CASES FOR DISCUSSION. The Gap

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1 Note: the following case is copyrighted and may be copied and used only by current users and owners of the textbook, BUSINESS ETHICS: CONCEPTS AND CASES by Manuel Velasquez. CASES FOR DISCUSSION The Gap On Monday July 24, 1995, Stanley Raggio, senior vice president for international sourcing and logistics for The Gap, Inc., opened a copy of The New York Times and found the article on the Gap. There, in a story by Bob Herbert, he saw his boss, Donald G. Fisher, being castigated for sourcing practices that he, Stan Raggio, was charged with managing. The hundreds of thousands of young (and mostly female) factory workers in Central America who earn next to nothing and often live in squalor have been an absolute boon to American clothing company executives like Donald G. Fisher, the chief executive of the Gap and Banana Republic empire, who lives in splendor and paid himself more than $2 million last year. Judith Viera is an 18-year-old who worked at a maquiladora plant in El Salvador that made clothing for the Gap and other companies. She was paid a pathetic 56 cents an hour. Donald Fisher should meet Judith Viera, spend some time with her, listen to her as she describes in a still-childish voice her most innocent of dreams. She would like to earn enough money to buy a little more food for her mother and two sisters. She would like to go to high school. But Donald Fisher is a busy man. It takes a great deal of time to oversee an empire balanced on the backs of youngsters like Ms. Viera (and her counterparts in Asia). 1 The article in The New York Times was one of hundreds that were to appear in newspapers across the United States during the next few months describing human rights violations and subsistencelevel wages at suppliers in Central America from which the Gap and other clothing retailers sourced their apparel. The Gap, Inc. is a chain of retail stores that sell casual apparel, shoes, and accessories for men, women, and children. Headquartered in San Francisco, the stores operate under a variety of names including: Gap, Banana Republic, Old Navy Clothing Company, GapKids, and babygap. All merchandise sold by the chain is private label. 3 The Gap was founded in 1969 when Donald Fisher and his wife, Doris, opened a small clothing store near San Francisco State University. By 1971 they were operating six Gap stores. In 1983 Fisher enticed Millard Drexler, former president of Ann Taylor, into taking over as the new president of the Gap, while Fisher became Chief Executive Officer and Chairman of the company. Drexler transformed the company by replacing the drab lines of clothing the store had been stocking, with new brightly colored lines of rugged high quality cotton clothes.

2 In 1995 Fisher retired as CEO and Drexler, now aged 50, took over the title. By now the Gap had 1348 well-located stores in the U.S. and Puerto Rico, 72 in Canada, 49 in the United Kingdom, and 3 in France. Competition was intense and earlier R. H. Macy and Federated stores had been forced to file chapter 11 bankruptcy. The Gap, however, had been doing very well, with 1994 profits of $258 million on sales of $3.723 billion. 3 Apparel stores like the Gap purchased their clothes from manufacturers in the United States and around the world. Some 20,000 contractors in the United States, most employing 5 to 50 workers, sewed clothes for companies like the Gap. The apparel manufacturing industry in the United States was under intense pressure from imports since the work was so labor-intensive, and labor was less regulated and much cheaper in many developing countries, depressing both wages and working conditions in the United States. For example, it is estimated that in China, wage rates in the apparel industry are approximately one-twentieth of U.S. rates. Since 1990 the U.S. had lost more than a half a million textile and apparel jobs, and companies struggling to survive in the United States often had working conditions as bad as anything to be found in developing countries. A 1989 study by the General Accounting Office discovered that two-thirds of the 7000 garment shops in New York City were sweatshops. 4 A spot check by the Labor Department in Southern California had found that 93 percent of the shops checked had health and safety violations. The Gap contracted with over 500 manufacturers around the world who made the Company s private-label apparel according to Gap s specifications. Gap Inc. purchased about 30 percent of its clothes from manufacturers located in the United States and 70 percent from vendors located in 46 foreign countries. No single supplier provided more than 5 percent of its merchandise. On May 10, 1993, a toy-factory fire in Thailand killed over two hundred workers and injured five hundred. The toy factory was owned by Kader Industries which made toys at the plant for some of the largest toy companies in the United States including, Toys R Us, Fisher-Price and Tyco. U.S. Customs Service documents revealed that during the first three months of 1993, U.S. companies had imported more than 270 tons of toys from the Thai factory. The accident drew attention not only to the responsibilities of the Toy industry, but to the responsibilities of all U.S. industries and consumers in ensuring that products are made under safe and humane working conditions regardless of where they are produced. In the wake