Nestlé and its impact on the local community of a host country in the light of an ethical stakeholder theory

Essay , 2016 , 16 Pages , Grade: 1,3

Business economics - Business Ethics, Corporate Ethics

Starting with a short literature study on the impact of multinational companies in their host countries, this essay gradually narrows the problematic down to the introduction of the case of Nestlé’s ‘Pure Life’ in Lahore, Pakistan. After illustrating the problem of Nestlè's impact on the local community in Lahore, the stakeholder typology of Mitchell, Agle & Wood (1997) will be used as an example to evaluate under which premises stakeholder theory becomes an ethical theory, before applying the ethically modified typology on the case.

Table of Contents

1. Introduction

2. Multinational companies and their impact on local communities in host countries – An academic literature study

3. Nestlé and its impact on local communities in the host country – The case of ‘Pure Life’ in Lahore, Pakistan

4. Stakeholder Theory – An ethical theory?

5. The case of ‘Pure Life’ in Lahore, Pakistan in the light of an ethical stakeholder theory

6. Conclusion

Table of Figures

Figure 1: “Stakeholder Typology: One, Two or Three Attributes Present”

Figure 2: “Modified Stakeholder Typology: One, Two or Three Attributes Present”

1. Introduction

Starting with a short literature study on the impact of multinational companies in their host countries, this essay gradually narrows down the problematic to subsequently introduce the case of Nestlé’s ‘Pure Life’ in Lahore, Pakistan. After illustrating the problem, the stakeholder typology of Mitchell, Agle & Wood (1997) will be used as an example to evaluate under which premises stakeholder theory becomes an ethical theory, before applying the ethically modified typology on the case.

2. Multinational companies and their impact on local communities in host countries – An academic literature study

Multinational companies^[1] have long been recognised as a subject of international and ethical business scholars due to their economic, political and social power (Simpson, 1982; Kolk & Lenfant, 2009). This paragraph attempts to reflect the essence of academic literature on that matter.

Early academic literature on MNC’s stresses their positive impact on host countries. Particularly in developing parts of the world, their presence is connected with an economic upturn, as MNC’s provide employment opportunities within themselves and also along their local supply chain. (Kolk & Lenfant, 2009; Zhao, Park & Zhou, 2014). They were also seen as a significant source of fiscal revenue for local governments (De George, 1993). Another aspect of the academic discussion is the accessibility of knowledge. Many scholars agree that a long-term effect of the presence of MNC’s is the introduction of new business practices in the host country, which has long-lasting positive impacts on the local economy (De George, 1993; Tan & Wang, 2011). A similar argumentation is applied to the introduction of new business ethics (De George, 1993). It could be argued, that an underlying assumption in this argumentation is the superiority of western business ethics over local ethics in developing countries. This assumption has to be critically evaluated. Later academic literature on the impact of MNC’s on local communities generally illustrated a more critical stance. This has been demonstrated in the evaluation of accusation against MNC’s to be the cause of various social issues in their host countries in the past decades (Zhao, Park and Zhou, 2014). Conflicts regarding the impact of MNC’s in host countries vary from abusive labour in China (Amold & Bowie, 2003) to environmental pollution in African countries (Idahosa, 2002; Idemuida, 2008) or the exploitation of local resources (Mattes, 2013), which shows the complexity of the topic. To be able to address this global problem, it is a vital point in the discussion between researchers to identify the nature and causation of ethical conflicts. Most scholars attribute the conflict to a mismatch between the ethics of home and host country; as “it has been long acknowledged that business ethics are culturally defined (England, 1975)” (Tan & Wang, 2011, p.374). This approach of cultural differences in the judgement on ethical issues find general empirical support in the work of Ford et al. (2005), Rashid & Ibrahim (2008) as well as Sarwono & Armstrong (2001). Nevertheless, variance in the explanation of the exact cause for that mismatch can be found. Donaldson & Dunfee (1999) describe this phenomenon with different development stages in home and host country. Tan & Wang (2011, p.373) argue in a similar manner, claiming: “[…] MNCs often approach ethical issues differently in the home and host countries”. Other scholars put a stronger emphasis on the host country and argue in that a multinational company’s CSR and ethics are locally rooted (Hamman et. al, 2005) and a product of historical and cultural factors (Idemudia & Ite, 2006). Jones (1999) and Vogel (1995) take up the latter position and highlight that the economic development of the host country has a profound effect on the enforcement of national regulations. Tan & Wang (2011, p.377) summarise those main aspects found in the literature, claiming: “The higher local ethical pressure in the host country, the more difficult it will be for an MNC to maintain its homegrown principles of ethics”. This tension between home and host country pressure takes mainly place on the level of subsidiaries (Kostova, Roth & Dacin, 2008). This idea could be used to argue that there will be a divergence of ethical behaviour between the subsidiaries within one MNC. A corresponding conclusion, drawn from the premises would argue that similarities in the (un)ethical behaviour in subsidiaries of one MNC, indicate strong “home-grown principles of ethics (Tang & Wang, 2011, p.377). The literature shows various examples of companies who have been accused of comparable unethical behaviour in different host countries. One MNC, who has been accused on various occasions to take advantage of loose regulations to extract natural water resources, is Nestlé. A summary of cases in which Nestle was accused of immoral behaviour can be found outside academia. The documentary “Bottled Life – The Truth about Nestlé’s Business with Water” presents cases of Nestlé’s activities in Lahore (Pakistan), Lagos (Nigeria) and Maine (USA). In U.S. cases, “environmental groups have raised concerns about issues including the depletion of local groundwater supplies, harm to local fisheries, and the minimal compensation paid to local communities or governments relative to the high water volumes extracted (Snitow et al. 2007)” (Jaffee & Newman, 2012, p.12). The cases in Lagos and Lahore accuse Nestlé for artificial scarcity of free drinking water.

