Business Ethics
Case Study “Norway Sells Wal-Mart” SUBMITTED TO:
Mr. Imtiaz Ahmed (COURSE INSTRUCTOR)
On Monday April 18, 2011 SUBMITTED BY:
Zill-E-Arsh
(08-0054)
FAST SCHOOL OF BUSINESS KARACHI
Case Study: Norway Sells Wal-Mart Introduction: Wal-Mart Stores is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. Wal-Mart, headquartered in Bentonville, Arkansas, is the largest majority private employer. Wal-Mart is also the largest grocery retailer in the United States. In 2006 Wal-Mart was the largest retailer of the world. The company has 6,100 stores operated worldwide out which 2,285 are outside Europe from which it generates 20% of its sales. Wal-Mart has 1.8 million employees. Wal-Mart has a market capitalization of $ 192 Billion on January 31, 2006 which makes it one of the largest 50 stocks of United States.
Supplier Agreement: Wal-Mart is known for its innovative and tough management with its suppliers. In 1992 Wal-Mart formulated a supplier agreement which refers to the company’s standard for suppliers. The standard included compliance with all national and standard laws in which the supplier operated and covering compensation practices, hours of labour, child labour, discrimination, workplace environment, social procedure, confidentiality, force labour and immigration compliance. Wal-Mart’s first priority is to make the supplier’s factories work with the compliance standard. In 2005 141 factories were banned to work with because of child labour violations. Another 23 factories were also disapproved for no compliance with the supplier standard. Supplier has to publically display Wal-Mart standards in their factories.
Wal-Mart’s Ethical Standards Program: Wal-Mart established its Standards for Suppliers, our code of conduct, in 1992. The standards pertain to matters such as compensation, underage labor, and health and safety. The Ethical Standards Program was established and exists to verify suppliers’ compliance with the standards, to strengthen the implementation of positive labour and environmental practices in factories producing merchandise for sale by Wal-Mart, and to bring opportunities for a better life in the countries where merchandise for Wal-Mart is sourced. Ethical Standards Program Highlights Program highlights include: Wal-Mart audits more factories than any other company in the world. 16,700 audits were conducted in 8,873 factories during 2006. Of the audits conducted, 26% were unannounced. Audits are conducted by Ethical Standards Auditors and approved third party service providers.
5,000 suppliers and factory management personnel attended training sessions on the Ethical Standards Program and best practices in the industry during 2006. Sessions were held at least once in each of the five regions where Ethical Standards operates: Southeast Asia; the Indian Subcontinent; the Far East; the Americas; and the Middle East, Africa, and Europe. Wal-Mart’s policy is to work with our suppliers to correct violations of Wal-Mart’s standards found in factories. We identify at-risk factories and invite the suppliers and their factory management to meet with members of the Ethical Standards and merchandising teams. The meetings centre on actionable steps that can be taken to improve areas of concern. For example, in the Middle East, Africa, and Europe region, meetings were held with eight targeted suppliers and factory management, and at the end of 2006, all eight targeted suppliers showed substantial improvement, with six achieving our highest audit rating. Stakeholder engagement is a core part of the Ethical Standards Program. WalMart believes it is vital to learn from the expertise of others and apply the learning to strengthen our efforts. They also believe that more can be accomplished when stakeholders collaborate together and work toward resolution of a complex problem than for each party to tackle the problem in isolation. Stakeholder engagement has allowed Wal-Mart and industry stakeholders to build a degree of trust with one another and to begin to work collaboratively on issues regarding labour and environmental practices in factories. We value the opportunity for productive dialogue and work with stakeholders, and we look forward to continuing collaborative interaction. Wal-Mart has been working collaboratively with industry peers to form the Global Social Compliance Program (GSCP), an initiative designed to promote uniform and acceptable working conditions at the highest standards for global sourcing. GSCP is dedicated to providing a holistic approach, including both factory monitoring and capacity building. Wal-Mart’s International Giving Program was established by Ethical Standards and the Wal-Mart Foundation to strengthen the communities where Wal-Mart merchandise is sourced and sold. Specifically, the program awards grants to sustainable community projects administered by non-profit organizations. The first grant was awarded to The Asia Foundation in 2006 for a scholarship program for migrant women workers in the Guangdong Province of China. As part of Wal-Mart’s global sustainability initiatives, the Ethical Standards Program expanded in 2006 to give consideration to the following items when auditing a factory: waste identification, waste handling and disposal, wastewater treatment and discharge, air emissions and the use of banned substances. Auditors discuss environmental findings with factory management as part of our efforts to educate factory management on the new criteria and on environmental
sustainability. Environmental training is also now included in group training sessions for new and existing suppliers. The Ethical Standards team is working closely with Wal-Mart’s Sustainable Value Networks to promote sustainability in Wal-Mart’s supply chain. We have begun the Model Factory Program to identify and implement sustainable and costeffective practices in 20 factories in China. We look forward to share learning from the program in the future. Ethical Standards has also begun the Factory Five Program. The program serves as a forum in which factory management (from five factories per region) regularly meet with suppliers and the Ethical Standards team. Time is spent identifying and resolving complex issues of noncompliance identified by factory management. In spite outstanding growth of Wal-Mart stocks and ethical initiatives to be socially responsible organization Norway divestiture Wal-Mart shares of approximately US$416 million worth in Norwegian pension funds. Now let’s find out what are the possible reasons for the exclusion of Wal-Mart from Norwegian Pension Funds.