of concern over Third World working conditions, the Gap had also adopted a set of Sourcing Principles and Guidelines. These provided standards that vendors had to meet including: engage in no form of discrimination, use no forced or prison labor, employ no children under 14 years of age, provide a safe working environment for employees, pay the legal minimum wage or the local industry standard whichever is greater, meet all applicable local environmental regulations and comply with the Gap s own more stringent environmental standards, neither threaten nor penalize employees for their efforts to organize or bargain collectively, uphold all local customs laws. To ensure compliance with its standards the Gap sent a Gap Field Representative to conduct an in-depth interview with a prospective supplier prior to the initiation of a business relationship. Among the suppliers from whom the Gap sourced its clothes was one in El Salvador run by Mandarin International, a Taiwanese-owned company that operated apparel assembly plants around the world. The Gap had begun contracting with the Mandarin plant in El Salvador about A worker there was paid approximately 12 cents for assembling a Gap three-quarter sleeve T-shirt or turtleneck which retailed at about $20 in the United States. Wages at the Mandarin plant averaged 56 cents an hour, a level that was claimed to provide only 18 percent of the amount needed to support a family of four but which was consistent with the industry standard for the region. 5

3 El Salvador is now a constitutional democracy. 6 In 1992 the country finally had ended a 12-year civil war that had torn the country apart with massacres and death squad killings and that had left 70,000 people dead. In spite of dramatic declines, the level of violence in El Salvador remained high, particularly murder, assaults, and robberies, including crimes against women and children. About 40 percent of the population was living below the poverty level. In spite of increases in the average monthly wage, inflation had brought about a decline in real wages. This in turn had encouraged foreign apparel makers to set up apparel factories there. The government maintained six free trade zones where foreign countries are allowed to import and export goods for assembly within the country without paying tariffs. Foreign companies operating within the free trade zones are called maquiladoras and they often paid better than companies outside the zones. Although the law prohibits employers from firing or harrassing employees who are trying to start a union, government authorities sometimes do not enforce this requirement. The Labor Code also prohibits minors between 14 and 18 years of age from being worked more than 6 hours a day, and the maximum normal workweek for adults is set at 44 hours unless overtime rates are paid. However, these rules are also not always enforced. Troubles erupted at the Mandarin plant which was located in one of the free trade zones in early February 1995 when workers notified the company of their intent to form a union, a right authorized by the Salvadoran labor code. 7 The Ministry of Labor granted the union legal status, the first union to be recognized in a free trade zone in El Salvador. The Mandarin company was notified of the legal status of the union on February 7. It responded by closing down the plant on February 8. Workers spent that day and night camped out in front of the factory. The next morning company security guards attacked and beat some of the female workers. 8 An emergency commission met, and the evening of February 9, the company agreed to end the lock-out, to recognize the union, and to comply with the Salvadoran Labor Code. A few days later, however, Mandarin fired over 150 union members and supporters. 9 In late March 1995 managers at the Gap became aware of claims that the management of the Mandarin factory was resisting union efforts to organize, in violation of Gap guidelines. Events at the plant were starting to receive publicity in the media, particularly with legislation now pending in Congress that would affect imports from the area. A Gap executive, Stan Raggio, went to El Salvador to investigate the situation. 10 While there he interviewed a number of workers regarding conditions at the factory. At the conclusion of his visit he reported that he had found no human rights abuses or other violations of the company s corporate sourcing policies. The company would, however, continue to monitor the situation at Mandarin. In April the Gap suspended placement of new orders at the Mandarin plant and announced it would not place more orders until it had determined whether the allegations were well-founded. 11 On Monday May 15, the workers union called a work stoppage to protest the continued firings of union people. Company guards are said to have physically attacked and beat union leaders when they stood up to announce the work stoppage. 12 Mandarin again closed the plant and fired all of the union leadership. An emergency commission was again convened and it again reached an agreement with the company, and the next morning the company reopened its doors. The company, however, refused to hire back the union leaders the next day. In May the Gap s Stanley P. Raggio again went to El Salvador to investigate the situation, and was again unable to get clear testimony from workers interviewed at the plant that their union rights were being violated.

