Corporate Autonomy and Buyer-Supplier Relationships:

The Case of Unsafe Mattel Toys

Abstract

This article analyses supplier-buyer relationships where the suppliers adapt to the buyers’

needs and expectations in order to gain mutual advantages. In some cases such closely-knit

relationships lead to violations of the autonomy of one or both partners. A concept of

corporate autonomy (CA) is developed in order to analyze this problem. Three different facets

can be distinguished: rule autonomy, executive autonomy and control autonomy. A case study

of Mattel’s problems with lead-contaminated toys produced in China shows that the CA of

buyer and supplier can be restricted as a result of a dysfunctional partnership involving a

moral dilemma.

Key Words

Corporate autonomy, supplier-buyer relationships, supplier development, outsourcing, Mattel,

Inc., China, social and environmental standards.

Introduction

In 2007, Mattel, Inc., the producer of iconic toys such as the Barbie doll and Matchbox cars,

faced a major scandal when some of its toys were found to contain lead, a poisonous metal.

Mattel reacted with a major product recall and communicated its efforts to remedy any

problems in its supply chain. Reacting to similar scandals involving Chinese products in the

same year, public discussion focused on the question of how the USA can avoid importing

low quality products from China. More insightful observers, such as the anonymous “Angry

Chinese Blogger”, blame not only a lack of quality control in connection with corruption and

poor law enforcement in China, but also corporate buying policies which create “a low

security, high competition, environment in which factory owners must compete with each

other for thin margin contracts, and in which they feel forced to cut corners or to infringing

regulations as a way of staying in businesses” (Anonymous, 2007). A closer analysis of the

case highlights the probability that Mattel’s approach towards managing its supplier

relationships, in combination with increasing cost pressures from the rising social and

environmental production standards expected by western customers, led to a situation in

which the supplier faced a loss of autonomy and believed that the only remaining options

were either to cheat or to accept bankruptcy.

Empirical evidence suggests that closely-knit buyer-supplier relationships are a double-edged

sword, since mutual benefits are bought with a greater dependency. Developing close

partnerships with suppliers became fashionable when many industries tried to benefit from

outsourcing and accompanying practices such as lean manufacturing and supplier integration

(Lee-Mortimer, 1994; Carter & Ellram, 1994; Kannan & Tan, 2004; Goffin, Lemke &

Szwejczewski, 2006). Hence, purchasing companies choose to develop selected suppliers with

the aim of reducing production costs and improving the quality of the product, the production

2
process and the communication between partners. Supplier-buyer partnerships offer

advantages to both parties: the buyer gains more reliable and predictable suppliers and can

save costs by reducing the number of suppliers, while the supplier gains a faithful client

whose investments in the partnership often improve the supplier’s capacities (Lee-Mortimer,

1994; Wagner, 2006). However, negative effects of buyer-supplier partnerships are

documented as well. Dissatisfied managers report that unfulfilled promises, deceitful

behavior, unreasonable demands and difficulties in changing the terms of the collaboration

spoil the relationship (Brown, Boyett & Robinson, 1994; Piercy & Lane, 2006). A reasonable

response might be to discontinue the partnership and to search for new buyers or suppliers.

Unfortunately, suppliers often adapt to their partners’ needs to such an extent that substantial

changes, and thus investment, are necessary if they are to serve other clients. If cost-cutting is

one aim of the partnership, margins tend to be low and the company might be unable to

finance any such new investment. As a result, a company that wants to disengage from its

partner might in the process risk bankruptcy (Fishman, 2006). A possible interpretation is that

a partnership of a nature that leaves no reasonable option for exit not only becomes

dysfunctional but also inhibits the company’s autonomy, potentially creating an ethical

dilemma situation in which managers have to choose between doing the right thing and their

firm’s economic survival.

In order to distinguish between functional and dysfunctional corporate partnerships, an

understanding is needed of what constitute the prerequisites for success. We propose that the

decisive difference is that, in functional relationships, the partners remain autonomous and are

thus able to ensure that the collaboration does not endanger the basis of their current and

prospective business, such as their access to clients and resources or their choice of

procedures. Any meaningful concept of corporate autonomy needs to account for the fact that

3
companies are never independent, since it is in their nature to be engaged in a multitude of

relationships with customers, employees, suppliers etc. The aim of this paper is to develop a

concept of corporate autonomy (CA) that allows for the analysis of corporations within their

complex network of relationships. We call companies ‘autonomous’ if they are able to set and

execute rules and to monitor their compliance among corporate members and key partners.