Norwegian Pension Fund: Norway is a democratic, well educated and ethically oriented nation. It is the world’s third largest exporter of oil with daily exports of 2.94 million barrels. Most of the oil profits went directly to Norwegian government so in 1990 Norwegian Pension Funds were established for the fair distribution of wealth and to reduce cyclical fluctuations in Norwegian economy because of the oil revenue variations. The assets of the funds were US$ 285 billion at the end of 2005 making it one of the largest government investment funds in the world. One challenge that the fund managers and Ministry of Finance were facing was to generate enough return on the fund’s assets when the Norwegian oil revenues will decline beyond 2010 and the pension obligations that were currently 10% of the GDP will reach 20% of GDP by 2050.
Ethical Guidelines of Norwegian Pension Funds: As Norway is an ethically oriented nation so in 2002 Norway Government appointed a committee to formulate ethical guidelines for the Norwegian Pension Fund. This movement has highly applauded by the Norway people as it fulfils their moral standards. On June 2003 Ministry of finance proposed two ethical obligations for the fund that are to generate high financial return and also to avoid those investments that have a substantial involvement in unethical actions. Norwegian Parliament approved ethical guidelines that were to be effective from December 1, 2004. The ethical guidelines focus on the exercise of shareholder ownership rights, exclusion of the companies that produce weapons and their normal use is against human rights violation. Also the companies involve in serious human rights violation like child labour, environmental damage, violations of individual rights during conflict and other serious violations of
ethical norms. For the exclusion of the companies a five member Ethical Committee was formulated and this committee proposed exclusion of Wal-Mart on ethical grounds.
Analysis of Ethical Guidelines on the Basis of Utility, Rights and Justice: On utilitarian grounds the proposed ethical guidelines of Norwegian Pension funds were correct as there guidelines produce maximum benefits from the moral values that is the total utility of these moral values is greater if everyone is to follow them. The ethical principles of protection of human rights, environmental protection as well as ownership right protection of the share holder is in the larger benefit of the Norwegian people as well as the rest of the world. Although the companies convicted of unethical practices will face hard financial consequences but this will also force them to adopt ethical practices to get reinstated in one the largest government investments of the world. By exercising these guidelines moral rights are also protected. As the companies violating moral rights are excluded from the fund so protection of moral rights are forced on the companies by negating their unethical practices and forcing them to adopt moral standards. Positive rights of individual like liberty and life are protected by these rights. Legal rights of the victims that are employees of the companies undergoing unethical practices are also protected as when these employees are contracted company make agreements stating all the legal and ethical rules but as time passes Companies do not act upon their standard polices and discrimination on the basis of gender, although their employment contract stated that no discrimination on any basis. Distributive and retributive justice is also followed by these guidelines. The ethical standards of these guidelines exclude companies adopting unethical practices, in doing so Norwegian pension funds are distributing burdens and justice fairly by depriving companies of their share in the largest government investment of the world and awarding the ones that are following ethical standards in accomplishment of their stock growth targets by investing in huge Norwegian pension funds. Retributive justice is also done by following these guidelines as unethical companies are punished for their wrong doings by excluding them from funds. Undoubtedly these guidelines are very beneficial from ethical point of view as they are pursuing an effort to urge companies for follow ethical standard to protect moral rights of human beings and also to preserve the environment for future generations.
Investigations of Wal-Mart by Council of Ethics: On June 2005, Council on Ethics start investigating Wal-Mart on the basis of their internal operations as well as global supplier network. The resources used for instigation were publically available like websites, newspaper and allegations from law suits filed against them. The authenticity of this material is also subjective as they were publically available so they were easily manipulated. The council should try to obtain more reliable material evidences for the possible ethical violations.
Allegations on Wal-Mart by Council on Ethics: Wal-Mart’s Global Suppliers violates International Labour Standards: On the basis of this material council founded that working conditions of Wal-Mart global supplier network violates International Labour Standard. Wal-Mart has global suppliers for apparels and other products mainly clothing goods. Mostly these suppliers are from third world country and intense violation of labour hours, child labour, low wages, prohibition of unionization, hazardous working condition e.t.c occurs there. The reason that most international retailers are outsourcing for fabric products to third world countries is because of low cost. Low cost is maintained by cheap labour, inhumane labour practices, adopting methods unsafe methods of production and damaging environment by not properly disposing harmful wastes.