4 American unions, such as the International Ladies Garment Workers Union, had long been concerned by conditions in offshore apparel sweatshops like the Mandarin plant with which American apparel manufacturers had to compete. Until the conditions of apparel workers in those countries improved, the plight of apparel workers in the United States would probably also remain unchanged since American companies could not afford worker amenities when they were competing against foreign companies that provided their workers with the barest minimum. Union leadership, therefore, had turned increasing attention to improving the conditions of labor in countries outside the United States with whom U.S. workers were now competing. The National Labor Relation Committee, a coalition of 25 labor unions, now made plans to launch a national campaign early in the summer of 1995 protesting harsh conditions faced by workers in Caribbean and Central American apparel contracting plants. The union decided to focus attention on workers attempts to unionize the Mandarin plant, on the subsistence wages prevalent in the area, and on the sweatshop conditions at the plant. During the summer of 1995, the National Labor Committee, arranged to have two young maquiladora workers Judith Viera, an 18-year-old former employee at Mandarin, and Claudia Molina, a 17-year-old former employee at Orion Apparel, a Korean-owned maquiladora in Choloma, Honduras spend 59 days crisscrossing the United States and Canada, visiting over 20 cities to criticize the Gap and other companies at press conferences and public meetings arranged by the National Labor Committee. At press conferences, the two women and representatives of the National Labor Committee accused the Gap of a cover-up of the situation at Mandarin, and described in detail long hours of work for 56 cents an hour; violence against union supporters, sexual harassment from supervisors, lack of clean drinking water, not being allowed to use rest rooms, and being forced to sweep the factory grounds under a torrid sun as a punishment. The publicity focused enormous attention on the Gap and its vendor in El Salvador. Major articles based on interviews with the two employees appeared in all major newspapers in the country. 13 The National Labor Relations Committee urged consumers to boycott the Gap and t o telephone or write to Gap executives voicing their displeasure about conditions at their vendor s factory. Union officials demanded that the Gap undertake a joint investigation, with the National Labor Relations Committee, of the situation at Mandarin, should pressure Mandarin to reinstate the fired union workers, and should commit itself to third party, independent monitoring of contractors compliance with the GAP code of conduct. The union noted plans to begin a broader range of coordinated actions at GAP stores across the United States and Canada leafleting consumers, etc. starting the day after Thanksgiving, when the critical Christmas buying season began. 14 The week of August 27, Stanley Raggio once again visited El Salvador and met with U.S. and E l Salvadoran government officials as well as several current and former factory workers in an attempt to objectively assess conditions at the factory. In a public statement issued after the visitation the company stated that Despite this intensive effort our investigation has not uncovered any significant evidence supporting the allegations or indicating that there has been any serious violations of our sourcing guidelines. Based on our investigation, we have determined with confidence that the Mandarin factory treats its workers well and meets our standards of fairness and decency. 15 The National Labor Relations Committee responded with news releases stating that several human rights organizations had verified its accusations and that workers had not spoken with the Gap out of fear. On the evening of Wednesday, August 2, Stanley Raggio met with Charles Kernaghan, executive director of the National Labor Committee to discuss the charges against the plant that the National Labor Committee was making in its summer campaign. Earlier that same day the NLC had held a demonstration at the Gap s distribution center in San Francisco. Both sides felt the discussions were productive but there were no immediate changes. 16