This essay will refer exclusively to Nestlé’s activities in Pakistan, as the Lahore case is the best documented and “a blueprint for a global production network [of Nestlé’s bottled water ‘Pure Life’]” (Rosemann, 2005, p.22)

3. Nestlé and its impact on local communities in the host country – The case of ‘Pure Life’ in Lahore, Pakistan

The availability of water has drastically decreased in past decades in Pakistan and is now at 1000m³ per capita per annum (Shahid, Iqbal & Hasnain, 2014). If this tendency continues, Pakistan will become a water shortage country (Hashmi, Farooq & Qaiser, 2009). Although exact figures vary, it can be assumed that a significant part of the available water does not fit for human intake (Shahid, Iqbal and Hasnain, 2014). This also accounts for the “[m]ajority of the people of Pakistan [who] get drinking water from groundwater source[s]” (Shahid, Iqbal and Hasnain, 2014, p.7525).

In 1997, Nestlé launched the concept for their water brand ‘Pure Life’. “The concept was to extract groundwater, and after purification and addition of minerals, to sell it as an affordable product for daily use.” (Rosemann, 2005, p.22). The affordability in Nestlé’s concept is questionable, as calculations of Rosemann (2005) suggest that the coverage of a family’s monthly demand of drinking water with Nestlé’s ‘Pure Life’ would consume a median Pakistani household income. While Nestlé’s activities only account for little over 1% of Pakistan’s groundwater extraction, their share is likely to rise, as water tables decline by approximately 1.4m per annum, causing public wells to dry out (Rosemann, 2005). Those circumstances draw a picture of a country with drastic demand for free and safe drinking water. The immoral behaviour Nestlé is accused for, is, to take advantage of the absence of regulations regarding groundwater extraction, to sell the drinking water to people, who urgently need it, but can hardly afford it (Rosemann, 2005). There is also the fact that traditionally, drinking water was a public good in Pakistan, rather than a commodity (Rosemann, 2005). It shall here be mentioned that the work of Rosemann (2005) has to be seen critically. Although it is supported by documents of the Pakistani government, the UN, UNESCO and other official institutions give the impression of being well-researched, it does not meet highest academic standards. Nevertheless, it remains one of the most profound available documents.

The opposing point of view can be found in a counter statement of Nestlè’s Chairman Peter Brabeck-Letmathe on the documentary “Bottled Life”, where Brabeck-Letmathe (2016) denies all accusations. As a counter argument, Brabeck-Letmathe (2016, p.1) asserts that Nestlé “operate[s] two of the approximately 680,000 wells in the region”. This statement suggests a small impact but fails to address Nestlé’s actual share of drinking water extraction. Later argumentation misses the core of the discussion in a similar manner. Brabeck-Letmathe (2016, p.2) states: “Water required for drinking and basic hygiene is without question a human right; i.e., a minimum of 25 L per day per person, or 1.5% of global water withdrawal.”. The underlying question to the assertion of Rosemann’s (2005) report and the documentary ‘Bottled Life’ (2012), was, if Nestlé’s activities in Pakistan enhance or inhibit the local population’s chance of safe and affordable drinking water. The predominant argumentation with global figures of general water withdrawal appears inadequate to address the problem of the local need for drinking water.

4. Stakeholder Theory – An ethical theory?

This paragraph will introduce the stakeholder typology of Mitchell, Agle & Wood (1997), which became a centrepiece in stakeholder theory. It follows a sequence of ethical notions by Kant (1785), Freeman (1994), Evan and Freeman (1993), Freeman et al. (2014) and Schlossberger (1994, 2008), to create a practical but more ethical stakeholder typology for the later analysis of the case outlined above.

