2012 Cambridge Business & Economics Conference ISBN : 9780974211428

Citius, Altius, Fortius – Faster, Higher, Stronger?

Corporate Social Responsibility in the Sporting Goods Industry

W. Richard Sherman, J.D., LL.M., C.P.A.

Professor of Accounting

Saint Joseph’s University

Erivan K. Haub School of Business

5600 City Avenue

Philadelphia, PA 19131

Conference for which the paper is submitted:

2012 Cambridge Business & Economics Conference (CBEC) Cambridge, England - June 27-28, 2012

Academic departments to which paper pertains: Management

Key Words: Sustainability Reporting; Triple Bottom Line Reporting;

Corporate Social Responsibility

ABSTRACT

As in most industries, the global sporting goods and apparel industry is marked by intense competition. In an Olympic year, companies want nothing more than to have athletes who wear their brand to run faster, jump higher, and be stronger. Yet despite this intense competition for market share, the leading companies in the sporting goods industry have shown a remarkable willingness to cooperate with one another to address challenges to their corporate citizenship. This paper looks at the corporate social responsibility issues confronting the industry, the individual company’s responses, as well as their collaborative efforts.

INTRODUCTION

For those passionate about sports, the first image that comes to mind when adidas, Nike, or Puma is mentioned may be a footballer scoring the winning goal, a tennis player at match-point, or a runner crossing the finish line. Athletes are often identified with and by the shoes and apparel they wear – David Beckham & adidas; Maria Sharapova Nike; Usain Bolt & Puma - to name just a few. Of course, sporting goods companies realize this and spend millions of dollars per year to promote that association through sponsorship of athletic events and the endorsement of their brands by athletes. With three years remaining on his existing deal with adidas, Beckham signed a lifetime contract in 2003, worth an estimated at $160.8 million (Boston.com, 2005). In 2010, the former #1 ranked women’s player but often injured Sharapova renewed her sponsorship agreement with Nike by eight years for $70 million (Rossingh, 2010). World record holding sprinter Bolt’s contract with Puma is the largest in track & field history, comparable to Real Madrid football star Cristiano Ronaldo's four-year contract with Nike, worth US $32.5 million (£21 million) (Kessel, 2010).

However, a second image which may flash to mind when adidas, Nike, or Puma, is mentioned is one of the poorly paid and ill-treated worker in the Asian factories with which these companies subcontract the manufacture of their shoes and apparel. In particular, Nike has been singled out for its use of alleged sweatshops (Beder, 2002; Keady, 2012; Porter & Kramer, 2006). Prefacing his speech about Nike’s labor initiatives at a National Press Club lunch in 1998, Knight noted how some critics had demonized the company.

It's been said that Nike has single-handedly lowered the human rights standards for the sole purpose of maximizing profits. And Nike products have become synonymous with slave wages, forced overtime, and arbitrary abuse. One columnist said, "Nike represents not only everything that's wrong with sports but everything that's wrong with the world" (Knight, 1998).

Indeed, the conditions in these factories and how companies manage their supply chain continue to present the most pressing challenge to corporate citizenship for the industry.

There is another elephant in the room – how to compete in an environment of limited and diminishing resources. Hannah Jones, Nike’s Vice President of Sustainable Business & Innovation, sounds the alarm:

We stand teetering between the old and the new. And I believe that this next decade will be the test for all of us. Not because of what might be, but because of what is. At Nike, we have long said that things we have taken for free will become the new gold -- water, waste, carbon. We believe we have entered the era of climate adaptation where we are no longer contemplating the potential, but beginning to grapple with the consequences (Brettman, 2012).

This paper looks at the sustainability initiatives by the three largest companies in the global sporting goods industry – adidas (Sales €13,344 million), Nike (Sales $20,862 million for FY11), and Puma (Sales €3,009 million) - as they attempt to meet their corporate social responsibilities. While each company has a unique response, they have also shown a remarkable willingness to cooperate with one another to address challenges to their corporate citizenship.

All companies struggle to tell their stories, to communicate the good - and sometimes the bad - they do in the marketplace, in the community, to and for the environment, and in society. Quite clearly, the challenge of telling the company’s story has not been met by conventional financial reporting practices. Triple bottom-line (TBL) reporting, a term coined by John Elkington in his 1997 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business, aims to remedy this shortcoming by explicitly considering not only the economic performance of a firm but also the company’s environmental and social performance as well. Adidas, Nike, and Puma have embraced the TBL (also known as People, Profit, and Planet or 3P reporting) and have been recognized for the quality of their reports. This paper relies heavily on those reports.