5 Two months later, Bob Herbert, writer for the New York Times visited El Salvador to investigate the situation for himself. On October 9 and on October 13 the New York Times published articles by him that were harshly critical of the Gap for continuing to claim that there was no evidence t o corroborate the charges of the National Labor Committee. 17 Herbert claimed to have interviewed over 30 women in El Salvador who had been fired for being union members. He had interviewed the president of the Mandarin plant who had confirmed that the women had worked at the plant but had left in late June. Interviews with local church groups and with the Government s Office for the Defense of Human Rights, he said, had also confirmed the mass firing of union workers. The question that now faced Stan Raggio and his fellow managers was: what to do? QUESTIONS 1. What course of action would you recommend to Stanley Raggio? Should the Gap give in to the Union s demand that the Gap undertake a joint investigation, with the National Labor Relations Committee, of the situation a t Mandarin, should pressure Mandarin to reinstate the fired union workers, and should commit itself to third party, independent monitoring of contractors compliance with the GAP code of conduct. 2. Should companies like the Gap attempt to get their suppliers to pay more than the local industry standard when it is insufficient to live on? Should they pay wages in the Third World that are equivalent to U.S. wages? Should they provide the same levels of medical benefits that are provided in the United States? The same levels of workplace safety? 3. Is a company like the Gap morally responsible for the way its suppliers treat their workers? Explain your answer. NOTES 1. Bob Herbert, Sweatshop Beneficiaries, New York Times, July 24, Patrick J. Spain and James R. Talbot, eds., Hoover s Handbook of American Companies, 1996, (Austin, TX: The Reference Press, 1996), p The Gap, Annual Report, Look Who s Sweating Now: How Robert Reich is Turning Up the Heat on Retailers, Business Week, 16 October Letter of Charles Kernaghan, Executive Director, National Labor Committee Education Fund In Support of Worker and Human Rights in Central America, 15 Union Square, New York, NY 10003; dated May 18, Information in this and the following paragraphs is drawn from: U.S. Department of State s Country Reports on Human Rights Practices for 1994, (Washington: U.S. Government Printing Office, Richard Rothstein, USAID Teaching El Salvador How to Suppress Labor, The Sacramento Bee, (Final Edition), 8 June National Labor Committee, News Release, 28 June Free Trade Zone Organizers Told Blood Will Flow, LaborLink, June August, 1995, no The Gap, Press Release, reported in Business Wire Information Services, 28 July Joyce Barrett, Caribbean Rights Group Heading for Gap Offices, Women s Wear Daily, 2 August, Ibid.

6 13. Articles appeared in: the New York Times (July 21, 24), the Washington Post (July 24), the Los Angeles Times (July, date unknown), The Miami Herald (July 1), The Toronto Star (August 16), The Toronto Globe and Mail (August 16), the Twin Cities Star Tribune (July 7), the Hartford Journal (July 12), the Toledo Blade (July 31), the San Francisco Examiner (August 2), the San Francisco Chronicle (August 1), the Sacramento Bee (June 8, August 1), the New York Newsday (June 27), the New York Daily News, the Women s Wear Daily (August 2, 4, 9, 11), and dozens of other major metropolitan newspapers around the United States. 14. Letter entitled Outline/Proposal, The GAP Campaign, A Strategy to Win from National Labor Committee Education Fund in Support of Worker and Human Rights in Central America, 15 Union Square, New York, NY 10003, dated October 18, Letter of Dotti Hatcher, Director, Sourcing & Trade Compliance, The Gap, dated September 11, Gap Meets Rights Group on Salvador, Women s Wear Daily, 4 August Bob Herbert, Not a Living Wage, (Op-Ed), New York Times, 9 October 1995, and In Deep Denial, (Op- Ed), New York Times, 13 October 1995.