Answer the following questions to the attached case study: Question 1 - In your judgment, were the possible utilitarian benefits of building the Caltex plant in 1977 more important than the...

Answer the following questions to the attached case study:

Question 1 - In your judgment, were the possible utilitarian benefits of building the Caltex plant in 1977 more important than the possible violations of moral rights and of justice that may be involved? Justify your answer fully by identifying the possible benefits and the possible violations of rights and justice that you believe may be associated with the building of the plant, and explaining which you think are more important.

Question 2 - In your judgment, does the management of a company have any responsibilities (i.e., duties) beyond ensuring a high return for its stockholders? Should the management of a company look primarily to the law and to the rate of return on its investment as the ultimate criteria for deciding what investments it should make? Why or why not, based on ethical principles/issues in your textbook and the lectures ?       

A South African Investment

Note: the following case is copyrighted and may be copied and used only by current

users and owners of the textbook, BUSINESS ETHICS: CONCEPTS AND CASES by

Manuel Velasquez.

In April 1977, the Interfaith Center on Corporate Responsibility announced that some of

its subscribing members owned stock in Texaco, Inc. and in Standard Oil Co. of

California (SoCal), and that these members would introduce shareholders' resolutions at

the next annual stockholders' meeting of Texaco and SoCal that would require that these companies and their affiliates terminate their operations in South Africa. The effort to get Texaco and SoCal out of South Africa was primarily directed and coordinated by Tim Smith, project director of the Interfaith Center on Corporate Responsibility. The stockholders' resolution that Tim Smith would have the Interfaith shareholders introduce at the annual meetings of Texaco and SoCal read as follows: Whereas in South Africa the black majority is controlled and oppressed by a white minority that comprises 18 percent of the population; Whereas South Africa's apartheid system legalizes racial discrimination in all aspects of life and deprives the black population of their most basic human rights, such as, Africans cannot vote, cannot

collectively bargain, must live in racially segregated areas, are paid grossly

discriminatory wages, are assigned 13 percent of the land while 87 percent of the land is reserved for the white population; Whereas black opposition to apartheid and black

demands for full political, legal, and social rights in their country has risen dramatically

within the last year; Whereas widespread killing, arrests, and repression have been the

response of the white South African government to nationwide demonstrations for

democratic rights; Whereas Prime Minister Vorster has openly declared his intention to

maintain apartheid and deny political rights to South African blacks; Whereas we believe that U.S. business investments in the Republic of South Africa, including our company's operations, provide significant economic support and moral legitimacy to South Africa's apartheid government; Therefore be it resolved: that the shareholders request the Board of Directors to establish the following as corporate policy: "Texaco [and Standard Oil of California] and any of its subsidiaries or affiliates shall terminate its present operations in the Republic of South Africa as expeditiously as possible unless and until the South African government has committed itself to ending the legally enforced form of racism called apartheid and has taken meaningful steps

toward the achievement of full political, legal, and social rights for the majority

population (African, Asian, colored)."The resolution was occasioned by the fact that Texaco and SoCal were the joint owners of Caltex Petroleum Co. (each owns 50 percent of Caltex), an affiliate that operates oil refineries in South Africa and that in 1973 was worth about $100 million. In 1975 Caltex announced that it was planning to expand its refinery plant in Milnerto, South Africa, from a capacity of 58,000 barrels a day to an increased capacity of 108,000 barrels a day. The expansion would cost $135 million and would increase South Africa's total refining capacity by 11 percent. Caltex would be obliged by South African law to bring in at least $100 million of these investment funds from outside the country. The management of Texaco and SoCal were both opposed to the resolution that would have required them to pull out of South Africa and to abandon their Caltex expansion plans, which, by some estimates, promised an annual return of 20 percent on the original investment. They therefore recommended that stockholders vote against the resolution. The managements of both Texaco and SoCal argued that Caltex was committed to improving the economic working conditions of its black employees and that their continued presence in South Africa did not constitute an "endorsement" of South Africa's "policies." The commitment of Caltex to improving the condition of its employees was evidenced, the companies claimed, by its adherence to the 1977 "Sullivan principles." Early in 1977, Caltex was one of several dozen corporations that had adopted a code of conduct drafted by the Reverend Dr. Leon Sullivan, a civil rights activist who is a minister of Philadelphia's large Zion Baptist Church. The Code was based on these six principles that the corporations affirmed for their plants:1

I. Nonsegregation of the races in all eating, comfort, and work facilities.

II. Equal and fair employment practices for all employees.

III. Equal pay for all employees doing equal or comparable work for the same period

of time.

