Nike Addresses Moral Hazard Problems: Labor Standards to Resolve - Essay Sample

Introduction

Different moral hazard problems affect Nike Company. Some of these problems are connected to health, safety, internal conflicts, and raw materials. Such challenges can grossly derail its operations; thus it took an initiative of devising means of dealing with them. One of the primary challenges faced by the company is the labor hazard issue. To resolve this challenge, the company is setting standards that have to be followed by all manufactures across the globe. For instance, the company should refrain from using any sort of forced labor, such as indenture, bonded, or prison. The firm does not also engage children in the form of their energy by following the rules of the country of origin. The company also closely observes its working hours and provisions of overtime by applying the local law on compensation of workers. In cases where their partners have violated their regulations, the company ceases cooperation with them and closes down facilities and comply with the standards and guidelines to compensate the affected group. The company decided to take such actions for future cases after, in the recent past, some foreign companies tainted its positive image ("Nike purpose: Policies," 9). The process is very costly for the company since it leads to a massive loss of profit and the inability to supply goods to potential clients in the affected areas. However, it restores the image of the company and eliminates the challenges such as injuries in production plants and minimization of the application of dangerous chemicals used in the production.

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The best solution to the problem is for Nike Company to spell out its primary objective to its workers, ensure that they have incentives that motivate them to perform better in their work. Moral hazard mainly occurs when employees do not fulfill their tasks well due to low payment, lack of benefits, and failure to understand the expectations of a firm. The company should motivate its employees to maintain top-notch performance by offering bonuses to them when they deliver quality work or after completing a complex task in time. Benefits and creation of awareness among employees about the objective of the company enable employees to be disciplined and perform in their work. By implementing such recommendations, the company should offer long term benefits to its workers by advising them to be more loyal and productive.

Principal-Agent Problem

The organizational structure of Nike Company is designed in a way that is controlled by a corporate head. Below them, other managers manage operations of the company in its various branches across the globe. These managers are mandated to effectively carry out activities of the company, maximize the profit, and act according to the standards of the company. Given that the regional managers work in a different time zone with the corporate manager, the principal-agent problem is that agents working in the company's branches listen to the directives of their leaders and work in their best interest. These agents may, at times, be selfish by ignoring the guiding principle of the company, which creates moral hazard and conflict of interest. The flow of information and operations among such agents would be asymmetrical and result in agent failure and conflict of interest.

Besides agents failing to comply with the principles of the company, the other problem would be the failure of the board of governance to act in the best interest of shareholders. The firm is structured in a way that the CEO operates via the board of directors who rely on their regional heads for direction. The structure modifies the interests of the principal agents, which results in the chief problem. Based on the structured nature of the company, the agents have the freedom of focusing on the agreed roles or failing to be loyal to the general objectives of the company. As observed by Germano (11), the above statement suggests that the yields of the agents will reduce since the principal-agent relies on the cost evaluation by the agents. The directors of the firm are inclined to executives than the shareholders to protect their career, and this results in the principal-agent problem.

Nike Company employs various tools to control its activities, incentives, and enhance its level of return. One of the tools used by the firm is the debut tool to combine agent and principle interests and highlights their variations. The directors must be the firm's shareholders to increase their commitment and work for the best interest of the firm rather than their own. Their actions are also controlled by the executives who bar them from engaging in risky projects that might affect the firm's return. The company also hires independent directors with no material interests with it, who also play an integral role in ensuring that the operations of the company are in line with its objectives. For example, the firms target sticking to the New York Stock Exchange in which an independent director has no real attachment in the firm for the last three years. The management of the firms is also enhanced by the incorporation of individuals who have received compensation worth $120000 from the committee funds and pension (Germano, 11). Such individuals must not have engaged in the auditor role within the firm within three years. This approach does not limit directors from acting out of self-interest but prevents them from making a decision based on their gains, such as giving consent to a risky project since it is coherent with the business.

Organization Structure

The organizational structure of Nike Company has been modified over the years to enhance the quality of operations. The structure has a matrix approach that channels instructions vertically or horizontally. Given that the customers of the company are based worldwide, the company adopted divisional structures that facilitate provisions of services to all their clients. The structure of each division is determined by the product line that enables the firm to innovate and develop throughout the ranges continuously. The structure of the company is divided into smaller functional units such as global sports, finance, operations, products and merchandising administration, and legal and international human resources. The president heads all these subunits, but the regional divisions are mandated to carry out independent decisions to some extent. The presid...