This ability is essential for shaping not only their own organization but also for fostering an

ethical working culture in a company and its relations. This understanding of corporate

autonomy does not suggest that companies are moral persons, but compares them with other

collective actors, notably, states and their aspirations to sovereignty and autarky. We argue

that, similar to states, companies may achieve a certain degree of sovereignty.

Our argument is structured as follows: first, we develop the concept of corporate autonomy

and discuss how the autonomy of a company can be restricted. Then we distinguish three

levels of autonomy: the autonomy to set, execute and control corporate rules. We argue that

the autonomy of both corporations in a buyer-supplier partnership is a prerequisite for

mutually beneficial and fair collaboration. Since supplier-buyer relationships are first and

foremost contractual relationships, we discuss in the following section the question of whether

all restrictions to autonomy that result from contracts are legitimate. Afterwards, we describe

the potential advantages and disadvantages of buyer-supplier partnerships in more detail. The

analysis of the incident where Mattel, Inc. sourced contaminated toys from China illustrates

how a company that had been praised for its supplier management can fail to address the

suppliers’ need for corporate autonomy and, as a result, jeopardizes its own autonomy as well.

The case is evaluated using the concept of corporate autonomy as a frame of analysis. We

conclude with a discussion of the case and a critical evaluation of the proposed concept and

its implications for ethical managerial practice.

4
Corporate autonomy

Concepts of autonomy

In philosophical terms, autonomy describes a person’s ability to act independently and to be

able to make choices reflecting his or her free will. During the age of enlightenment,

autonomy – described as a person’s ability to self-determination – became a central concept in

moral philosophy. Immanuel Kant (1999) believed that the autonomy of a rational person is a

precondition for ethical decision-making. In order to determine moral rules, two prerequisites

have to be fulfilled: a rational person – free in her will – chooses to bind herself to that rule

and the rule has the potential to be binding for everybody else. An autonomous person in this

concept is not necessarily a person that is empirically free from constraints. It is a person that

is bound only by rules that she would have chosen for herself in a rational reflection of her

free will. As Paton (1971, p. 181) points out: “By force and threats I can be compelled to

actions which are directed as means to certain ends; but I can never be compelled by others to

make anything my end. If I make anything my end, I do so of my own free will […]”.

According to Kant (1999), a person’s autonomy to choose moral rules is fundamental to his or

her dignity (Paton, 1971).

The conception of autonomy in an organizational context

Because of this individual focus, autonomy in the contemporary organizational context is

mainly considered as workers’ autonomy. The discussion includes formal aspects such as

employee rights, e.g. right of free speech and to collective bargaining, as well as informal

aspects such as the worker’s right to fulfilling work (Fisher, 2001). In organizational theory,

the question of workers’ autonomy became crucial for the human-relations movement. As

Douglas McGregor (1960) points out in his Theory Y, employees seek responsibility, aspire

5
to self-fulfillment and try to enlarge their intellectual and creative potentialities. “Man will

exercise self-direction and self-control in the service of objectives to which he is committed”

(McGregor, 1960, p. 47). Continuing this discourse, Domènec Melé (2005) defines the degree

of workers’ autonomy as a measure for ethically preferable forms of organization. He argues

that the principle of subsidiarity – a term originally derived from governmental theory – also

applies to companies and guarantees the autonomy of each hierarchical unit. Thus,

organizations that follow the principle of subsidiarity are ethically preferable to organizations

that violate it (Melé, 2005). Other authors use the term autonomy when analyzing the number

of decisions a manager is allowed to make without consulting superiors (Brock, 2003) or to

describe the independence a region can achieve when policy decision-making and

administration are decentralized (Verschuere, 2006). The latter shows that the idea of

autonomy shares similarities with the concept of autarky and sovereignty. While autarky

describes the dimension of economic independency, autonomy refers to the ability of self-

legislation. Autonomy and autarky inspired the idea of a sovereign state, whereby sovereignty

is defined as the quality of independence that a nation state may achieve.

