World case competition, a partnership between Corporate Knights magazine and York University’s Schulich School of Business.

With a prize pool in 2015/2016 of $10,000, the final round of this MBA competition will see three top teams present their case analysis in front of a live panel of high-profile judges in Davos, Switzerland, coinciding with the World Economic Forum in January.

Student teams will be asked this year to decarbonize the holdings of the Norway Government Pension Fund Global, the largest sovereign fund in the world with a value of $940 billion (USD). Managed by Norges Bank Investment Management, the fund is commonly referred to as The Oil Fund because it has been built from the surpluses of Norway’s petroleum income. Teams will have four key objectives:

• Minimize the carbon footprint of the fund;
• Reduce risks that might strand assets;
• Maximize returns and engagement impact with companies;
• Position the fund to thrive in and drive a world that does not exceed an average 2-degree temperature increase.

Throughout this competition, students will have access to a tool, designed by Corporate Knights, which will help them assess the carbon profile of the fund’s holdings and allow them to watch this profile change as the holdings mix is altered.

“With our first two competitions, teams were asked to broadly improve the sustainability performance of a case subject. This year, apropos to the lead-up of the Paris climate summit in December, we’re taking a different approach targeted strictly at carbon,” says Tyler Hamilton, editor-in-chief of Corporate Knights. “The case subject will be a sovereign fund worth nearly a trillion dollars. The MBA team that can show the best returns with the lowest portfolio carbon footprint will take the top prize, and send a strong message to investors around the world.”

For more details or to register a team, visit http://www.corporateknights.com/affiliates/2016contest/

The registration deadline is October 16. Case details will be released on October 2, so teams that register early will have an advantage.

Contacts:

Toby Heaps, CEO, Corporate Knights, toby@corporateknights.com

Dirk Matten, Professor, Schulich School of Business, DMatten@schulich.yorku.ca

Julia Shtopel, Schulich MBA student and event organizer, julia.lev1103@gmail.com

About Corporate Knights Inc.

Founded in 2002, Corporate Knights Inc. is a Toronto-based media, research and financial products company focused on clean capitalism. Corporate Knights, the company’s quarterly magazine, was named “Magazine of the Year” in 2013 by the National Magazine Awards Foundation. It is distributed in Canada as an insert inside the Globe and Mail and in the United States inside the Washington Post. With a circulation of more than 120,000, Corporate Knights is one of the most widely read publications devoted to business and sustainability issues. Corporate Knights Inc. is proud to be a certified B Corporation. Visit: www.corporateknights.com

About the Schulich School of Business

Known as Canada’s Global Business School, the Schulich School of Business is ranked among the world’s leading business schools by a number of global surveys. Schulich’s MBA program has been ranked #1 in the world by the Aspen Institute and on the Corporate Knights Global Green MBA Ranking. In Canada, the school has been ranked #1 by Forbes, The Economist and others. The Schulich School is based out of Toronto's York University. Visit: www.schulich.yorku.ca

Should business leaders speak out more on public issues?

Business leaders are among the most powerful people on the planet. At the helm of huge corporations, with billions of dollars of assets to leverage, their decisions have a profound influence on all of us. At the same time, however, those very same business leaders only very rarely seem to speak out on many of the public issues that actually affect us.

Consider when the former Toronto Mayor Rob Ford was engulfed in a crack-smoking scandal that put the city in the headlines for all the wrong reasons. The response from the city's business elite was a deafening silence. Nonetheless, the scandal must have prompted considerable anxiety among business leaders about its effect on the business and investment climate of Canada's largest city.

Are CEOs right to hold back in such instances or should we expect them to take a more prominent position in public debates? There are no black and white answers to this; it largely depends on context. So here are four things to consider when deciding whether the silence of business leaders in good thing or not. And if you want to dig deeper, check out The Guardian's live chat on "Should business leaders speak out more on public issues such as climate change?" on Wednesday 5 August 2015, 1-2:30pm BST.

