Good Honest Dollar $$

Dear readers,

Today I would like to start a new series of discussions which will focus upon the rights and responsibilities of employees at work. Although the majority of the discussions will focus predominately upon employee rights, the responsibilities of workers will be alluded to also, particularly I do not feel that it would be appropriate for me to focus solely upon employee rights whilst neglecting the other side of the equation.

Also, I intend to discuss the issue at a very broad level, so as to ensure that the discussions are relevant across both the developed and the developing world as much as possible.

I have not yet made a final decision about which specific areas the discussions will cover, and readers are more than welcome to suggest any particular topics.

I thoroughly hope all readers enjoy this series.

Cheers

Andrew

The recent announcement by Wal-Mart of its intention to adopt a more stringent approach toward its supply chain in terms of labor and environmental standards represents a positive step in the right direction.

Now comes the hard part – verifiable and lasting improvement on the factory floor.

 
Wal-Mart’s strategy
On October 22, the company outlined a renewed strategy designed to produce significant improvement in terms of the management of its supply chain from a social and environmental perspective.

The centerpiece of this strategy is a new supplier agreement, to be phased in over a three year period beginning in January 2009. Under the new agreement, suppliers will be required to:

• Certify (a) compliance with all relevant laws and regulations in areas in which they operate and (b) adherence to strict social and environmental criteria;
 
• Conduct their own audits, as well as co-operate with (sometimes unannounced) audits from company representatives or independent auditors;
 
• Provide the name and location of every factory which they use in the manufacturing process; and
 
• By 2012, source 95% of all manufacturing inputs from suppliers which receive the highest ratings in relation to social and environmental practices.

In addition, the strategy also includes a range of targets relating to energy efficiency and product quality and safety, with particular emphasis upon its Chinese operations.

(Refer company announcement and International Herald Tribune article for more details)

 
Lessons from Nike
Associate Professor Chris McDonald, author of The Business Ethics Blog, draws a comparison with Nike. By all means, this is a valid comparison – Nike once had a poor reputation from the point of view of labor practices within its supply chain, but its reputation has improved considerably over recent years due to improvements in public transparency and accountability.

Nevertheless, the comparison with Nike raises three interesting issues:

 
• Wal-Mart’s efforts, at least in terms of public accountability and transparency, do not appear to be as extensive as those of the sporting goods manufacturer.

Nike currently provides full public disclosure in relation to (a) the location of supplier factories; and (b) the aggregate results of audits into labor conditions at supplier factories.

The announcement by Wal-Mart does not state whether or not such information will be publicly disclosed. If not, the general public will not have means by which to verify any claimed improvement in supply chain practices.

 
• Wal-Mart’s problems go beyond its suppliers.

Whilst the problems at Nike relate predominately to its external contract manufacturing practices, those at Wal-Mart extend further, and include alleged poor labor practices in the U.S.

If the company is serious about improving its reputation, it must address all of these issues, not just the issues which pertain to its supplier base.

Moreover, responsibility for improvement cannot be simply transferred to suppliers. Wal-Mart itself has a responsibility to adopt proactive supply chain management initiatives, including the training of suppliers in terms of best practice operating proceedures. Perhaps the most important action which the company could take is to cease placing unrealistic cost and time pressures upon its supply chain - suppliers must be provided with the opportunity to make improvements in operating practices without compromising the viability of their operations.

 
• Accountability is one thing, results are another.

As noted in an earlier post, whilst Nike has made significant improvements from an accountability viewpoint, its progress in terms of verifiable improvement on the factory floor has been very disappointing, with problems occurring frequently in terms of excessive overtime, poor occupational health and safety practices and failure to pay legal minimum wages.

Wal-Mart must go beyond Nike and demonstrate a substantial level of verifiable improvement at the level of the factory floor. Until this happens, no improvement in its corporate reputation will be justified.

 
Summary
Wal-Mart is to be commended on its positive initiatives, particularly its new supplier agreement.

Now comes the hard part – results on the factory floor.

Contrary to the opinions expressed from certain quarters within the business world, the U.S. government is right on the money in seeking to place limits upon executive compensation in firms who receive government assistance as part any bailout of financial institutions.

American taxpayers should not have to subsidize mass exit packages for executives whose firms have failed to deliver acceptable results.