Although the terms autonomy, autarky and sovereignty are used to describe regions and

nations, they are less frequently used for smaller collective actors such as organizations and

companies. A concept of corporate autonomy has so far been missing. We suggest that such a

concept is necessary in order to analyze buyer-supplier relationships in a comprehensive

manner. For the purpose of our argumentation, it is not the autonomy of organizational

members, but the question of the autonomy of the company itself, which is pivotal.

Accordingly, we turn to the concept of sovereignty which is usually used to describe

collective actors – namely states.

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According to Immanual Kant’s Doctrine of Right, the ability of rational rule setting is crucial

for ensuring governmental independency. The objective of sovereign states – defined by their

legislative, judicative and executive power – is to encompass a state of perfect conformity

between constitution and common principles of law, whereas this pursuit of perfect

conformity between constitution and common law has to be seen as a request of the

categorical imperative. Kant concludes: “There are thus three distinctive authorities (potestas

legislatoria, executoria, iudiciaria) by which a state (civitas) has its autonomy, that is, by

which it forms and preserves itself in accordance with laws of freedom” (Kant, 2006, p. 94

[6:318]). Also, Hegel’s idea of governmental sovereignty consists of the three elements “self-

determination”, “judicatory” and “executive power” (Hegel, 1999, paragraph 279 &

paragraph 287), wherein Hegel differentiates between internal and external sovereignty: The

first refers to the internal order guaranteed by government and its institutions, while the latter

describes the acceptance of autonomy concerning the dealings of sovereign states among each

other. Hegel believes that respecting the autonomy of other states is a duty which results from

demanding the right to autonomy for one’s own state (Hegel, 1999).

The concept of corporate autonomy

Companies are constituted as legal persons, which guarantees their ability to act as a corporate

body, to sign contracts in their own name and makes them liable for their actions. Therefore,

companies are seen as legal entities, separate from their members, that are capable of holding

property and which possess distinct rights and obligations (French, 1995). This implies that

companies are potentially independent and autonomous in terms of the law and autarchic in

the sphere of economy. Nevertheless, autonomy reflects not only a formal description of

independence in juristic terms, but also refers to the factual ability of a company to follow

what is defined as its intent, in particular to act according to its own principles, including

7
standards for ethical conduct, restricted only by the rights of others and by national and

international law. If Kant’s definition of sovereignty as a state’s autonomy can be applied not

only to political entities but also to other forms of organizations, autonomy in general can be

defined as an organization’s ability to set and enforce rules, as well as its ability to monitor

the observation of these. Only if it is capable of all three can an organization be considered as

an autonomous entity. The more one of the three abilities is restricted, the weaker is the

corporation’s autonomy. Furthermore, referring to Hegel, the demand of autonomy results in a

duty to respect the autonomy of others. Thus, a company’s claim for autonomous rights

implies its acceptance of other companies’ autonomous rights.

Applied to our purpose, corporate autonomy (CA) can be defined as a company’s ability (1)

to establish its internal and external rules (potestas legislatoria), (2) its freedom to execute its

own rules (potestas executoria) and (3) its ability to monitor compliance and to sanction

misbehavior in its sphere of influence (potestas iudiciaria) as guaranteed by national and

international law. Thus, corporations must be able to define their own rules for corporate

behavior; they must be able to implement their rules and they must possess supervising

authority that allows them to guarantee rule observation, e.g. by controlling their employees’

behaviors. Accordingly, CA consists of three elements: (1) rule autonomy, i.e. setting a code

of conduct which expresses a company’s objectives and responsibilities, (2) executive

autonomy, i.e. executing and adapting work processes and technical solutions reflecting the

company’s objectives and its corporate code of conduct, and (3) control autonomy, i.e.

establishing appropriate governance structures and control mechanisms that allow to monitor

company rules and to sanction misbehavior (see figure 1). Limitations that restrict one or

more of these constitutive principles result in a loss of autonomy.