IV. Initiation of and development of training programs that will prepare, in substantial

numbers, blacks and other nonwhites for supervisory, administrative, clerical,

and technical jobs.

V. Increasing the number of blacks and other nonwhites in management and

supervisory positions.

VI. Improving the quality of employees' lives outside the work environment in such

areas as housing, transportation, schooling, recreation, and health facilities.

These companies agree to further implement these principles. Where implementation

requires a modification of existing South African working conditions, we will seek such

modification through appropriate channels.

The code had been approved by the South African government since the principles were to operate within "existing South African working conditions," that is, within South

African laws. South African laws requiring separate facilities and South African laws

prohibiting blacks from becoming apprentices, for example, would continue to apply

where in force.2 Also, the principle of equal pay for equal work would probably require

few changes where blacks and whites did not have equal work. Caltex, however, was apparently committed to improving the economic position of its workers. It had moved 40 percent of its 742 black workers into refinery jobs formerly held by whites, although most blacks had remained in the lower six job categories (a total of 29 had moved into the top four white-collar and skilled categories).3 The company had also kept its wages well above the averages determined in studies conducted by the South African University of Port Elizabeth. A basic argument that Texaco and SoCal advanced

in favor of remaining in South Africa, then, was that their continued presence in South

Africa advanced the economic welfare of blacks. Texaco believes that continuation of Caltex's operations in South Africa is in the best interests of Caltex's employees of all races in South Africa. . . . In management's opinion, if Caltex were to withdraw from South Africa in an attempt to achieve political changes in that country, as the proposal directs, . . . such withdrawal would endanger prospects for the future of all Caltex employees in South Africa regardless of race. We are convinced that the resulting dislocation and hardship would fall most heavily on the nonwhite communities. In this regard, and contrary to the implications of the stockholders' statement, Caltex employment policies include equal pay for equal work and the same level of benefit plans for all employees as well as a continuing and successful program to advance employees to positions of responsibility on the basis of ability, not race. [Statement of Texaco management]4 It is undeniable that the presence of foreign corporations in South Africa had helped to improve the real earnings of black industrial workers. Between 1970 and 1975, black incomes in Johannesburg rose 118 percent, while between 1975 and 1980 black per capita income was expected to rise 30 percent. In addition, the gap between black and white incomes in South Africa had narrowed. Between 1970 and 1976, the gap in industry narrowed from 1:5.8 to 1:4.4; in construction from 1:6.6 to 1:5.2; and in the mining sector from 1:19.8 to 1:7.7.5 If the flow of foreign investment came to a halt, however, the South African normal yearly growth rate of 6 percent would drop to about 3 percent and the results would undoubtedly hit blacks the hardest.6 Unemployment would rise (American companies employ 60,000 blacks), and whatever benefits blacks had gained would be lost. Tim Smith and the Interfaith stockholders were aware of these facts. The basic issue for them, however, was not whether Caltex adhered to the six Sullivan principles or whether its presence in South Africa improved the economic position of blacks:

The issue in South Africa at this time is black political power; it is not slightly higher

wages or better benefits or training programs, unless these lead to basic social change. As one South African church leader put it, "These [six] principles attempt to polish my

chains and make them more comfortable. I want to cut my chains and cast them away." . .

