82 PART A Understanding Business Ethics by US immigration officials in 2009 and was forced to fire some 1,800 immigrant workers, almost a quarter of its workforce, for 'irregularities' in their immigration documents. Controversies, catastrophes, and closure American Apparel was clearly a leader in some areas of corporate responsibility, but its unusual approach coupled with its outspoken boss also caused it a whole host of problems along the way. To begin with, the company was often criticized for its overtly sexual advertising, featuring scantily dressed young girls (and occasionally men) in provocative, borderline pornographic, poses. The use of nudity in adverts (and more recently, visible pubic hair on its mannequins) was successful in court- ing publicity, but it also threatened the firm's appeal, especially among many parents of its sizeable teenage market. However, the firm also purported to be promoting a more open approach to sexu- ality, using advertising that eschewed airbrushing and came straight from the firm's headquarters rather than via an advertising agency. It may have had risks, but American Apparel's edgy aesthetic clearly had its legions of fans. One of the more visible risks of its 'sex sells' approach was a series of sexual harassment claims made against former CEO Charney, beginning in 2005. Although most cases were dismissed or settled, Charney became a divisive figure who not only encouraged romantic relationships in the workplace (unlike much of corporate America, which prohibits them), but actively promoted a highly charged sexual atmosphere. In one now legendary encounter, he even masturbated in front of a journalist while being interviewed in his office. According to one account: 'He's short, hairy and absolutely unapologetic about loving sex-any time, anywhere, with anybody he comes across, up to and including his own company employees.' Even to his supporters, he is something of a 'a tarnished hero's Ongoing investigations into sexual harassment at the firm eventually led to Charney being fired in 2014. But it was not just ethical controversies that plagued American Apparel. Even more of a threat to the health of the company was its multitude of financial problems. After years of strong growth and one of the fastest international retail expansions in history, American Apparel started to run into problems around 2009. Its run-in with the immigration authorities led to staff shortages and supply hold-ups, while its super-charged expansion left the company short of cash during the financial down- turn. A hike in global cotton prices then drastically cut into the firm's profitability. As a result, the firm twice faced bankruptcy in 2009 and 2012, only to be saved by last-minute loans from investors. It was even at one point threatened with delisting from the New York Stock Exchange due to financial mismanagement and delays in its filings. Lawsuits from investors for- lowed. From a high of $15 in December 2007, its stock tumbled to below $0.50 in 2014. A turnaround strategy, including a new management team (and eventually the ousting of CEO Charney), a retrenchment of its retail operations, and debt refinancing, helped American Apparel to arrest its precipitous decline. However, by 2015 the company still had not managed to turn an annual profit since 2009 and once again bankruptcy came calling. The company was still operating at a loss and burdened by heavy debts; the high-cost 'made-in-the-USA' business model could not stand the test of time. Creditors converted the debt into equity and, in 2017, Gildan Activewear purchased American Apparel intellectual property and other assets for $88 million in a bankruptcy auction Despite retaining the symbolic American Apparel brand assets, the new owners decided to American Apparel factories, laying off the 3,000 Southern Californian workers and moving operations ded to close the outside of the US. The closure of most of its stores followed suit. As of 2017, American Apparel runs as an online-only retailer. Outspoken CEO Dov Charney also launched competitor clothing busines 'Los Angeles Apparel', in 2016, premised upon the same values that motivated Charney at American Apparel, but a more wholesale business model. To its critics, American Apparel argued that its business model could stand the test of time: "Mane facturing in America requires risk taking and long-term investment. We think it's well worth it. theCHAPTER 2 Framing Business Ethics 81 wage. Workers were also guaranteed full-time employment and promotion opportunities rather than the precarious, part-time, and casual work typical of the industry. Also available were a range of employee benefits including subsidized health insurance, an on-site medical clinic, subsidized public transport, and even free on-site massages! Because so many of its workers were immi- grants to the country (typically from Mexico and other parts of Latin America), the company also provided English classes. 2 Such an unusual approach to doing business in the apparel industry did not come cheap. Producing garments with decent working conditions in the US incurred significant costs in terms of overheads, labour, capital, and training. According to the company, however, its vertically integrated business model in fact offered certain efficiencies because everything was completed in-house. The company claimed that it enabled better quality control and provided for a faster response to the rapid changes in the fashion industry. It also reduced shipping and transport costs of products from their place of manufacture and kept the firm's carbon footprint relatively low. Its claims to be 'sweatshop free' and made in the USA' also appealed to its young consumer base, potentially driving greater sales-but What does that these were not major elements of its marketing strategy. 4-shirt-ready All in all, American Apparel acknowledged that its sweatshop-free approach was 'not the easy road to travel'. Regardless of the benefits, the company remained a conspicuous outlier in an industry that tries rely on tora has wholeheartedly embraced the cost savings of global outsourcing. urope and Now Political activism costs than if the A socially responsible approach to manufacturing was not the only area where American Apparel stood out from the pack in terms of corporate responsibility. The company also took a distinctly least $1,250 PF unusual approach to political activism. Where most apparel companies either avoid any real political hile, according engagement or look to carry out political lobbying behind the scenes, American Apparel took a much Cambodia Came more public stance. For many years, the firm actively pursued two hot-button political causes in the Bangladesh a US-immigration reform and gay rights-both of which proved to be popular with some and highly a fraction of controversial with others. a $14 T-shirt