Apple’s Moral Problem

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Over the last few months Apple has received a fair amount of negative press over the factory conditions in its manufacturing plants in China. To be more precise, Apple has been criticized for the working conditions in the Foxconn manufacturing facilities it contracts with to produce its entire product line including iPods, iPhones, iPads, and Mac computers. Investigative pieces by the New York Times and Nightline have documented a number of disturbing instances of worker abuses such as underage employees, dangerous if not deadly working conditions, 70 hour work weeks, cramped living conditions in factory dorms, and suicides.[1] All of this is made worse by Apples recent $13.06 billion profit announcement demonstrating that the company is not operating on razor thin margins. Further, Apple reportedly has over $100 billion in cash reserves.

While Apple has received substantial criticism, some commentators have noted that Apple is not the only company doing business with Foxconn. Dell, Lenovo, IBM, LG, Amazon, and others also use subcontract with Foxconn to manufacture their products in the same facility. For many this industry-wide use of Chinese manufacturing in some ways mitigates Apple’s responsibility. Since all companies are taking advantage of the more lax labor laws and lower minimum wage, a single company cannot afford to unilaterally make changes without suffering a competitive disadvantage. Nor can a single company change the working environment in what amounts to a medium sized city. But, these responses miss the moral and legal complexity of the situation. What Apple faces is not what is termed in ethics a “coordination problem”, but rather a moral, legal. and structural problem.

The Non-Coordination Problem
One of the responses that might be offered in defense of Apple’s actions in China is based on a coordination problem. A coordination problem is essentially one in which an individual—in this instance a corporate person—is absolved of some or all of the responsibility for his or her actions because individually they are unable to affect meaningful change unless everyone else takes the same or a similar action. Generally, a coordination problem is one such that the agent will be worse off if they unilaterally take a particular action.

In the case of Apple, the coordination problem does not exist. As of January 2012, Apple cleared more than $13 billion dollars in the last quarter. In addition to its most recent profits, it currently has nearly $100 billion in cash reserves. This level of resources means that Apple can afford to spend a substantial sum of money to improve the working conditions for the employees of its suppliers, while still maintaining extremely high profits and cash reserves. Unlike other electronic manufacturers, Apple has fairly high margin with estimates in the 30% range.[2] High product margins, combined with large cash reserves suggests that Apple could improve worker conditions while maintaining a high level of profitability and competitiveness.

Corporate Responsibility
In business ethics, the idea of corporate responsibility is controversial. Many argue that corporations have an obligation to the communities in which they do business. Others hold that a corporation has no other responsibility than to maximize profits for shareholders and follow the letter of the law. Those holding this latter view argue that unelected, non-accountable corporations should not be engaging in the provision of social services. Of course, there are instances when corporations can engage in work that might be termed socially responsible or charitable, namely, when such acts improve the public perception of the company. Improvements in perception are yield greater profits, and are thus in line with corporate ends.

If the issue was simply one of morality, then there would be little to debate in terms of Apple’s culpability for the treatment of the workers. Decent working conditions, adequate compensation, limited work week, etc., are things Apple should ensure that its partners at Foxconn are respecting. But, the issue becomes more muddled, and the culpability extends to others when we consider the ways the legal system has defined corporate responsibility.

For people like Milton Friedman [3] and Albert Carr [4] Apple doesn’t really have a problem, provided that they haven’t broken any laws and continue to maximize shareholder profits or corporate value. While this view leaves itself wide open to moral objections, from both a U.S. and Chinese legal perspective the situation may not be so clear cut.

Chinese Labor Law
One of the difficulties in doing business in foreign countries is the difference in labor laws. By American standards, Chinese workers are vastly underpaid for the work they do. The monthly wages for a Chinese worker can range from to $175 to $200 depending on overtime plus overtime.[5] The maximum legally allowed work week is supposed to be capped at 49 hours per week. By law workers can add on an addition 9 hours per week in overtime. In many plants, the actual work week is closer to 60 hours per week.

While the long hours and low compensation are harsh by western standards, many Chinese workers view work at Foxconn as the opportunity to better his or her station in life. By Chinese standards, Foxconn workers are better paid than their counterparts in places like Taijin and Shanghai.[6] Foxconn workers (as of 2010) make $290 per month plus overtime. These workers rarely make factory work a career, and usually view the work as temporary. They will spend 5–10 years accumulating enough money to start his or her own business, save up in order to marry, or help support their family through tough times.

Recently, Foxconn has announced that it will be enforcing the maximum 49 hour work week, along with the mandatory one day off a week. The response from the workers was to protest the enforcement of the rules. As many articles noted, Foxconn workers argued that they were not there for recreation, but were there to work. They didn’t want to lose the overtime pay that a shorter work week would entail.

Regardless of whether one thinks the Foxconn workers are victims of a false consciousness, are concerned about losing their jobs or are just hard workers, the fact is that Apple via Foxconn is (at least now) not violating the law. Workers are in fact better compensated at the Foxconn plant than they are elsewhere in China. Of course, this does not mean that the working conditions are just, but justice seems to have little to do with the way laws in the United States view the situation.