8
 *********************************************

Insert figure 1 about here

*********************************************

Restrictions of corporate autonomy

It should be noted that our definition of autonomy is used only as a formal description of

different degrees of freedom. It is neither meant to constitute corporations as moral actors, nor

to define their personhood. As de Graaf points out, organizational behavior differs

fundamentally from personal behavior: “Organizations do not have minds, they are not

human, and they certainly do not ‘think’ like people. They have their own dynamics, which

cannot be reduced to human metaphors. They ‘act’, but they act in different ways” (de Graaf,

2006, p. 354). De Graaf continues his argumentation by focusing on how individuals are

influenced by their role in companies. In contrast, our focus is on the company as a collective

actor. Thus, the question is not whether and under which conditions autonomy imparts

corporations a quasi-personal state or functions as a constituent of norm legitimization, but

whether a company – being a collective actor constituted by law as a legal person – is able to

act autonomously. In this context, autonomy is as an essential feature of choice (Michaelson,

2006) that renders it possible to make the Kantian differentiation whether someone acts from

duty or in accordance with duty (Kant, 1999). Accordingly, an actor, who solely complies

with rules which are imposed on her, disregarding her own conviction, is not described as

autonomous. De Graaf concludes, with reference to Tom Beauchamp, that “a realistic

definition of autonomy includes at least three conditions: (1) acting intentionally, (2) acting

with understanding, and (3) acting free of controlling influences” (De Graaf, 2006, pp. 349-

350). We propose that comparable criteria apply to collective actors.

9
Our definition of autonomy as an organization’s ability to set rules, to enforce them and to

monitor the rule compliance of the organizational members, helps in describing at which point

and how an organization loses its autonomy. Provided that these three elements – rule

autonomy, executive autonomy and control autonomy – are sufficient to describe

organizational autonomy, we can formally distinguish three potential insufficiencies: a

corporation can be restricted in its autonomy to set rules, it can be hindered in enforcing its

rules, and it can be unable to control that rules are observed.

Such insufficiencies can result from various factors. For example, rule autonomy can be

jeopardized by conditions imposed by business partners or because of different national

cultures. As an illustration, in some countries it is more difficult than in others to implement

equal job opportunities and equal pay for male and female workers. Executive autonomy may

become questionable in cases where corporate culture hinders rule observation or

contradictory demands force employees to bypass corporate regulations e.g. to reach their cost

targets. For example, at Enron Corporation some managers introduced dubious investment

schemes that contradicted the firm’s code of conduct. Their activities finally led to the

bankruptcy of the firm (McLean & Elking, 2004). Control autonomy can be restricted, among

other circumstances, when companies are unable to monitor compliance by their business

partners. Such restrictions can result from long and complex supply chains or from a large

number of small decentralized business units. Mattel’s difficulties in controlling their supply

chain are a good example of restricted control autonomy.

In general, rule, executive, and control autonomy can be violated by effects resulting from the

corporate environment (e.g. legal or societal restrictions), from internal effects (e.g. corporate

10
culture) or effects resulting from interaction with business partners (e.g. abuse of power

asymmetries) (see figure 2).

*********************************************

Insert figure 2 about here

*********************************************

To explain how corporate autonomy can be jeopardized we will concentrate in the following

section on the example of contractual partnerships. Although we will analyze in this case

restrictions to corporate autonomy of firms that are in a buyer-supplier relationship, the

concept can also be applied to firms that forge ties for other reasons with suppliers, customers,

shareholders, competitors, governments and so forth. Nevertheless, we consider that

contractual partnerships serve as a good example because corporate autonomy is, on the one

hand, a prerequisite for forging contracts and, on the other hand, might be restricted by

contractual agreements. Thus, especially in this context, the question arises as to what extent

autonomous rights can be abandoned in partnerships without compromising the principle of

corporate autonomy.

Contracts and the autonomy of contractors

Theoretically contract models are based on the idea of voluntary consent of both parties (de

Graaf, 2006). Contracts serve purposes at the individual as well as at the societal level.

Classical contract theory focuses on (hypothetical) contracts that are constitutive for society

and societal order. By consenting to a hypothetical contract or a constitution, people establish

political government, guarantee its supremacy and constitute the legal framework of society

(Hobbes, 1981; Locke, 1952). In a similar manner, contemporary scholars of contract theory

11
attempt to develop processes for defining societal contracts that enable social justice (Rawls,

1994). However, Adam Smith already doubted that a hypothetical contract guarantees

governmental authority. He pointed out that such contracts are unable to bind future

generations and demanded – as opposed to Kant (2006) – that in principle, every single

subject must be able to reject the contract (Smith, 1982). He concludes that a “contract is not

therefore the principle of obedience to civil government…” (Smith, 1982, p. 404).