Gender Discrimination: The other allegation on Wal-Mart was of gender discrimination. The company faces the largest gender discrimination case in the history of this country. Discriminatory policies are as follows: 1. Denied Training: Women had been denied training and promotion opportunities that are offered to men. 2. Under payment: women are underpaid in relation to men. In June 2001 a group of six current and former female Wal-Mart employees filed a sex discrimination lawsuit (seeking to represent up to 500,000 current and former WalMart workers) against the company. The suit was filed because Wal-Mart failed to provide equal employment for women. It was an ambitious discrimination lawsuit against Wal-Mart, accuses it of favouring men over women in promotions and pay. The lawsuit includes all 700,000 women who worked at Wal-Mart from 1996 to 2001, which would make it by far the largest employment discrimination class action in American history. The lawsuit, filed in 2001 in federal court in San Francisco, focuses largely on one statistic compiled by plaintiffs' experts: in 2001, the suit claims, women made up 65 percent of Wal-Mart's hourly employees but only 33 percent of its managers. The suit also claims wide disparities in pay. In a study released early this month, Richard Drogin, an emeritus statistics professor at California State University at Hayward hired by the plaintiffs' lawyers, found that full-time women hourly employees working at least 45 weeks at Wal-Mart made about $1,150 less per year than men in similar jobs, a 6.2 percent gap. Women store managers, he found, made an average of $89,280 a year, $16,400 less
than men. The following table clearly exhibits wage and authority discrimination against woman.
Diversity Programs: Although in 1990 Wal-Mart started a number of programs to achieve diversity, this includes establishing a separate office to achieve diversity goals and paying officers 15% bonuses for achieving diversity. Verdict of this discrimination case was not announced when Wal-Mart’s stocks was divested from the pension fund. This was a strict act against Wal-Mart because allegation was not imposed on them but still this was formed a basis in convicting them of discrimination against woman and excluding them from the fund.
Prohibition on Unionization: Wal-Mart was also convicted of not allowing forming unions of workers which is the violation of worker’s right. Wal-Mart is a non union organization that feels it does not need third party intervention. So, Instead of unions, Wal-Mart has an open door policy that encourages employees to take their complaints beyond management. According to this policy the door of the management is always open for the associates to share suggestions, ideas, and voice concerns whether it’s help with a problem, guidance or direction, or simply getting an answer to a question. Managers also treat all discussions fairly, with an open mind, and without bias. They maintain complete confidentially, whenever it’s possible. They work with the associates to mutually resolve any issues or problems. This open door policy is violating workers right and strengthens management to undergo unethical practices without any fear. This policy does little to help its employees but gives the business the leverage it needs to terminate unwanted non compliant help. Also employees start out at lower wages than unionized corporations and end up quitting by the end of the first year. Wal-Mart’s global supplier network has unions. In this allegation instead of relying on the published material the Ethical council should themselves meet the workers of Wal-Mart and investigate from them that how much they are satisfied with the open door policy.
Repudiation of investor’s request to change Wal-Mart’s Business Practices: Furthermore the ethics council also cited unsuccessful efforts by several investor groups to change Wal-Mart business practices. These efforts include Third party inspection of Wal-Mart’s Latin location which was turned downed by the management. Shareholder’s proposal of independent monitoring of Wal-Mart suppliers for their compliance with the International Labour Organization’s human rights standards. It was rejected as only 4.4% of shareholders favoured it. A group of investors proposed to prepare a report on Wal-Marts efforts to human rights protection, worker rights, land and the environment right. This also was not well supported by the share holders but Wal-Mart was publishing this report in 2007. Wal-Mart was not bound to follow the shareholders resolution as they are advisory in nature. But Wal-Mart should make efforts in publishing such material that clarifies its efforts for being ethically responsible. This sets back Wal-Mart even if was taking responsible actions. If such a material is published or a third independent party is monitoring Wal-Mart operations then Wal-Mart’s ethical practices would be known and it will also shut the mouth of those who are highly declaring it as an unethical organization undergoing intensive human rights violations.
Other Unethical Practices of Wal-Mart: Fair Labour Standard Act Violations Wal-Mart, a frequent violator of wage and hour laws, now finds itself defending its labor practices in legal battles across the nation. Wal-Mart is currently facing more than 80 lawsuits alleging that employees were forced to work off the clock and skip lunch and rest breaks while management manipulated time and wage records in order to keep labor costs down. An internal audit performed by Wal-Mart in July 2000 indicated these types of violations were and had been a massive problem companywide for years. The lawsuits allege that Wal-Mart knew that it was violating the Fair Labour Standards Act and hid evidence of its illegal practices in order to attempt to avoid liability.