. We must look not just at wages but at the transfer of technology, the taxes paid to South Africa, the effect of U.S. foreign policy, and the provision of strategic products to the racist government. If these criteria become part of the "principles" of U.S. investors, it should be clear that on balance many of the corporations strengthen and support white minority rule. This form of support should be challenged, and American economic complicity in apartheid ended. [Statement of Tim Smith]7 In short, the issue was one of human rights. The white South African government was committed to denying blacks their basic rights, and the continued presence of American companies supported this system of white rule. Nonwhites in South Africa are rightless persons in the land of their birth. . . . [The black African] has no rights in "white areas." He cannot vote, cannot own land, and may not have his family with him unless he has government permission. . . . The two major black political parties have been banned and hundreds of persons detained for political offenses . . . strikes by Africans are illegal, and meaningful collective bargaining is outlawed. . . . by investing in South Africa, American companies inevitably strengthen the status quo of [this] white supremacy. . . . The leasing of a computer, the establishment of a new plant, the selling of supplies to the military--all have political overtones. . . . And among the country's white community, the overriding goal of politics is maintenance of white control. In the words of Prime Minister John Vorster during the 1970 election campaign: "We are building a nation for whites only. Black people are entitled to political rights but only over their own people--not my people." [Statement of Tim Smith]8 There was no doubt that the continuing operations of Caltex provided some economic support for the South African government. South African law required oil refineries in South Africa to set aside a percentage of their oil for government purchase. In 1975,

about 7 percent of Caltex's oil sales went to the government of South Africa. As a whole, the South African economy relied on oil for 25 percent of its energy needs. Moreover, Caltex represented almost 11 percent of the total U.S. investment in South Africa. If Caltex closed down its operations in South Africa, this would certainly have had great impact on the economy, especially if other companies then lost confidence in the South African economy and subsequently also withdrew from South Africa. Finally, Caltex also supported the South African government through corporate taxes. At each of the Texaco and SoCal shareholders' meetings held in May, 1977, the resolutions of the Interfaith Center on Corporate Responsibility received less than 5 percent of the shares voted. The Caltex plant in South Africa completed its expansion as planned. But conditions in South Africa continued to deterioriate for the oil industry.

In 1978, the OPEC nations announced that all of their members had at last unanimously agreed to embargo oil shipments to South Africa. Concerned about the increasingly sensitive vulnerability of its strategic oil supplies, the South African government, now under the leadership of Prime Minister P. W. Botha, responded by tightening its regulation of the oil industry. The National Supplies Procurement Act was strengthened to give the government authority to force foreign-owned companies to produce strategically important petroleum products. The Act also prohibited oil companies from restricting sales of oil products to any credit-worthy customers, including any branch of government. And the Official Secrets Act made it a crime for anyone within South Africa to release any information whatsoever on the petroleum industry or the  perations of any oil enterprise. Because it was important that foreign companies remain in South Africa, however, the government became more receptive to the obbying efforts of American companies. Business lobbying efforts were instrumental in the 1979 repeal of laws that had denied legal status to unions for Africans and of laws that hindered Africans from being trained or promoted for skilled jobs. Starting in the early 1980s, American businesses began lobbying for the repeal of the hated "influx control laws" (laws requiring black Africans within white South Africa to carry a "pass book" detailing their residence and employer and prohibiting non-employed black Africans from remaining in white South Africa for longer than seventy-two hours) and for granting blacks some form of political representation in the South African government. Several of the social aspects of apartheid (such as the "Immorality Act" which made interracial sexual intercourse a criminal offense until 1985 and the "petty apartheid laws" which required enforced segregation of the races) were eventually lifted or attenuated. Although the 1977 defeat of their resolution was diasppointing, antiapartheid activists determined to press on with their battle. In May 1983, activists introduced another shareholder resolution to be considered at the Texaco and SoCal shareholders' meetings, this time asking that Caltex not sell petroleum products to the police or military of South Africa. The managers of both Texaco and SoCal objected to the resolution, claiming that this new resolution asked them to violate the laws of South Africa. According to the managers, South Africa's National Supplies Procurement Act gave the South African government the authority to require any business to supply it with goods. Moreover, the Price Control Act of 1964 also gave the government the authority to prohibit companies from placing restrictions on the sale of their goods. The South African government had exercised this authority, the managers said, when it earlier had "directed Caltex to refrain from imposing any conditions or reservations of whatever nature in respect to the use, resale, or further distribution of petroleum products and, also, from refusing to sell except subject to such conditions."9 Consequently, they held, the resolution in effect asked them to commit a serious crime: "It would be a crime under South Africa's law were Caltex- South Africa to undertake a commitment to not supply petroleum products for use by the South African military or any other branch of the South African government."10 The Securities and Exchange Commission (SEC), which regulates the submission of shareholders' resolutions, agreed with the companies. The SEC therefore allowed SoCal to remove the resolution from its proxy ballots on the grounds that the resolution might be asking the company to do something illegal. Although Texaco was allowed to do the same, Texaco managers decided to let the resolution be voted upon by its shareholders. At the May, 1983 shareholders' meetings, the resolution received the support of 7.4 percent of the Texaco shares voted, an unusually high level of support, but not sufficient to require the company to implement the resolution. Encouraged by the gradually increasing levels of shareholder support their resolutions were drawing, the anti-apartheid forces were more determined than ever to press on with their efforts. In June, 1983, Bishop Desmond Tutu, a moderate black South African religious leader, had outlined four principles that he urged foreign companies in South Africa to follow. Foreign companies, he said, should tell the government of South Africa that they would remain in the country only if they were permitted to (1) ensure their black workers could live with their families, (2) recognize black labor unions, (3) oppose influx control over labor, and (4) enforce fair labor practices and invest in black education. These four principles, activists felt, went beyond the Sullivan principles because they required companies to work for change outside the company. Consequently, in 1984, and again in 1985, they brought a resolution before the shareholders of Texaco and SoCal (now renamed "Chevron") that read as follows:

WHEREAS, the system of apartheid assigns the non-white majority of South Africa to perpetual and enforced inferiority by excluding them from full participation in the social and economic system and political processes by which their lives are controlled, thus effectively denying them their economic and political rights; WHEREAS, laws such as the Group Areas Act which assigns 87% of the land to 16% of the population and the various influx control laws which regulate the movement of black within the country form the basic legal structure of apartheid; WHEREAS, Texaco Inc. [and Chevron], through Caltex, is one of the largest U.S. investors in South Africa, with assets of pproximately 300 million; WHEREAS, Caltex is engaged in South Africa, through subsidiaries in refining crude oil, manufacturing and blending lubricants, and marketing petroleum products, including retail gasoline sales. Caltex holds an estimated 20 percent share of the petroleum market in South Africa. The oil industry plays an extremely strategic role in South Africa today,and oil is deemed a "munition of war" under South African Law; WHEREAS, the operations of Caltex in South Africa are subject to the National Supplies Procurement Act No. 89 of 1970, and the Price Control Act No. 25 of 1964. Caltex has been given a directive under these laws that it may not refuse to supply petroleum products to any credit-worthy South African citizen or organization, and the Government has power to demand the supply and delivery of such products. The South African Government has directed Caltex to refrain from imposing any conditions or reservations of whatever nature in respect of the use, resale or further distribution of petroleum products. Caltex cannot impose any restrictions on its sales to the military or police; WHEREAS, the size of Texaco's investment, strategic role in the economy, and sales to the military and police in South Africa invest Texaco with special social responsibility for the impact of its operations in South Africa; WHEREAS, Texaco has stated that "We believe our affiliate is making an important positive contribution to improving economic and social opportunities for its present and future employees"; WHEREAS, Bishop Tutu, General Secretary of the South African Council of Churches, recently outlined several conditions of the investment which would enable Caltex and other U.S. companies to make such a "positive contribution to improving economic andsocial opportunities," these conditions include:

1. House the workforce in family-type accomodations as family units near

the place of work of the breadwinner.

2. Recognizing black trade unions as long as they are representative.

3. Recognizing the right of the worker to sell labor wherever the best price

can be obtained, calling for labor mobility, and opposing any ultimate

implementation of influx control, and

4. Enforcing fair labor practices and investing massively in black education

and training.