In business ethics, contractual theory became popular thanks to the work of Thomas

Donaldson (Donaldson, 1982) and Thomas Dunfee (Dunfee, 1991). Starting from two

different positions, both authors combined their theories into an “Integrative Social Contracts

Theory” (Donaldson & Dunfee, 1994, 1995, 1999). While macrosocial contracts in this

conception are seen as hypothetical, voluntary agreements among rational members of a

society on common shared norms and values, microsocial contracts reflect specific norms of a

community filling the “moral free space” left by macrosocial contracts due to their more

general nature (Donaldson & Dunfee 1999, p. 38). Microsocial contracts specify norms

presupposing real contracts reflecting general agreements on the macro-level that regulate

core principles of society such as property or freedom. Thereby, microsocial contracts

postulate informed consent of the contractors and include the possibility to exit a contractual

agreement (Donaldson & Dunfee, 1994, 1999).

Especially at the micro-level, contract partners are interpreted as autonomous subjects who –

despite existing constraints – can voluntarily consent to or decline a contract. As De Graaf

points out: “For the concept of consent, the concept of autonomy is vital: we can only consent

if we have the autonomy to do so. If we are forced into a contract, we invalidate the concept

of contract” (De Graaf, 2006, p. 349). The underlying assumption is that contracts are forged

12
by similar partners with identical economic and political power, sufficient information about

the contractual objects and – at least in principle – freedom of choice to sign the contract or

not. Many scholars consider this kind of freedom a necessary precondition of autonomy. But

in reality asymmetries between the partners are common: the companies’ assets, bargaining

power and information access differ in most cases (de Graaf, 2006). In fact, those differences

motivate companies to search for new partners and initiate collaboration.

Nevertheless, in some cases inequalities may force companies to accept contracts

involuntarily and to consent to undesirable terms. Although economic theories exist that

explain why companies consent to exploitive contracts, the question arises from a

philosophical point of view whether companies that make such agreements can still be called

autonomous. Donaldson and Dunfee are aware of limitations of their theory concerning this

problem. When moral agents appear to have no choice, as is for example the case when poor

workers living in an area of high unemployment accept exploitive working conditions and low

pay, Donaldson and Dunfee hesitate to say that the agents “consented” to the contract

(Donaldson & Dunfee, 1994, p. 263). We conclude that it is possible that companies accept or

continue contractual relationships that are not beneficial and which compromise their

autonomy.

Corporate partnerships and supplier development

In the last two decades, a trend towards outsourcing and a growing number of international

business transactions have created a need for sophisticated supplier management. In order to

handle the risks connected with outsourcing buyers, suppliers try to minimize any dependency

from the firms they work with. Porter (1980) describes a number of ways to select business

partners strategically. Accordingly, suppliers ought to evaluate the needs, potential for

13
growth, the bargaining power and the cost for serving each potential client. Buyers search for

competitive and qualified suppliers and try to create a maximum of leverage with them

through a credible threat of switching to other suppliers or re-integrating the production of the

item within the buying firm (Porter, 1980). However, this strategy was questioned once the

world became aware of Japanese management style, which contradicts much of Porter’s

advice. Notably, Toyota’s successful strategy in sourcing approximately 80 percent of the

value of its cars from suppliers (Lee-Mortimer, 1994) has brought attention to the practice of

lean management and supplier integration.

Inspired by the Japanese example, companies all over the world relying on suppliers started to

engage in organizational development of their key suppliers in order to enhance their quality

and reliability, particularly in terms of timely delivery and flexibility in adapting volumes and

product specifications to the buyers’ needs (Goffin, Lemke & Szwejczewski, 2006). In turn,

the buyers would work with a smaller number of suppliers. Supplier integration makes it

possible to source more efficiently and is often described as a buyer’s competitive edge

(Williams 2007; Wagner, 2006; Theodorakioglou, Gotzamani & Tsiolvas, 2006; Kannan &

Tan, 2004; Lee-Mortimer, 1994). This approach results not only in closer-knit buyer-supplier

relationships, but also in a greater interdependence of both corporations.

