Note: the following case is copyrighted and may be copied and used only by currentusers and owners of the textbook, BUSINESS ETHICS: CONCEPTS AND CASESby Manuel Velasquez.

CASES FOR DISCUSSION

The Gap

On Monday July 24, 1995, Stanley Raggio, senior vice president for international sourcing andlogistics 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 practicesthat he, Stan Raggio, was charged with managing.

The hundreds of thousands of young (and mostly female) factory workers in CentralAmerica who earn next to nothing and often live in squalor have been an absolute boonto American clothing company executives like Donald G. Fisher, the chief executive of theGap and Banana Republic empire, who lives in splendor and paid himself more than $2million last year.

Judith Viera is an 18-year-old who worked at a maquiladora plant in El Salvadorthat made clothing for the Gap and other companies. She was paid a pathetic 56 cents anhour.

Donald Fisher should meet Judith Viera, spend some time with her, listen to her asshe describes in a still-childish voice her most innocent of dreams. She would like toearn enough money to buy a little more food for her mother and two sisters. She wouldlike to go to high school. But Donald Fisher is a busy man. It takes a great deal of time tooversee an empire balanced on the backs of youngsters like Ms. Viera (and hercounterparts in Asia).1

The article in The New York Times was one of hundreds that were to appear in newspapersacross the United States during the next few months describing human rights violations and subsistence-level wages at suppliers in Central America from which the Gap and other clothing retailers sourced theirapparel.

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 namesincluding: Gap, Banana Republic, Old Navy Clothing Company, GapKids, and babyGap. All merchandisesold by the chain is private label.3

The Gap was founded in 1969 when Donald Fisher and his wife, Doris, opened a small clothing storenear San Francisco State University. By 1971 they were operating six Gap stores. In 1983 Fisher enticedMillard Drexler, former president of Ann Taylor, into taking over as the new president of the Gap, whileFisher became Chief Executive Officer and Chairman of the company. Drexler transformed the companyby replacing the drab lines of clothing the store had been stocking, with new brightly colored lines ofrugged high quality cotton clothes.

In 1995 Fisher retired as CEO and Drexler, now aged 50, took over the title. By now the Gap had1348 well-located stores in the U.S. and Puerto Rico, 72 in Canada, 49 in the United Kingdom, and 3 inFrance. Competition was intense and earlier R. H. Macy and Federated stores had been forced to filechapter 11 bankruptcy. The Gap, however, had been doing very well, with 1994 profits of $258 million onsales of $3.723 billion.3

Apparel stores like the Gap purchased their clothes from manufacturers in the United States andaround the world. Some 20,000 contractors in the United States, most employing 5 to 50 workers, sewedclothes for companies like the Gap. The apparel manufacturing industry in the United States was underintense pressure from imports since the work was so labor-intensive, and labor was less regulated andmuch cheaper in many developing countries, depressing both wages and working conditions in the UnitedStates. For example, it is estimated that in China, wage rates in the apparel industry are approximatelyone-twentieth of U.S. rates. Since 1990 the U.S. had lost more than a half a million textile and appareljobs, and companies struggling to survive in the United States often had working conditions as bad asanything to be found in developing countries. A 1989 study by the General Accounting Office discoveredthat two-thirds of the 7000 garment shops in New York City were sweatshops.4 A spot check by theLabor Department in Southern California had found that 93 percent of the shops checked had health andsafety violations.

The Gap contracted with over 500 manufacturers around the world who made the Company’sprivate-label apparel according to Gap’s specifications. Gap Inc. purchased about 30 percent of its clothesfrom manufacturers located in the United States and 70 percent from vendors located in 46 foreigncountries. 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 fivehundred. The toy factory was owned by Kader Industries which made toys at the plant for some of thelargest toy companies in the United States including, Toys R Us, Fisher-Price and Tyco. U.S. CustomsService documents revealed that during the first three months of 1993, U.S. companies had imported morethan 270 tons of toys from the Thai factory. The accident drew attention not only to the responsibilitiesof the Toy industry, but to the responsibilities of all U.S. industries and consumers in ensuring thatproducts 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 ofage, provide a safe working environment for employees, pay the legal minimum wage or the local industrystandard—whichever is greater, meet all applicable local environmental regulations and comply with theGap’s own more stringent environmental standards, neither threaten nor penalize employees for theirefforts to organize or bargain collectively, uphold all local customs laws. To ensure compliance with itsstandards the Gap sent a “Gap Field Representative” to conduct an “in-depth interview” with aprospective 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 byMandarin International, a Taiwanese-owned company that operated apparel assembly plants around theworld. The Gap had begun contracting with the Mandarin plant in El Salvador about 1992. A worker therewas paid approximately 12 cents for assembling a Gap three-quarter sleeve T-shirt or turtleneck whichretailed at about $20 in the United States. Wages at the Mandarin plant averaged 56 cents an hour, a levelthat was claimed to provide only 18 percent of the amount needed to support a family of four but whichwas consistent with the industry standard for the region.5