ADIDAS – “In the Real World Performance Counts”

Adidas and Puma share a common heritage and a fascinating story of sibling rivalry. In 1924, Adolf and Rudi Dassler began manufacturing shoes as the Gebrüder Dassler Schuhfabrik (Dassler Brothers Shoe Factory). Perhaps their most famous “endorser” was the American sprinter Jesse Owens who won four gold medals at the 1936 Olympic Games in Berlin wearing Dassler spiked shoes. After World War II, the brothers split bitterly with Adolf (Adi) going off his separate way to create adidas; Rudi formed his own company which would eventually become Puma. Although located in the same small Bavarian town of Herzogenaurach, the companies and their employees maintained a fierce rivalry along the lines of the legendary feud between the Hatfields and McCoys. Only recently has this relationship begun to thaw. Noteworthy enough to be included in its 2010 Annual Report, Puma highlights the “historic handshake between adidas and PUMA heard around the world” – a one day soccer tournament held in Herzogenaurach with 192 adults and children playing in mixed teams of adidas and Puma employees (Puma, 2011: 68). At least, now the families and their respective companies speak to one another.

Adidas, which also sells products under the Reebok, Rockport, CCM Hockey, and TaylorMade brands, has been recognized for its sustainability reporting and performance by numerous organizations. The company is included in the Dow Jones Sustainability (DJSI), the FTSE4Good, STOXX® Global ESG Leaders indices, and has been named among the Global 100 Most Sustainable Corporations, and is recognized as the Industry Leader in the DJSI (adidas, 2012a). As reflected in its reporting, adidas embraces a balanced view of the importance of its various stakeholders. In short, it has adopted the Triple Bottom Line (TBL).

We are striving to be the global leader in the sporting goods industry and this demands that we return strong financial results. But leadership is not only about results, it is also

about how success is achieved. It is about striking the balance between business needs and social and environmental demands. Balancing these interests requires strong commitment, strategic direction, efficient and

careful execution, as well as regular reflection on the progress made (adidas, 2012b: 6).

As is true for almost all companies in the sporting goods industry, adidas outsources over 95% of production to independent third-party suppliers, primarily located in Asia. The reason is simple – lower production costs. In 2011, adidas worked with more than 1,200 independent suppliers in 63 countries. Of all factories, 67% are located in the Asia Pacific region, 20% in the Americas and 13% in Europe, Middle East and Africa (EMEA). 28% of production is in Chinese factories (adidas, 2012b: 43). To monitor the labor standards in its supply chain, adidas developed a system of key performance indicators (KPI) which ranks its subcontractors’ performance along a scale of 1C (lowest) to 5C (highest). The company requires a minimum ranking of 2C for a supplier to maintain its active status. In 2011, through aggressive efforts to improve the performance of its lowest ranked suppliers, adidas was able to reduce factories at the 1C level from 19% to 8%. Under its strategic plan (called Route 2015), adidas has set a goal of having 60% of its direct suppliers at the 3C level or higher (currently at 39%) by 2015 (adidas, 2012b: 51). New subcontractors (China leading the way with India second) are subject to initial assessments. Of the 476 new applicants in 2011, 20.7% were rejected by adidas as not meeting the threshold under its KPI system.

In addition to the audits conducted by its own Social & Environmental Affairs (SEA) unit (1,401 in 2011), adidas has had more than 280 Independent External Monitoring (IEM) audits performed as part of its membership in the Fair Labor Association (adidas, 2012b: 51).

Following a practice initiated by Nike as early as 2005, adidas “published a complete list of the names and addresses of the factories producing adidas clothes, shoes and equipment for the London 2012 Olympic Games. The list also shows the status of worker or trade union representation and whether there is a Collective Bargaining Agreement in place at the individual facility” (adidas, 2012b: 4).

Although management of its supply chain remains the greatest challenge to its corporate social responsibility, adidas has adopted a proactive approach towards environmental stewardship as well. In 2008, it launched its Green Company Initiative which measures the environmental footprint of its operations. One goal is to become a zero emissions company (adidas, 2012b: 56).

