Nike: Free Speech or "False Promises"?

A new book charges that it and other multinationals merely pay lip service to their stated labor standards and rarely follow through

By Aaron Bernstein

On Apr. 23, the U.S. Supreme Court will hear charges that Nike (NKE ) committed consumer fraud by making false statements about the labor conditions in its overseas factories. This hearing stems from a May ruling by the California Supreme Court in which the judges upheld corporate critic Marc Kasky's right to sue Nike for false advertising. He claims Nike misled the public when it denied that subcontractors were mistreating workers in shoe factories in Southeast Asia.

The question before the court is one of free speech. Do the promises Nike makes in its workplace code of conduct for factories worldwide constitute commercial speech, thereby making the outfit subject to civil charges if they're found to be false? Or are they political speech, thereby protected by the U.S. Constitution?

Nike has received an outpouring of support from free-speech advocates and corporations worried about the chilling effect of a negative ruling. But the footwear giant could be in real trouble if the justices rule in favor of the plaintiffs.

IGNORING THE CODES.

  Now comes a new book, Setting Global Standards: Guidelines for Creating Codes of Conduct in Multinational Corporations (published in March by John Wiley & Sons), and its thesis provides more fuel for labor-rights groups. Author S. Prakash Sethi concludes that Nike, like Wal-Mart (WMT ), Disney (DIS ), and many other Western multinationals, aren't following the labor codes they adopted in response to the anti-sweatshop campaign of the past decade or so.

"Companies have been all too willing to make promises in the form of codes of conduct whenever they're forced to respond to public concern, but they have treated these promises as harmless paper exercises that they will not need to put into practice anytime soon -- if ever," writes Sethi, a business professor at Baruch College in New York City with long experience in sweatshop monitoring. "When it comes to creating codes of conduct and complying with them, most companies have been entrapped by their own misstatements and false promises," he says.

The book is an eye-opener for anyone interested in how corporations like Nike and Wal-Mart have responded to the longstanding criticisms of their labor practices. While some of the book deals with details of monitoring that may be of less interest to average readers, Sethi still manages to liven up the globalization debate. He has written several books on international codes of conduct and has headed an unusual external monitoring group created to examine and improve the factories that produce toys for Mattel (MAT ), the world's largest toymaker.

EXISTING STANDARDS.

  A framework for standards already exists in large parts of the developing world, Sethi believes. Many Western businesses producing in low-wage countries have adopted codes for their factories or those of their suppliers. Most of the codes look very much like Nike's and require the factories to do such things as adhere to the local country's labor laws, not use forced or child labor, respect health and safety concerns, and allow workers to form labor unions.

Sethi points out that because codes are voluntary, they offer a flexible way for companies to address social concerns. They also minimize the need for the kind of government regulations that employers dislike.

A handful of businesses have set up factory-monitoring groups that rely on inspections by outsiders. Nike has joined the Fair Labor Assn., a Washington (D.C.)-based organization it set up with Reebok (REB ), Liz Claiborne (LIZ ), and several other clothing companies. The FLA performs random surveys of their factories to ensure that they're adhering to the labor code the outfits have agreed upon.

"HOUSE OF CARDS."

  While Sethi argues that the FLA and other independent monitoring groups are on the right track, they still have a long way to go. For example, the FLA allows the corporations to choose which factories will be monitored. What's more, he says the FLA's penalties for errant factories or companies are weak, and it has shown little interest in enforcement. "In the end, the entire process is reduced to a house of cards," Sethi concludes.

It's clear that Nike doesn't live up to the part of its labor code involving unions, Sethi argues. Indeed, it can't, at least not until countries like China, where Nike has thousands of workers, recognize the rights of employees to freely form independent unions. Like virtually every other Western employer doing business in that country, Nike operates within China's labor system and hasn't even tried to work around, much less challenge, the government's stance toward unions. Yet that system directly contradicts Nike's code -- and the promise it has made to its customers.

The Supreme Court may decide that Nike is engaging in political speech when it tells consumers that it respects the unionization rights of its workers. But if the justices find that the outfit makes such statements primarily to reassure buyers about its labor practices -- i.e., to sell shoes -- Sethi's argument is that Nike could be in real trouble. And virtually every other Western business producing in low-wage countries could find itself on the same footing.

Bernstein is BusinessWeek's labor editor

Edited by Patricia O'Connell