El Salvador is now a constitutional democracy.6 In 1992 the country finally had ended a 12-yearcivil war that had torn the country apart with massacres and death squad killings and that had left 70,000people dead. In spite of dramatic declines, the level of violence in El Salvador remained high, particularlymurder, assaults, and robberies, including crimes against women and children. About 40 percent of thepopulation 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 t oset up apparel factories there.

The government maintained six “free trade zones” where foreign countries are allowed to importand export goods for assembly within the country without paying tariffs. Foreign companies operatingwithin the free trade zones are called “maquiladoras” and they often paid better than companies outsidethe zones. Although the law prohibits employers from firing or harrassing employees who are trying tostart a union, government authorities sometimes do not enforce this requirement. The Labor Code alsoprohibits minors between 14 and 18 years of age from being worked more than 6 hours a day, and themaximum normal workweek for adults is set at 44 hours unless overtime rates are paid. However, theserules are also not always enforced.

Troubles erupted at the Mandarin plant—which was located in one of the free trade zones—in earlyFebruary 1995 when workers notified the company of their intent to form a union, a right authorized bythe Salvadoran labor code.7 The Ministry of Labor granted the union legal status, the first union to berecognized 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 byclosing down the plant on February 8. Workers spent that day and night camped out in front of thefactory. The next morning company security guards attacked and beat some of the female workers.8 Anemergency commission met, and the evening of February 9, the company agreed to end the lock-out, t orecognize the union, and to comply with the Salvadoran Labor Code. A few days later, however, Mandarinfired over 150 union members and supporters.9

In late March 1995 managers at the Gap became aware of claims that the management of theMandarin factory was resisting union efforts to organize, in violation of Gap guidelines. Events at theplant were starting to receive publicity in the media, particularly with legislation now pending inCongress that would affect imports from the area. A Gap executive, Stan Raggio, went to El Salvador t oinvestigate the situation.10 While there he interviewed a number of workers regarding conditions at thefactory. At the conclusion of his visit he reported that he had found no human rights abuses or otherviolations of the company’s corporate sourcing policies. The company would, however, continue t omonitor the situation at Mandarin. In April the Gap suspended placement of new orders at the Mandarinplant and announced it would not place more orders until it had determined whether the allegations werewell-founded.11

On Monday May 15, the workers’ union called a work stoppage to protest the continued firings ofunion people. Company guards are said to have physically attacked and beat union leaders when they stoodup 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 thenext morning the company reopened its doors. The company, however, refused to hire back the unionleaders the next day. In May the Gap’s Stanley P. Raggio again went to El Salvador to investigate thesituation, and was again unable to get clear testimony from workers interviewed at the plant that theirunion rights were being violated.

American unions, such as the International Ladies’ Garment Workers Union, had long beenconcerned by conditions in offshore apparel sweatshops like the Mandarin plant with which Americanapparel manufacturers had to compete. Until the conditions of apparel workers in those countriesimproved, the plight of apparel workers in the United States would probably also remain unchanged sinceAmerican companies could not afford worker amenities when they were competing against foreigncompanies that provided their workers with the barest minimum. Union leadership, therefore, had turnedincreasing attention to improving the conditions of labor in countries outside the United States withwhom U.S. workers were now competing.

The National Labor Relation Committee, a coalition of 25 labor unions, now made plans to launch anational campaign early in the summer of 1995 protesting harsh conditions faced by workers in Caribbeanand 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 thesweatshop conditions at the plant.