An in-depth examination of specific proposals is beyond the scope of this discussion. However, I do wish to comment today on the general issue of whether the American Congress should seek to intervene in relation to executive compensation at firms which participate in any taxpayer-funded bailout.

  
Generally, the government should stay out of it …
In general, governments should not intervene in the process of determining appropriate compensation arrangements for executives in private sector firms.

The process of determining fair and appropriate structures for executive remuneration is extremely complex, and a high degree of flexibility is required for corporate boards, acting on behalf of shareholders, and the executives concerned to negotiate compensation packages which are appropriate in the context of the individual firm concerned.

Governments are in no position to intervene in this process. Indeed, any significant level of government intervention would most likely entail unintended consequences, and could, in many cases, be detrimental to the objective of achieving reasonable and fair compensation arrangements. This is particularly the case particularly if the intervention resulted in an overly prescriptive, one size fits all approach.

Moreover, any intervention should be limited strictly to firms participating in the bailout. Under no circumstances should it apply to any other firms. Nor should it be used as part of any wider plan to increase the level of government intervention in relation to the broader issue of executive compensation structures.

  
… but not when taxpayer money is involved
But things are different where taxpayer money is involved.

Governments, as custodians of taxpayer funds, are obligated to ensure that such funds are allocated in an appropriate manner. Support for the financial system may or may not be an appropriate use for taxpayer funds, but the payment of grossly excessive compensation packages is not.

Wall Street should accept this. Taxpayer bailouts should, and do, involve consequences. One such consequence is a significant increase in the importance of the general public as a key stakeholder, and this necessitates a much greater degree of public scrutiny and accountability. This includes the area of executive compensation, which must not exceed levels which are considered to be fair and appropriate from a public viewpoint.

Firms cannot expect taxpayer help without accepting the associated consequences.

To be fair, I have no doubt that each of the individual executives concerned devoted considerable effort toward their employment responsibilities. But compensation should be proportional to outcomes, and given the extent to which negative outcomes have had an adverse impact on American taxpayers, limits on compensation are more than fair.

  
In short
In cases where firms receive taxpayer assistance as part of any Wall Street bailouts, sensible government intervention to prevent excessive remuneration is justified.

American taxpayers should not fund mass exit packages at firms which have failed to deliver acceptable financial outcomes.

This is the final part of a three-part discussion relating to the ethical rights and obligations of a range of parties, from an ethical standpoint, whereby the following situation occurs:

• a prospective employer wishes to make an offer of employment to a prospective employee; but
• acceptance of the offer would constitute a breach or violation of the employee’s current employment contract.

This situation would typically occur where the prospective employee was currently employed on a fixed term contract basis, with no provisions for early termination. It could also arise in cases where other contractual conditions, such as non-compete clauses, prevent the employee from accepting employment with rival firms.

The previous discussions examined the rights and obligations of the prospective employer and the employee concerned in the above situation. Today, I would like to discuss the issue from the viewpoint of the current employer. Should the current employer take action to prevent the employee concerned from accepting the alternative offer?

 
My initial view
Under my initial viewpoint, the current employer should not be strict in the enforcement of their contractual rights in the above situation.

Under this viewpoint, the employer should consider the basic principle of reasonableness and fairness. This would involve exercising a degree of leniency in cases where early termination of the contract would not cause significant disruption to their business operations.

 
No ethical problem in enforcing contractual obligations
But my viewpoint has changed - there is no reason why the current employer should not take action to enforce their contractual rights in the above situation.

A contract is a contract – a formalized and binding agreement which confers both rights and obligations on behalf of the parties involved.

Contracts only serve their purpose if all relevant parties fully comply with the terms and conditions of the contract. Moreover, parties to a contract are well within their rights to take whatever measures are necessary to ensure that other parties fulfill their contractual obligations.

Contracts of employment are no exception, and in the above circumstance, the employer has every right to take legal action to prevent the employee from accepting an alternative offer of employment.

I mentioned above the principle of fairness – that an employer should seek to act in a fair and reasonable manner. However, there is nothing unfair about an employer enforcing their contractual rights.

To be sure, some firms may elect not wish to prevent the employee from accepting the offer, either for reasons of goodwill or their reputation as an employer. But that is their own prerogative, and does not arise out of any form of ethical obligation.

The current employer, in the above situation, is well within their rights to take action to prevent the employee concerned from accepting the alternative offer of employment in the above circumstance.