RESOLVED, Shareholders request the Board of Directors to:

1. Implement and/or increase activity on each of the four Tutu conditions and

report to shareholders annually how the Company's presence is, on

balance, a positive influence for improving the quality of life for nonwhite

South Africans; Or,

2. If the South African Government does not within 24 months take steps to

rescind the Group Areas Act and the influx control laws as steps toward

the dismantling of apartheid, begin the process of withdrawal from South

Africa. Although the resolutions failed in both years, they were again supported by a surprisingly large number of votes. By the end of 1985, it was clear that South Africa was at a crisis point and that the pressure on companies would continue.11 Hundreds of blacks had been killed in the unrest that had erupted in September 1984 when a new constitution had established a three-part government with representation for whites, Indians, and coloreds, but not for blacks. In 1985 martial law was imposed on the country. Freed from the fear of civil restraints, the police brutally abused blacks. Thousands were imprisoned without charges, dozens were shot and killed in "incidents." Black townships assigned as living areas for blacks in white South Africa became dangerous "no go" areas for whites. The press and television were banned from photographing "any public disturbance." The economy was undergoing a severe recession. Sporadic black boycotts of white businesses broke out. Black unemployment climbed to 35 percent, while the costs of basic goods and services rose sharply. In an effort to show that black Africans were not completely disenfranchised, Prime Minister Botha had earlier established elected community councils to govern the black townships. But in most townships council members were forced to resign under pressure from other blacks who held that the councils were a cover for the basic fact that blacks still had no political rights in the three-part government that had been imposed on them. Several major Western nations imposed economic sanctions against South Africa, and Western banks began to refuse to renew loans to private companies as they came due. The South African government responded by imposing a moratorium on the repayment of its foreign debt on September 1, 1985. The government also announced that foreign companies wishing to sell their assets in South Africa would have to be paid in "financial rands," special currency that could not be converted into a foreign currency unless another foreign investor wanted to buy the South African assets. It thus became more difficult for firms to leave South Africa.

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kipling2448 | (Level 3) Educator Emeritus

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Formulation of foreign policy during the Cold War, especially during the 1970s and 1980s, very often required a desperate balancing act between national security imperatives, for example, countering Soviet Bloc activities in what was known as “the Third World,” and adherence to the principles represented in the U.S. Constitution.  Too often, the balance swung towards national security concerns, as the rivalry between the superpowers was viewed as existential to many national security and foreign policy analysts on both sides of the Atlantic.  This brief background is essential to fully appreciating the context in which the issue of sanctions against the Republic of South Africa were debated in the United States during the 1970s and early 1980s.  South Africa was a staunch, and important ally of the West during the Cold War, its vehemently anti-Communist government, regional military and economic dominance, and willingness to engage Marxist-Leninist insurgencies in southern Africa all considered vital to U.S. interests.  Add southern Africa’s enormous wealth in natural resources, especially minerals essential for modern manufacturing processes and advanced weaponry, and the conditions for an especially intense competition between the Soviet Union and its allies on one side and the United States and the pro-Western regime in South Africa on the other side were ripe for armed conflict.  The thoroughly immoral and ultimately self-destructive policy of racial apartheid, therefore, made the issue of U.S. policy towards Pretoria one of the most politically contentious issues during the period in question.

This is the historical context in which Caltex Petroleum was making its decision regarding its operations in South Africa.  Apartheid was an absolute wrong.  It condemned generations of black South Africans to lives of economic destitution, denied the country the advantages that an equitably-treated and educated black population could have provided, and established the conditions under which anti-government insurgencies could grow and enjoy support from countries hostile to the regime’s strict Calvinist philosophies and pro-Western posture.  American companies seeking to do business in South Africa, then, had to navigate the most politically sensitive waters imaginable. 

At the core of the debate regarding Caltex and many other corporations was the question of whether American companies adhering to U.S. labor standards could benefit the aggrieved black population in South Africa, or whether their operations there would benefit the racist government.  Many businessmen argued that, by establishing factories in South Africa, they could employ large numbers of economically disadvantaged blacks, providing them incomes otherwise unattainable.  Over the long term, they argued, American political and cultural influences would contribute to the liberalization of South Africa’s government, the easing of apartheid rule, and the increased affluence of the country’s majority black population. 

