This is Part I of a two part series. Part II will be published on Friday morning. This is a cross post with the Fordham Corporate Law Forum.
A Foxconn factory likely created the device you’re using to read this post, as Foxconn manufactures over 40 percent of the world’s electronics for companies including Apple, Dell, Amazon, Sony, and Motorola. Headquartered in Taiwan, Foxconn employs over 1.2 million people, making it China’s largest private employer. Recent reports about Foxconn, summarized below, raise challenging normative questions related to the social responsibilities of corporations and separate yet related matters of international justice. More specifically, to what extent should a successful American company ensure that its suppliers and subcontractors are paying their workers fair wages and providing safe and comfortable working conditions?
Foxconn in the News
The reports about Foxconn that have been flooding the news lately allege exploitive and unsafe labor practices and working conditions at Foxconn. In particular, a news broadcast critical of Foxconn, later found to contain numerous erroneous assertions, has brought the company to the center of media scrutiny. The well-regarded investigative and feature public radio program, This American Life, retracted its story because it related partially fabricated accounts of working conditions at Foxconn’s factories. This American Life admits and details the fabrications here.
Two weeks after This American Life retracted its report, the Fair Labor Association (FLA), a nonprofit international monitoring group that conducts inspections of factories worldwide published what appears to be a more fact-based review of labor issues at three Chinese Foxconn facilities. Apple agreed to the FLA audit, which found that assembly-line workers in the three factories worked more than 60 hours per week, on average, during peak periods. Concerning worker safety, 43% of the workers surveyed said they had experienced or witnessed accidents while on the job. The full FLA report on Foxconn is available here.
Apple and Foxconn Take Steps to Improve Working Conditions
This recent news deluge, including reports of employee suicides at Foxconn in 2010 that prompted Foxconn to install safety nets, has led Foxconn and Apple to step up their effort to improve the factory working environment. Foxconn said it will reduce working hours to 49 hours per week, including overtime. Total compensation for workers will remain the same. As a result, Foxconn will hire tens of thousands of additional workers and build more housing facilities and canteens to keep up with production demands and make up for lost hours. Workers, however, would rather have pay raises than reduced hours. The FLA survey found that the average worker is 23 years old and is paid 2,536.85 yuan, or $403, a month. In addition to supporting the FLA probe, Apple has created a Code of Conduct for suppliers to follow, published a supplier responsibility report, and has made available an interactive Supplier Responsibility section on their website to access these and other materials.
The Corporation’s Role
An early judicial analysis of the role of American corporations was offered in Dodge v. Ford Motors (1919), and is frequently cited for the legal principle that a business corporation is organized primarily for the profit of stockholders, with the qualification that a corporation is not prohibited from engaging in “incidental” humanitarian expenditure.
In Dodge, Ford Motor Company sought to stop issuing to shareholders a $39 million dollar special dividend. Dodge, a Ford competitor and minority shareholder, sued to compel Ford to continue payments of the special dividend. At trial, Henry Ford’s rationale for stopping the dividend was to facilitate a price reduction of cars, allowing more people to have them, and to hire more workers. Ford did not allege he intended these measures to increase Ford’s profitability, but in short, Ford argued that stopping dividends would provide a humanitarian benefit to consumers of Ford cars and prospective workers. Unmoved by Henry Ford’s humanitarian reasoning, the Michigan Supreme Court affirmed the trial court’s order to give out the $39 million dollar special dividend. Ford owed a duty to maximize profit for its corporate shareholders, not maximize profit for the community as a whole or for employees.
This well-established holding has statutory support. According to ALI Corporate Governance rule §201, the objective of a corporation is profit and shareholder gain, but again, a corporation may devote reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.
Of course, American law does not extend to companies like Foxconn in light of basic principles of comity. Extraterritorial application of American law applies only in limited circumstances that are probably not present in this instance. Nor is it argued that American laws should apply to Chinese or Taiwanese companies solely because American companies are the beneficiaries of their labor practices.
Nonetheless, perhaps American case law and statutes can serve as a standard by which we start normatively evaluating the overseas economic activity of American corporations. At first glance, at least under American corporate governance standards cited above, companies like Apple are not required to make efforts to improve working conditions or increase wages at the facilities of suppliers. Such a policy would raise manufacturing costs, although it could also increase worker productivity and enhance brand image.
In any case, Apple is undoubtedly concerned about the public relations implications. Should consumers start feeling guilty about buying iPads and iPhones, they may stop buying them. Companies like Apple depend heavily on brand image to sell expensive products in competitive markets filled with comparable products, and Apple is associated with socially conscious youthfulness through its slogan “think different.” Apple has surpassed Google recently as the world’s most valuable brand, but a brand association to poor labor practices could be detrimental to that status. Daniel Diermeier, a professor at Northwestern University who studies reputation management, believes that the more aggressive stance by Apple toward factory conditions is the result of greater scrutiny by the media and advocacy groups. He also believes Apple’s new chief executive Tim Cook has played a role in the change, stating that “I think he probably has a deeper understanding, and this is more personal for him than it might be for other executives.”
Apple’s latest efforts can reasonably be seen as mitigation of economic risk, the risk of harm to a brand identity that is central to Apple’s profitability. In other words, not only are Apple’s efforts to improve working conditions in conformity with American law, it is not too far fetched to say companies like Apple are required to take such measures to head off such risk.
Part II of this post, which will be published on Friday, will discuss whether concerns for international justice should play a part in the role of a corporation that does business in the developing world.