so The company's 'Legalize gay' campaign emerged in response to efforts to outlaw same-sex mar- ould comprises riage in California, and spread to the protection of gay rights more generally. The firm gave away more d at the cheva than 50,000 of its 'Legalize Gay' T-shirts to lesbian, gay, bisexual, and transgender (LGBT) groups and organizations across the world and featured the T-shirts in its stores during LGBT demonstrations and celebrations. The firm also partnered in organized protests and ran gay rights advertisements in the companies Co US. It even stocked the often-explicit gay publication, Butt Magazine, in its stores, despite occasional on working cow bouts of media controversy. eas manufacture The 'Legalize LA' initiative, on the other hand, advocated for immigration reform in the US. Like an that enjoyer much of the world, immigration issues in the US are very politically sensitive, but as the company's y deductions former CEO Dov Charney argued in support of his company's involvement: neet internation Despite the fact that so many experts agree that the productivity and hard work of im- migrants improves our economy, the issue has been grossly misrepresented by the ourcing its con media and certain politicians. Businesses are generally afraid to speak out because flically integer they're frightened of reprisals by government agencies, but at American Apparel we ting, and sticks have not been able to sit in the shadows while the facts get distorted. The campaign focused on the company's hometown of Los Angeles, which to this day still has one of nis particular the largest concentrations of immigrants in the US. American Apparel itself hired a large proportion of its staff from the city's immigrant community, and featured a number of them in video clips hosted on its Legalize LA webpages. The firm also produced a hard-hitting pamphlet, distributed T-shirts ss model was printed with the Legalize LA motto, and raised funds for immigrant organizations, among other activi- ties. Yet, many questioned the business logic of such a stance when the company was investigated Did well me Average Are\fCHAPTER 2 Framing Business Ethics 83 apparel industry's reliance on low wages cannot be sustained over time, ethically or fiscally. As labour and transportation costs increase worldwide, exploitation will not only be morally offensive, it will not even be financially viable. Today, while the focus on 'ethically made, sweatshop free' remains a key part of messaging at American Apparel, the company has swapped its 'made-in-the-USA' man- tra for a 'Globally Sourced' strategy. The rise, fall, and potential rebirth of American Apparel provides some useful lessons for business ethics in the 21st century. QUESTIONS 1. What were the main CSR issues faced by American Apparel and how did the business address them ? 2. How would you characterize the overall CSR strategy adopted by American Apparel? 3. Who were the main stakeholders of American Apparel and how did the firm prioritize them? 4. What were the potential risks and rewards of American Apparel's political activism on immigra tion reform and gay rights? Are there ways that it could have improved its approach? 5. To what extent do you think that American Apparel was successful in managing its various social and economic responsibilities? What would you advise American Apparel to do now? Visit the online resources for web links to useful sources of further information on this Case. SOURCES http://www.americanapparel.net. Gumbel, A. 2006. Dov Charney: the hustler and his American dream. Independent, 23 December: http://www.independent.co.ukews/people/profiles/dov-charney-the-hustler-and-his-american- dream-429627.html. Ibrahim, N. 2017. The new American Apparel: claims of 'ethically made' abroad clash with meality Guardian, 12 November: https://www.theguardian.com/business/2017ov/12/thenews apparel-claims-of-ethically-made-abroad-clash-with-reality. Li, S., Hsu, T., and Chang, A. 2014. American Apparel, others try to profit from doments tion. LA Times, 10 August: http://www.latimes.com/business/la-fi-american-apparelcenter 20140810-story.html#page=1. Millman, E., Ghebremedhin, S., and Effron, L. 2012. American Apparel CEO Dov Charney damaged hero? ABC News, 27 April: http://abcnews.go.com/Business/american-apparel-ceo-down s nished-hero/story?id=16229958 Minato, C. and Edwards, J. 2013. American Apparel's first profit in years put the CEO's sex scandals in the rearview mirror. Business Insider, 9 March: http://www.businessinsider.com/american-appar els-first-profits-in-years-put-the-ceos-sex-scandals-in-the-rearview-mirrow-2013-3?IR=T.CASE 2 American Apparel: a new fashion for CSR? American Appare ent is this moss , ersions of spot in to the manesgone trate the concept orporate citizenship This historical case examines American Apparel's unique approach to social responsibil y governmental rest ity in the apparel industry. The case discusses the firm's 'sweatshop-free', made-in-the-USA ng over these respons philosophy as applied to clothing design and manufacturing, and also explores the company's ment goals presented unusual commitment to political campaigning on immigration and sexual orientation causes. It also reflects on recent developments which led to the firm filing for bankruptcy in 2015. You have the opportunity to evaluate the potential risks and rewards of American Apparel's social responsibility strategy and to consider how such practices might have helped or hindered the company's financial performance. Alongside Zara, Gap, and H&M, American Apparel used to be a fixture on most high streets across oncepts and practice much of the world. In terms of CSR, however, American Apparel was unlike virtually all of its coun- The Oxford handdo terparts in the apparel industry. While almost all global clothing companies outsource the produc- tion of their products to suppliers in emerging economies, American Apparel had steadfastly stuck Press. and practice (albeit for to a made-in-America philosophy, promising that its clothes are resolutely 'sweatshop free'. Many wondered about the business logic of such an approach when American Apparel's competitors could wn scholars enjoy such drastically lower labour costs. Was this a case of 'ethics pays', or was American Apparel extended theoredid ultimately doomed to failure? Vertically integrated and sweatshop free this chapter in mass Since the 1990s, apparel companies in Europe, North America, and much of the rest of the devel- oped world have reorganized the way that clothes get produced. No longer do mass market-branded re /us apparel companies like Gap, Levi's, H&M, or Zara manufacture their own clothes. Instead, such companies subcontract their entire manufacturing process-from dying to cutting and stitching-to third-party contractors. Almost always these contractors are located in emerging economies such