Principles at Levi Put a Wrinkle in Being Competitive

Watching a corporate icon get tripped up by the mismatch between its institutional principles and its actual performance is not always fun.

To be sure, there are plenty of truly amusing cases out there. There’s WorldCom Inc., whose creator, Bernard Ebbers, was the most blustery, arrogant American chief executive since General Bullmoose and now stands accused of having profited from the biggest accounting hoax in history. Or Merrill Lynch & Co., whose bullishness on America turned out to be the cover story for the dissemination of fraudulent research reports.

On the flip side, there’s the matter of Levi Strauss & Co.

The San Francisco jeans maker now celebrating its 150th anniversary will release its latest quarterly financial results today. The occasion will represent yet another opportunity to consider why a company whose name is synonymous with pure corporate ethics (not to mention “jeans”) can’t manage its own business more effectively.

Levi’s public grappling with the balance between social responsibility and the profit motive goes back at least as far as the 1970s, when its then-patriarch, Walter Haas Jr., asked a Berkeley ethicist to help codify the moral principles bequeathed him by his father and grandfather, his predecessors as chairman. Haas’ hope was that a written code could help guide an enterprise that by then had become too large to be influenced by the personal magnetism of a single individual. (He also knew he wouldn’t be around forever.)

Levi wore Haas’ principles as a badge, but there’s no reason to believe its management treated them as a mere PR tool. Rather, the bosses seemed to make every effort to follow them wherever they might lead. When Levi integrated the workforce at its Virginia manufacturing plant in the 1950s, it refused to bow to demands by the white establishment for separate work spaces or sanitary facilities for its black workers. Within a week, according to the book “Levi’s Children” by Karl Schoenberger, a former business reporter for The Times, “black and white workers were eating at the same tables in the company cafeteria.”

Decades later, the company imposed explicit and tough anti-sweatshop guidelines on its overseas garment contractors. When Haas took the company public in 1971, the prospectus warned investors that they might have to bear the cost of hewing to high standards while competitors cut ethical corners.

So no one should take pleasure in recent signs that this marvelous utopian experiment in corporate behavior has been lately straining at the seams.

For one thing, the company’s financial results have been dismal. From a peak of $8 billion in annual sales in the mid-1990s, revenue is down to $4.2 billion. The decline, along with the weight of its nearly $2.6 billion in debt -- some of it left over from the Haas family’s 1996 leveraged buyout of the company -- has subjected the bottom line to enormous pressure.

A Failure to Respond

Meanwhile, the company has responded ineptly to changes in the apparel sector, including the arrival of designer jeans, its own sliding market share and a consolidation among department stores that has given surviving retailers considerable clout to bargain with manufacturers. All of those developments have conspired to make Levi’s traditional manner of doing business obsolete.

“For a long time, Levi Strauss did set the standards of production, marketing and style,” Henry Bernard, a San Francisco apparel marketing expert who has followed Levi for three decades, told me this week. “But when you’re king of the hill and feel totally invulnerable to the ebbs and tides affecting everyone else, it’s different from when your company’s clearly in trouble.”

To some extent, it’s possible to blame the company’s slow reaction time on its principles. Levi was reluctant to follow its competitors into large-scale overseas manufacturing, arguably because it meant closing plants in communities to which the company felt an institutional commitment. “We’ve acknowledged in the past that we probably held on to a significant domestic manufacturing base too long,” says Levi’s spokeswoman, Linda Butler.

One might conclude from such evidence that, as many critics say, a corporation is doomed to failure if it allows such externalities as the well-being of employees or the future of the communities they live in to get in the way of the profit motive. (This is also the rationale by which so-called ethical investing is derided as a mug’s game.)

But that’s too facile. One lesson of Levi’s financial travails may be that the virtuous will always be victimized by the unscrupulous, at least in the short term, unless the contest itself is played according to ethical rules and overseen by an honest referee. In business terms, that amounts to an argument for legislation and regulation, both of which are currently out of style.

This is not to say that Levi Strauss necessarily would have stayed atop the apparel heap if the government had enacted laws prohibiting the dereliction of domestic factories or conducted its own audits of overseas plant conditions. Levi itself, as it happens, has not always escaped accusations of its complicity in the kind of workplace abuses it says it abhors on principle.

Facing Labor Lawsuit

The company remains the only one of 27 garment retailers and manufacturers accused in a lawsuit of participating in abusive labor conditions on the Pacific island of Saipan, a U.S. commonwealth where garment makers enjoyed cheap labor and the ability to stitch “Made in USA” labels onto their apparel.

Levi acknowledges it did employ garment contractors on the island, but insists it held them to its own high principles and phased out its work in Saipan long before other manufacturers. “The claims against the company are untrue,” Butler says. “When you settle an untrue claim, that also compromises your values.” Still, labor activists say the company has been hiding behind its reputation. “It’s been very challenging to bring to public attention ... the other side of Levi’s,” says Victor Narro, co-director of the California group Sweatshop Watch.

Another lesson of the Levi Strauss record is that moral high-mindedness can take you only so far. For example, it doesn’t protect you from making dumb, even venal, business decisions.

Many people familiar with the company say its financial problems stem from the 1996 leveraged buyout. The transaction called in whatever equity was left over from an earlier LBO and placed the company’s fortunes, which then looked bright, entirely in the hands of Robert Haas (Walter’s son) and three relatives. It may have intensified what was already an insular, family-driven management culture and deprived the company of the discipline that often comes from the scrutiny of public investors.

If nothing else, it certainly saddled Levi Strauss with all that debt. A balance sheet as misshapen as this one can lead managers into making panicky financial decisions, which is the implicit suggestion behind one of the company’s recent embarrassments. This is the wrongful-termination lawsuit filed by two accounting executives who were fired on the same day in December.

The executives, Robert Schmidt and Thomas Walsh, contend that they uncovered numerous illegalities in the way Levi accounted for overseas earnings that allowed it to fraudulently understate its U.S. taxes and inflate its profit through the late 1990s. Among the stratagems, the pair claim, was the creation of a Brazilian partnership that had no employees and no business purpose but provided the parent company with $138 million in tax deductions.

Schmidt contends that he was fired after refusing to withhold incriminating documents from the Internal Revenue Service; Walsh when he objected to a superior’s stated determination to withhold important information from the company’s outside auditors.

Suspect Actions

Such allegations are certainly not the sort of thing one expects from a company with a reputation for probity. And it’s possible the accusations are a bad rap. The transactions at issue are complicated, and Levi Strauss isn’t the only apparel maker working through foreign accounting issues with the IRS. “Fundamentally, the allegations are false,” Butler says. “We stand by the integrity of our financial statements.”

But in many ways, the company’s handling of the crisis has been ham-handed in a way that might lead outside observers to go, “Hmmm.” Chief Executive Philip Marineau initially said the company’s accounting had been cleared by a “thorough and independent” investigation by an outside lawyer. Once that lawyer turned out to be someone whose firm relies on significant business from Levi, the board commissioned a second investigation, which is still going on.

At the same time, the company’s assertion that Schmidt and Walsh were fired for reasons unrelated to their court allegations was undermined by the release of their termination letters, which explicitly cite the internal disagreements they had over the treatment of the foreign transactions.

Clearly, holding to absolute standards in today’s complex world has proved much harder for mere humans than Walter Haas Jr. might ever have believed. But has the grand utopian experiment at Levi failed? As Chou En-lai once said of the French Revolution, “It’s too early to say.”

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at [email protected].