In 2011, the company implemented EMeReT (Environmental Metrics Reporting Tool) to better enable it to track its environmental impact and that of its suppliers (adidas, 2012c). Adidas continues to pursue ISO 14001 certification of its major sites. As do Nike and Puma, adidas is constantly looking to find ways to optimize the environmentally friendly production of its footwear and apparel. About 90% of all adidas Olympic articles have some sustainable content. In 2011, 65% of adidas athletic footwear met the company’s baseline environmental criteria (adidas, 2012b: 3).
NIKE – “Just Do It”

It started with a handshake between two visionary Oregonians - Bowerman and his University of Oregon runner Phil Knight. They and the people they hired evolved and grew the company that became Nike from a U.S.-based footwear distributor to a global marketer of athletic footwear, apparel and equipment that is unrivaled in the world (Nike, 2012a).

In the sporting goods industry, Nike (which also sells its products under the Converse, Umbro, Cole Haan, Jordan, and Hurley brands) is the Big Dog on the block. Not surprisingly, in this role, Nike takes a lot of hits from various critics ranging from its use of low-cost Asian subcontractors who manufacturer its shoes and apparel, to its continued sponsorship of controversial athletes like Kobe Bryant and Tiger Woods, to its support for and subsequent eulogy by its outspoken co-founder Phil Knight of Joe Paterno in light of the child abuse allegations against one of Paterno’s most trusted coaches.

Throughout the 1990s, the company’s reaction was to scoff at critics. In his now infamous remarks at Nike’s 1997 shareholder meeting, Phil Knight argued that working conditions had improved so dramatically during the 25 years Nike had outsourced the production of its shoes that “if a shoe worker in Korea or Taiwan had gone to sleep in the shoe factory there ten years ago and wakened in a shoe factory in Indonesia or Vietnam today, would have thought that he or she had died and gone to heaven” (Knight, 1997).

Somewhere along the line, Nike finally got the message and responded. In 2001, the company formed a Corporate Responsibility (CR) Committee as part of its Board of Directors to oversee the environmental impact, sustainability, and labor issues of its major business decisions. (Nike, 2012: 15). After arguing for over a decade that disclosure of the locations of its subcontracting factories would be a competitive disadvantage, Nike released this information in 2005, marking the first time this was ever done by anyone in the industry (Nike, 2012: 32). As Hannah Jones, Nike’s Vice President for Sustainable Business & Innovation, notes, “This moment also marked us taking a non-competitive business risk that changed the system” (Albanese, 2012: 2).

It certainly changed the way the investment community viewed Nike. Included in the Calvert Social Index, the Dow Jones Sustainability Indexes (DJSI), Domini 400 Social Index, KLD Catholic Values 400 Index, KLD Broad Market Social Index, KLD Large Cap Social Index, KLD Large-Mid Cap Social Index, KLD Global Sustainability Index, KLD North America Sustainability Index and KLD Select Social Index, and the FTSE4Good Index, Nike has been recognized as one of the Global 100 Most Sustainable Corporations in the World, included on the 100 Best Corporate Citizens list, ranked as one of the World's Most Ethical Companies each year from 2007 to 2009 in an analysis by Ethisphere, and named in the top 10 of Newsweek's 2009 first annual Green Rankings (Nike, 2012b). Its sustainability reports (first issued in 2001) have been recognized by Ceres-ACCA as the best in North America (Ceres, 2011).

Despite the turnaround in public perception, Nike still faces the challenge of managing its supply chain in a socially responsible way. As noted earlier, adidas has developed its KPI system to rate the performance of its suppliers. Nike has a variety of indices that perform the same function. Remembering the fall-out from Phil Knight’s “died and gone to heaven” remark, the company has gone to great lengths to create metrics to define “what ‘good’ looks like for factories that supply to Nike.” The results are complex indices for Materials Sustainability, Sourcing & Manufacturing Sustainability, Manufacturing, and Considered Design (Nike, 2012:40).

Creating metrics and standards is one thing; making sure they are being followed is another. “Auditing is the first step toward working to improve factories that may meet minimum compliance standards but have opportunities to improve their sustainability performance. It’s also the first step toward eliminating from our supply base those factories with serious, recurring violations” (Nike, 2012: 31). During FY09, fewer than half of the factories with which Nike subcontracted were audited; by the end of FY11, 80% were. Of the 1,169 audits conducted in FY11, 59% were by third parties (Nike, 2012: 42). Pursuant to its membership the Fair Factories Clearinghouse (FFC), Nike shared 39% of its audit results in order to promote transparency throughout the industry. It is also one of 16 companies whose labor compliance program is accredited by the Fair Labor Association’s Sustainable Compliance Initiative.