The Purpose of a Corporation and U.S. Law
Assuming for a moment that Apple and Foxconn abide by Chinese labor laws, there is an additional difficulty in instituting reform. Most interpretations of U.S. corporate law hold that it is the duty of the corporation to maximize shareholder wealth. If a corporation fails to take advantage of an income opportunity, it is violating its fiduciary responsibility to its shareholders. This view of corporate responsibility was reinforced in the recent eBay v. Newmark case. In this case, the founders of Craigslist held that their primary responsibility was not to generate profit, but to provide a service. It was not that they didn’t generate profit, only that they did not feel they needed to monetize every element of Craigslist. Their shareholders and the court disagreed:

Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce. If Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig’s actions affect others besides themselves.[7]

Herein lies the tension between morality and the law. A corporation is required by law to maximize profits. Failure to do so amounts to an unjust taking of shareholder profit. Even though Apple has the resources, there is some question as to whether the shareholders would have a claim against the company if they took one or two billion dollars out of profits to pay workers wages higher than those required by Chinese law. Of course, if paying the workers better wages made for good public relations then the expenditure could be justified. Yet, even with the bad publicity, Apple has had record-breaking profits in the last several quarters.

The criticism Apple has received is well deserved. As a corporation Apple does have the resources and the clout to make meaningful changes in its manufacturing process while still maintaining a healthy bottom line. But, the Apple case belies a number of other troubling aspects of both the global economy and business in general:

  1. We as a society have designed corporations in such a way so as to make it difficult if not impossible to directly consider the plight of workers, society or the global community.
  2. As Americans, we have become both dependent on, and indifferent to, the plight of workers in other countries for cheap goods. While we lament the working conditions in places like China, we continue to purchase their manufactured goods.
  3. While we can influence the conditions in foreign plants, ultimately it is the responsibility of foreign governments to protect their citizens. It is extremely difficult to influence—let alone ensure—that foreign labor laws are being respected by foreign companies.

I am not sure how to address these issues, but it is clear that the case of Apple (and other companies manufacturing in China) is not only an issue of corporate greed. It is also an issue of both individual and collective responsibility.

  1. As of the writing of this post, recent evidence suggests that the conditions in China may have been slightly exaggerated. NPR’s Marketplace recently had a look in and around some of these factories:  ↩

  2.–2/What-are-the-profit-margins-on-Apples-products  ↩

  3. “The Social Responsibility of Business”  ↩

  4. “Is Business Bluffing Ethical?”  ↩

  5.…  ↩

  6.…  ↩

  7. eBay Domestic Holdings, Inc. v. Newmark, et al., C.A. No. 3705-CC (Del. Ch. Sept. 9, 2010)  ↩

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1 Comment

  1. ethicsblogger

     /  2012/04/14

    Mark:Thanks for laying out the issues so clearly. I’m afraid I’m not sure what my own conclusions are about Apple/Foxconn, but I’ll offer a few critical comments here in case they’re useful.1. You’re probably right that there’s no coordination problem here, but I’m not sure anyone thinks there is. If anyone thinks there’s like a coordination problem, it might be something closer to diffusion of blame: it’s not so much that no company acting alone *can* do any good, but that no company has an *obligation* to act alone. (I’m not making the argument, just clarifying what it might be.)2. Almost (?) no one worth considering actually thinks that “a corporation has no other responsibility than to maximize profits for shareholders and follow the letter of the law.” Not even Milton Friedman had a view that narrow; even he allowed that corporations must follow ‘ethical customs’, though that term doesn’t clarify much. (In fact, note that, even just thinking about the law, there’s a sense in which, of all a manager’s obligations, obligations to shareholders come *last*. They have to pay employees, pay the rent, pay their suppliers, pay the interest on their bank loans, pay for expenses related to regulatory requirements, etc etc. and only THEN, if there’s money left over, does any go to shareholders.)3. Even if we sympathize with the plight of Foxconn workers, it’s not immediately clear that Apple should help. First, why should *Apple* help Foxconn workers, rather than some other wealthy company? Second, why should Apple help *Foxconn* workers, rather than someone even worse off? After all, we’re talking about charity here: why not help people in China who only *wish* they could be lucky enough to work in a Foxconn factory? Some might point to the more or less direct relationship that Apple has with these workers as generating a special responsibility; but surely that would be outweighed by greater need on the part of others.4. The thing that you say is “nearly impossible,” in Conclusion 1, seems quite common. Considerations other than profit may not be as common or as forceful as some would like, but they certainly do have a role for lots of companies.5. Thanks for the Craigslist example. But it’s kind of the example that proves the rule, which is that managers actually have vast discretion (under what lawyers call the “Business Judgment Rule.) I take it that shareholder suits are in fact relatively rare.6. At some level, your complaint about corporate law seems to be that corporate law doesn’t license theft — it doesn’t allow executives to use shareholder money for whatever purposes they see fit. (Re the Craigslist case, note that If Craigslist didn’t intend to maximize profits, then they effectively took eBay’s money under false pretences. Note by comparison that the NYT’s mission is explicitly not to maximize profits, and that’s understood up-front, so no one complains.) Encouraging execs to divert resources to pet charitable projects is on the whole not a good idea. The worry here is that it would be very hard to institutionalize a principled distinction between ethically good pet projects and ethically bad or neutral ones. Imagine NOT requiring managers to aim at profit: that would essentially license them to goof off, be wasteful, or worse.

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