1. Some social issues face a leadership vacuum that business leaders can help fill
Earlier this year, a group of 43 CEOs of major multinationals signed a open letter urging governments to strike an ambitious climate deal at COP21 in Paris, Likewise, the CEO of the biggest oil sands producer, Suncor, recently called for more stringent climate regulation, including a high price on carbon.

These announcements, unthinkable even a decade ago, give at least some indication of the kind of muscle that business leaders might be able to flex in filling the great big hole in leadership around climate change. Quite simply, such signalling from the business community helps empower political leaders to do their jobs better.

Of course, if these CEOs had spoken out saying that no action on climate change was needed (despite all the evidence to the contrary), as indeed has happened in the past (most notably from successive Exxon-Mobil leaders), we would be bemoaning the addition of their voices into the debate. So it's a double-edged sword, with substantial risks as well as opportunities.

2. Hypocrisy won't work
There is a tendency to criticize business leaders for making pronouncements like these because their actions do not always match their impressive sounding words. Richard Branson for example, was branded a hypocrite by Naomi Klein for failing to follow through on his promise to divert $3bn of Virgin's revenues to developing biofuels and other clean energy projects.

"Greenwashing", as this is known, can be a major problem when companies and their leaders go public with grandiose plans that they either cannot deliver on, or that they actively undermine behind the scenes with lobbying and back room deals. Business leaders already face a major trust deficit when it comes to their credibility as spokespeople. Survey after survey has confirmed that CEOs and business executives in general are not trusted as a credible source by the public. So any attempt to hoodwink the public is unlikely to work, not least because most of the public don't believe them in the first place.

3. Aspirational talk isn't all bad
For all the problems of greenwashing, business leaders making aspirational statements about social issues shouldn't automatically be criticized. For one thing, in the context of challenging, complex problems, it is often imperative that business leaders do go outside their comfort zones and articulate "stretch" goals that they can not necessarily know if or how they can achieve. Consider Interface Carpet's mission to reduce their waste to zero by 2020. When they started their 'mission zero' journey in 1994, former CEO Ray Anderson did not have a plan for how this would be realized only that he needed to set a vision that was inspiring enough to galvanize the entire company. Since then, Interface has cut waste to landfill by more than 90% and GHG emissions per unit of production are down almost 75%. The company is rightly lauded as a sustainability leader that others should follow. The lesson is that there is scope for business leaders to be aspirational but sooner or later they need to back up their words with sustained action.

4. There is surprisingly little risk attached to CEOs speaking out personally on issues not directly connected to their company. 
Business leaders rarely take the plunge and speak about public issues not directly tied to their business. Despite being smart, influential people used to tackling complex problems, they are usually either too busy or too concerned about prompting a backlash to say publicly what they think about such issues. The silence really is deafening. But according to unpublished research conducted at the Schulich School of Business last year, when CEOs do take the plunge, there is rarely any kind of negative media response. Looking back over a number of years across a range of issues such as Obamacare, same sex marriage, the fiscal cliff, the Rob Ford scandal and the proposed Quebec secular charter, the mainstream press reaction to the rare instances of individual CEOs speaking out has been largely neutral. This suggests that corporate leaders may well be overestimated the risks associated with speaking out on public issues, especially those where their own self-interest is less obvious.

The bottom line is that business leaders could probably be part of the conversation on a whole swathe of public issues. But if they are to participate, it has to be in the right way, and that means three main things: a) transparency about what their company stands to gain or lose with respect to the issue (i.e. is it a matter of self-interest or not?); b) clarity about what they or their company is doing or planning to do to address the issue (i.e. are they open to a charge of hypocrisy?); and c) a willingness to encourage others, especially those without such power and influence, to also participate - and to engage fairly in the unfolding debate rather than seeking to dominate it. It's a tall order. But if nothing else, it might help earn back a bit of that trust in business leaders that is so sorely lacking .

Photo copyright Onewaystock.com. Reproduced under creative commons licence