Opponents of those arguments believed that, by operating in South Africa, American companies and, by extension, the U.S. Government, were legitimizing the South African Government’s harsh practices regarding the black population, and were bolstering that regime’s position, thereby making less likely the eventual easing of apartheid policies.  The entertaining industry, never one to shy away from politically contentious issues, became involved by establishing a boycott of South Africa.  Musical groups, for example, were pressured not to perform in South Africa.  The famed and highly-respected songwriter and performer Paul Simon endured considerable criticism for his decision to record tracks for his album Graceland in South Africa, utilizing local musicians (most notably the group Ladysmith Black Mambazo), but Simon persevered and the rest was both musical and cultural history, with those musicians enjoying opportunities they otherwise would not have had. 

The first of the questions – were the possible utilitarian benefits of building the Caltex plant more important than the possible violations of moral rights those business activities entailed – remains essentially unanswerable insofar as the success of the sanctions movement resulted in the fall of the apartheid regime and the establishment of majority black rule.  Certainly, the sanctions movement proved far more successful than many had anticipated, thanks in no small part to the acquiescence in implementing peaceful change on the part of then-South African President F.W. de Klerk and the incredibly pacific and dignified appearance of long-imprisoned political activist Nelson Mandela.  Many foreign policy analysts had been very skeptical that such a peaceful transition could ever occur, anticipating a large civil war to remove an entrenched and militarily powerful government.  The comprehensive nature of the international sanctions movement, however, was more unified than against any government in modern history, thanks in no small part to the pro-Western nature of the South African government, which was already opposed by the Communist and non-aligned worlds.  The transition to majority black rule, in short, made the question of U.S. business practices increasingly irrelevant.

The more important question, given the failure of the majority black government to function effectively in the ensuing years, the economic decline that country has experienced, the enduring political dissension and the rampant violent crime that have characterized post-apartheid South Africa, is whether a more wide-spread and vibrant U.S. business presence in apartheid-era South Africa could have helped blacks transition more smoothly to self-rule.  As with the precipitous withdrawal of colonial powers from countries like Angola and Mozambique (both former Portuguese colonies), black-ruled South Africa was unprepared for the exigencies of governing.  There were too few educated bureaucrats and civil servants, and too little knowledge and experience in the areas of running an economy.  It is fair to say, had American businesses operated there, and adhered to the Sullivan Principles referred to in the article, that South Africa’s transition to majority black rule would have taken longer, but would have occurred more smoothly and efficiently than the somewhat chaotic environment that existed in the years immediately following the assumption of rule by the former guerrilla movement known as the African National Congress.

With respect to the second question – do privately-owned companies have responsibilities to act as moral citizens or is their sole legitimate mandate to earn money – the answer again depends upon one’s personal views.  To this educator, who confronted that issue on a daily basis for many years, the answer is an unqualified “yes, companies should be responsible for acting morally and consistent with American principles.”  While many businesspeople adhere to the notion that “the business of business is business,” and that extraneous details like human rights constitute a distraction from their core functions, I happen to believe that American companies operating abroad are representatives of the United States and should operate according to U.S. laws and principles.  Many American companies believe that their financial well-being is inextricably connected to the broader national interest, and are ambivalent about the ramifications of corporate activities that may undermine U.S. national security or the rights of overseas populations.  American manufacturers, for instance, want the right to export technologies and goods and services to any foreign country whenever they want, even though those exports may strengthen dictatorships and eventually threaten U.S. national security.  They resent U.S. Government regulations intended to prevent the export of goods or services that will strengthen foreign armies with which the U.S. may very well be in conflict at some point down the road, and they convince themselves that their overseas operations benefit the populations of those countries, which they sometimes do, and sometimes don’t.  In any event, privately-owned companies should be responsible for their conduct overseas, and should not transgress U.S. laws and principles just because the foreign countries in which they operate maintain weaker laws or fail to enforce the laws they have on their books.  American corporations routinely respond that U.S. laws place them at a disadvantage relative to their foreign competitors, who often are not constrained by laws as stringent as those that bind Americans (the Foreign Corrupt Practices Act of 1977, which makes it a federal crime to bribe foreign officials for the purpose of attaining business contracts with those governments, is a classic example, with much of the rest of the world considering bribery a natural part of doing business).  For some of us, principle should trump profits.  Shareholders, however, often disagree. 

Sources:

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