In the three decades after Freeman (1984) published his landmark work Strategic Management: A Stakeholder Approach, stakeholder theory as an academic subject, has become an interdisciplinary field of research (Freeman et al., 2014). This development is the main contributor to the sharply increased ambiguity of the terms ‘Stake’ and ‘Stakeholder’, which today, is a principal topic of the related literature. Miles (2011, p.285) analysis found “435 different definitions from 493 articles”, demonstrating the abortive attempt of a universal definition. Yet, scholars agree that “different definitions serving different purposes’’ (Freeman et al., 2014, p. 211); claiming the need to refine the common core (Miles, 2011). An early approach to harmonise the upcoming ambiguity of the term, was the work of Mitchell, Agle & Wood (1997), which became an influential and dominant reference in the academic literature after ’97. Their article synthesises the hitherto published literature and extracts the three attributes ‘Power’, ‘Legitimacy’ and ‘Urgency’ as shown in Figure 1

Figure 1: “Stakeholder Typology: One, Two or Three Attributes Present”

Abbildung in dieser Leseprobe nicht enthalten

Source: Mitchell, Agle & Wood (1997, p.874)

Although the model suggests the equal importance of the attributes (Mitchell, Agle & Wood, 1997) it has to be critically scrutinised if this, in fact, is always the case. The author presumes that real world managers will predominantly address ‘Power-Stakeholder’ (1, 4, 5 and 7) and argues that Mitchell, Agle & Wood (1997) subliminally include this prioritisation in their description of the different stakeholder types. Therefore, it will here be argued, that the work of Mitchell, Agle & Wood (1997) is not ethical per se, rather more advance towards a management theory.

The problem as to whether stakeholder theory is ethical or not is captured in what is discussed in the literature as the ‘separation thesis’, that is, the unity or dichotomy of business and ethics. Freeman (1994) firstly articulates the separation thesis and argues for the inseparability of business and ethic. Wicks’ (1996) literature study demonstrates that the prevailing tenor till ’96 was the opposite. A later attempt (Freeman et al., 2014, pp.6-10) to conceptualise an argument for the unity of business and ethics appears to be self-evident; rather autotelic from a critical stance. Yet, the separation thesis remains a matter of value perspective.

Adopting Freeman’s (1994) argument for the inseparability of ethic and business, the author chooses to analyse the prior illustrated case in the light of stakeholder theory for its practical approach. “[U]sing the language of stakeholders makes it easier for business executives and theorists to see business and ethics as integrated, rather than always in conflict.”(Freeman et al., 2012, p.1) Accepting the unity of business and ethics, stakeholder theory combines ethical consideration in a practical management theory.

The ease and accessibility of stakeholder theory provides the chance for a wide acceptation amongst real world managers. To further illustrate and discuss this opportunity, this essay follows the academic secession as to who considers stakeholder theory as an ethical theory.

Stakeholder theory has “a central place in business ethics (and vice versa)”; moreover there is little doubt amongst scholars of this field “that values, a sense of purpose that goes beyond profitability, and concern for the well-being of stakeholders were critical to the origins of stakeholder theory” (Freeman et al., 2014, p. 195). Those ‘values’ and the ‘sense of purpose’ are prevalent based on the ethics of Immanuel Kant. Therefore, it is the theory inherent to “treat humanity, […], always at the same time as an end and never simply as a means (Kant, 1785).

Evan and Freeman (1993) take this maxim to build their argument, that companies have fiduciary duties, that is, the serious consideration of the interest of everyone who ‘invest’ in the company, whereby they interpret ‘Investments’ in its widest sense – financially, but also investment of time, labour, future, et cetera. Schlossberger (1994, 2008) enriches the notion of Evan and Freeman (1993) by the use of dual-investor theory. Schlossberger (2008, p.739) claims: “businesses rely upon roads and transportation networks, currency systems, educational systems, water supply systems, and police protection, whose considerable costs are borne by society” and therefore owe “a good return on its investment to […] society”.

Following a Kantian approach, the author agrees in Freeman’s (1994) argumentation regarding the separation thesis and accepts the unity of business and ethics as normatively given. He furthermore concurs in the general notion of Evan and Freeman (1993) and Schlossberger (1994, 2008), that every ‘Investor’, whatever form the investment might be, holds a stake in the company.

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^[1] Hereinafter MNC

• College: University of Bristol
• Grade: 1,3
• Author: Malte Eilbracht (Author)
• Publication Year: 2016
• Pages: 16
• Catalog Number: V342226
• ISBN (eBook): 9783668322714
• ISBN (Book): 9783668322721
• Language: English
• Tags: Business Ethics, Ethics, Nestle, Water, Pure Life, Pakistan, Stakeholder, Stakeholder Theory