During the summer of 1995, the National Labor Committee, arranged to have two youngmaquiladora workers—Judith Viera, an 18-year-old former employee at Mandarin, and Claudia Molina, a17-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 criticizethe Gap and other companies at press conferences and public meetings arranged by the National LaborCommittee. At press conferences, the two women and representatives of the National Labor Committeeaccused the Gap of a “cover-up” of the situation at Mandarin, and described in detail long hours of workfor 56 cents an hour; violence against union supporters, sexual harassment from supervisors, lack of cleandrinking water, not being allowed to use rest rooms, and being forced to sweep the factory grounds under atorrid sun as a punishment. The publicity focused enormous attention on the Gap and its vendor in ElSalvador. Major articles based on interviews with the two employees appeared in all major newspapers inthe country.13 The National Labor Relations Committee urged consumers to boycott the Gap and totelephone 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 RelationsCommittee, 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 theGAP code of conduct. The union noted plans to begin a “broader range of coordinated actions at GAPstores across the United States and Canada—leafleting consumers, etc.” starting the day afterThanksgiving, 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 ElSalvadoran government officials as well as several current and former factory workers in an attempt t oobjectively assess conditions at the factory. In a public statement issued after the visitation the companystated that “Despite this intensive effort our investigation has not uncovered any significant evidencesupporting the allegations or indicating that there has been any serious violations of our sourcingguidelines. Based on our investigation, we have determined with confidence that the Mandarin factorytreats its workers well and meets our standards of fairness and decency.”15 The National Labor RelationsCommittee responded with news releases stating that several “human rights organizations” had verifiedits 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, executivedirector of the National Labor Committee to discuss the charges against the plant that the National LaborCommittee was making in its summer campaign. Earlier that same day the NLC had held a demonstrationat the Gap’s distribution center in San Francisco. Both sides felt the discussions were productive but therewere no immediate changes.16

Two months later, Bob Herbert, writer for the New York Times visited El Salvador t oinvestigate the situation for himself. On October 9 and on October 13 the New York Times publishedarticles by him that were harshly critical of the Gap for continuing to claim that there was no evidence t ocorroborate the charges of the National Labor Committee.17 Herbert claimed to have interviewed over 30women in El Salvador who had been fired for being union members. He had interviewed the president ofthe Mandarin plant who had confirmed that the women had worked at the plant but had “left” in lateJune. Interviews with local church groups and with the Government’s Office for the Defense of HumanRights, 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 demandthat the Gap “undertake a joint investigation, with the National Labor Relations Committee, of the situation a tMandarin, 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 whenit is insufficient to live on? Should they pay wages in the Third World that are equivalent to U.S. wages? Shouldthey provide the same levels of medical benefits that are provided in the United States? The same levels of work-place safety?

3. Is a company like the Gap morally responsible for the way its suppliers treat their workers? Explain youranswer.

NOTES

1. Bob Herbert, “Sweatshop Beneficiaries,” New York Times, July 24, 1995. 2. Patrick J. Spain and James R. Talbot, eds., Hoover’s Handbook of American Companies, 1996,(Austin, TX: The Reference Press, 1996), p. 394. 3. The Gap, Annual Report, 1995. 4. “Look Who’s Sweating Now: How Robert Reich is Turning Up the Heat on Retailers,” Business Week, 16October 1995. 5. Letter of Charles Kernaghan, Executive Director, National Labor Committee Education Fund In Support ofWorker and Human Rights in Central America, 15 Union Square, New York, NY 10003; dated May 18, 1995. 6. Information in this and the following paragraphs is drawn from: U.S. Department of State’s CountryReports on Human Rights Practices for 1994, (Washington: U.S. Government Printing Office, 1995. 7. Richard Rothstein, “USAID Teaching El Salvador How to Suppress Labor,” The Sacramento Bee, (FinalEdition), 8 June 1995. 8. National Labor Committee, News Release, 28 June 1995. 9. “Free Trade Zone Organizers Told ‘Blood Will Flow,’ ” LaborLink, June–August, 1995, no. 4.10. The Gap, Press Release, reported in Business Wire Information Services, 28 July 1995.11. Joyce Barrett, “Caribbean Rights Group Heading for Gap Offices,” Women’s Wear Daily, 2 August,1995.12. Ibid.

13. Articles appeared in: the New York Times (July 21, 24), the Washington Post (July 24), the LosAngeles Times (July, date unknown), The Miami Herald (July 1), The Toronto Star (August 16), TheToronto Globe and Mail (August 16), the Twin Cities’ Star Tribune (July 7), the Hartford Jou rna l(July 12), the Toledo Blade (July 31), the San Francisco Examiner (August 2), the San FranciscoChronicle (August 1), the Sacramento Bee (June 8, August 1), the New York Newsday (June 27), theNew York Daily News, the Women’s Wear Daily (August 2, 4, 9, 11), and dozens of other majormetropolitan newspapers around the United States.14. Letter entitled “Outline/Proposal, The GAP Campaign, A Strategy to Win” from National Labor CommitteeEducation Fund in Support of Worker and Human Rights in Central America, 15 Union Square, New York, NY10003, dated October 18, 1995.15. Letter of Dotti Hatcher, Director, Sourcing & Trade Compliance, The Gap, dated September 11, 1995.16. “Gap Meets Rights Group on Salvador,” Women’s Wear Daily, 4 August 1995.17. 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.