Published in CFO Asia, September 1999
Written by Elizabeth Fry

A year ago or so, Saw Kok Wei watched as his boss Phil Knight, chairman of Nike Inc., fielded questions about the company�s disastrous fiscal 1998 results. During the press conference, Knight tried to explain the staggering 50 percent drop in earnings at the U.S. maker of athletic goods. The founder of the Beaverton, Oregon-based company placed most of the blame for the poor performance on sagging future orders, freefalling Asian economies, and mercurial foreign currency movements. Knight then spoke of "the agony felt in every corner of the company" over the poor showing.

Nike�s shareholders probably didn�t feel so great, either. The recent roller-coaster ride of the company�s share price likely has some of the company�s investors downing handfuls of high-beta blockers. The price of a share of Nike common dipped as low as $38 in 1998�down from a high of $64 just months earlier. Although the share price has since rebounded, the company�s revenues have yet to follow suit�a worrying sign. Indeed, management recently reported that turnover in fiscal 1999 dropped to around $8.8 billion�an 8 percent drop in revenues from the previous year. Meanwhile, profit margins have continued to erode.

Nevertheless, during that press conference in 1998, numbers-man Saw wasn�t thinking about those dismal numbers. No, what struck Nike�s Singapore-based CFO was the sinking feeling that Nike�a company once known as a hip trendsetter�was no longer cool. And in truth, Nike�s recent fall from grace�including allegations that the company operated sweatshops in Asia�has seen the world-famous swoosh turned into a veritable punching bag for consumer groups, politicians, and media pundits. Worse, some of Nike�s young consumers�and young consumers are Nike�s consumers�have apparently been turned off by claims that chemicals used in manufacturing Nike shoes and apparel have polluted ground water in less developed countries.

None of this has done the Nike brand any good. "Every shoe we don�t sell hurts our brand," concedes Saw. To help clean up its tarnished image�and thus win back disillusioned customers�Nike management recently decided to step up its environmental program. That program, which was decried by some as a publicity stunt, was initially launched in 1993. But the recent push includes several intriguing new projects, including an initiative to get suppliers, vendors, and business partners to adopt strict environmental standards for manufacturing processes.

While such a warm and fuzzy campaign makes good marketing sense in the U.S., convincing hard-bitten suppliers to invest precious cash in greening up the factory is no easy sell here in Asia. Despite Nike�s considerable sway, Saw says he can�t simply snap his fingers and expect all 38 Nike footwear suppliers in the region to come to. Explains Joel Enderle, Nike�s director of corporate responsibility in Asia: "It is not just a question of demanding that suppliers toe the line, since many factories are not controlled by Nike. Where we are sharing [subcontractors] with Liz Claiborne, Tommy Hilfiger, and the Gap, our voice is smaller and suppliers are not as willing to listen."

To get their attention, Saw and Enderle have trumpeted the bottom-line benefits of green manufacturing. Those benefits can be substantial. For publicly traded companies, going green goes over big with investors. According to a study conducted by the consulting group at ICF Kaiser International, public companies that improve their corporate practices increase shareholder value by up to 5 percent. Even privately held companies stand to gain from environmental management. Focusing on the type of fuel burned in a factory, experts point out, often leads to a reduction in a company�s overall energy consumption. Eliminating or reusing hazardous materials means companies don�t have to pay to dispose of those materials. And switching to water-based solvents generally reduces the need for costly site maintenance and cleanups. Surprisingly, the average payback period for such projects is less than a year, according to research conducted by the International Organization for Standardization (ISO).

For Nike, the payoff seems to go beyond mere numbers. In attempting to green the company�s supply chain in Asia, Enderle says the company has developed a closer working relationship with suppliers. And by encouraging those suppliers to improve their manufacturing processes, Nike managers say they have been able to improve the overall quality of the company�s products. That�s crucial. "We have long-term relationships with our eight factories in Thailand," says Enderle. "We have been here 18 years, and look at this as a hand-in-glove relationship."

That beats a hand-over-eyes approach. Peter Briggs, director of Arthur Andersen�s legal and environmental department in Sydney, points out that managers who choose to ignore the issue of ecological liability do so at their own risk. While many corporate executives turn the job over to their legal departments, Briggs says this doesn�t get management off the hook. "Company directors are absolutely obliged, legally, to understand any risks to their business," Briggs says. "And coming to terms with ISO 14000 definitely falls within the definition of risk."

So, too, does a loss of goodwill. As Nike management painfully discovered, negative press reports and ugly consumer protests can absolutely lay waste to a company�s hard-earned brand name. According to the Nike annual report, the company values its brand name at $430 million. Of course, that may seem like a drop in the bucket when compared to the company�s $5.4 billion in total assets. But after reports started surfacing in the U.S. press about Nike�s alleged use of underage workers and environmental recklessness, the company�s return on those assets fell like a rock in the Chao Praya�down to 7.4 percent in 1998. The previous year, that number was over 17 percent. Profit margins have plummeted as well.

This is not surprising. Pricing is wholly dependent on a company�s brand, maintains Kenneth Worsdale, the Philippine-based CFO at fruit producer Dole Asia. Since fresh fruit has not always been a branded item in Asia, Worsdale is keenly aware of the importance of brand image. The Dole Asia CFO says the company is able to charge a premium for its products, in part, because it promotes the company�s commitment to environmental practices. That environmental message is a big selling point in Japan. By touting its minimal use of fertilizer and bug spray, Dole is able to mark up its products in Japan�and still outsell cheaper local brands.