Health Care: Nationally, 64% of workers in companies of 5,000 employees or more receive their health benefits from their employer. However, Wal-Mart typically covers only around 50% of its employees. In addition, the average wait for full-time Wal-Mart workers to qualify for benefits is six months, compared to the retail average of 2.6 months. Wal-Mart avoids providing benefits by relying more heavily on part-time workers, who must wait a year before receiving any benefits. In addition, with Wal-Mart's high employee turnover rate, many workers never get health care. The affordability of Wal-Mart's health plan options
is another problem. Getting Wal-Mart's choice network family plan with a $322.60 biweekly premium, $700 annual deductible, $500 health care credit, and $4000 out-ofpocket medical expenses could potentially cost over $12,000 a year. However, the average Wal-Mart employee makes approximately $20,000 a year.
Environmental Issues: In 2001, the Environmental Protection Agency and Justice Department fined Wal-Mart for violating newly adopted standards for storm water runoff. In 2004, Wal-Mart faced fines for violations of environmental laws in nine states and paid the government $400,000 to settle claims that it had violated air pollution regulations in eleven states. Wal-Mart was also fined in Georgia for allowing polluted storm water to run into state waters and in Florida for failing to adhere to safety restrictions on petroleum storage at its auto service centres. Currently, Wal-Mart is under investigation for ignoring hazardous waste laws in several states.
Ethical Council’s Decision: The ethical council found Wal-Mart guilty of undergoing operations against Fund’s ethical guidelines. The violations are in the interest of the company as outsourcing from cheap labour countries and giving low wages to women workers in spite of their high productivity. Somehow Wal-Mart as knowledge of these unethical practices but instead of that it did not take notice or even acted upon the advice of their share holders.
Wal-Mart did not respond to Ethical Council’s to comment on allegations: The Ethical council contacted Wal-Mart to have their view on these allegations by sending them a draft but they did not responded to it. Representative from the council also called the general council of the Wal-Mart but did not receive a call back. So there was also a communication gap between the management of Wal-Mart and Council of Ethics. Finally having no answer from the Wal-Mart and further assessing Ministry of Finance divested Wal-Mart from the pension funds.
Other Companies Divested from Norwegian Pension Fund: There were almost 40 companies that were divested from Norwegian Pension fund for the breach of ethical guidelines. In 2009 three companies have been reinstated in the fund because now they meet ethical guidelines of the fund. There are also companies in consideration for exclusion from the fund if they found guilty of breaching ethical guidelines of the fund.
Action Plan for Wal-Mart: Previously Wal-Mart has not undergone such kind of situation like that of divesture from Norwegian pension funds. Wal-Mart has not responded to the calls of Ethical Council for their views on the allegations. This is a big issue as they can clarify their position to the council by providing them material that establishes their repo as ethical responsible organization as well as highlights the results of their ethical initiatives actions. Now it is useless to cry over spilt milk! Wal-Mart has to think about a strategic plan that will enable them to develop an image of ethically and socially responsible organization to get them reinstated in the Norwegian Pension Funds. The first thing CEO of Wal-Mart has to do is to determine the elements that hurdles the council to contact with Wal-Mart and discuss the issue. If it is because of the many layers of management that makes the flow of information difficult to get noticed at the right level then the management has to develop such structure and hierarchy through which easy flow of information relating to critical issues flows easily to the right level of management from which is properly addressed and responded. The CEO should contact the Ethical Council and himself have an investigation of the allegations. Also he should make sure that Wal-Mart practices are according to the ethical guidelines of the funds to get it reinstated in pension funds. Wal-Mart should also establish a department that has only responsibility of maintaining relations with the investors. The department should make sure that Wal-Mart is fulfilling all the criteria required standardized by their investors. The department should also guide the investors about Wal-Mart’s ethical initiatives. The department should also address truthfully about allegations on Wal-Mart and what polices they are undertaking to address those allegations. This will strengthen investor’s belief on Wal-Mart and WalMart will try to maintain the standards of their investors for ensuring growth of its stocks. Wal-Mart should publically publish report highlighting its ethical initiative and social responsibility. These reports should be approved by relevant authorities of the authenticity. Wal-Mart should also allow third parties to monitored ethics of its operations and publish reports. Wal-Mart should also address the ethical concerns damaging their image. Employee discrimination issues should be settled. Such polices should be adopted that ensure the equal opportunities of female workers. There should not be any compromise on ethics and socially responsible behaviour, as it is giving back to the society, otherwise its survival will be in danger. Wal-Mart also force its global supplier to have their operations investigated from international third parties to make sure that their operations are in compliance with the international labour standards and they are not violating any national and international laws