Research suggests that a close buyer-supplier relationship offers advantages for both partners

(Carter & Ellram, 1994). However, in order to improve their suppliers’ performance, buyers

may demand the disclosure of information concerning the supplier’s production process,

sourcing practices, research capacities etc. (Piercy & Lane, 2006). This process can be

interpreted as consulting offered by the business partner (Roloff, 2006). The immediate

outcome tends to be positive for both partners: The buyer gains a more efficient and reliable

14
supplier and the supplier a faithful client. As a result of supplier development the buyer gains

a reliable and serviceable supplier whose quality and flexibility improve, while prices

decrease as a result of the consulting process. However, most partnerships aspire to make

significant improvements only in one or two of the named aspects, depending on the specifics

of the industry and the product in question. For example, in retailing and in the textile and

automotive industries a combination of quality control, timely and flexible delivery and cost

cutting has been the major motive for engaging in partnerships (Roloff, 2006, Piercy & Lane,

2006, Brown, Boyett and Robinson, 1994). Industries that are less price sensitive, such as

pharmaceuticals and the arms industry, aim at improving quality, reliability and flexibility of

their suppliers (Piachaud, 2002). Achieving cost reduction and better performance

simultaneously is possible when production and communication become more efficient as a

result of close collaboration and mutual learning. However, empirical evidence suggests that

suppliers are less likely to benefit in terms of innovation, product quality and financial

performance from the development of collaborative products than their partners (Chung &

Kim, 2003).

Pitfalls of partnerships

Despite the overall advantages connected to such partnerships, close collaboration also has the

potential to open the door to exploitation. Brown, Boyett and Robinson (1994) evaluate a

number of case studies on partnership sourcing. They write that “it was observed by most

suppliers that the partnership that they had entered into was an unequal one, and that by

revealing information on costs and relying so heavily on one purchaser they were potentially

open to exploitation” (Brown, Boyett and Robinson, 1994, p. 16). They conclude that

partnerships are most successful when there is a high degree of strategic fit between both

partners. However, Brown and his colleagues also discovered a number of latent conflicts.

15
Suppliers frequently expressed frustration because the volume of business they were

achieving as a result of the partnership did not increase as rapidly as they expected. They were

afraid that the buyers might not be as open with them as the suppliers were supposed to be,

resulting in asymmetrical disclosure of corporate data. In addition, most purchasers continued

to source from several suppliers in order to avoid too great a dependency. As a result, the

dependency of the supplier is often much greater than the buyer’s. Brown, Boyett and

Robinson conclude that “one partner, usually the purchaser, is dominant” (1994, p. 18).

However, problems do not solely arise from cost-cutting. For example, the setting of ethical

standards regulating social and environmental issues which is popular in the clothing and toy

industry also puts pressure on suppliers. The introduction of social and environmental

standards, in combination with an emphasis on high quality products, timely delivery and

competitive prices, put suppliers in a rather challenging situation. Not all of them are ready or

able to cope with such substantial changes in their business. The buying firms, on the other

hand, face a critical audience in Europe and the USA that expects a rigorous implementation

of such ‘minima moralia’ in supply chains. As a result, buyers tend to communicate to their

suppliers that no deviance from their standards will be accepted. It is not difficult to imagine

that some suppliers feel tempted to hide difficulties and failures in standard implementation.

Recent research into suppliers in China supports this assumption. Egels-Zandén (2007)

published a study on the compliance situation at Chinese suppliers of Swedish toy retailers.

He unearthed a number of standard violations and well-developed strategies to deceive the

retailer’s auditors (Egels-Zandén, 2007). For example, “managers instruct employees what to

say and how to act during monitoring occasions” (Egels-Zandén, 2007, p. 54) and salary lists

and time cards are systematically forged. These findings are particularly disturbing since the

suppliers selected for the study were recommended by the retailers as their best in terms of

16
compliance. The journalist Alexandra Harney (2008) documents the reasoning of workers and

managers in the Chinese export industry for using and fighting such practices of deception.

Several industrial and multi-stakeholder networks that aim at improving social and

environmental standards in international supply chains have reacted to this challenge by

searching for new ways to convince suppliers that there is a business case for these standards

and thereby enhance their commitment to comply with them (Fair Labor Association, 2007;

FIAS & Business for Social Responsibility, 2007). To this date, the proposed solutions are

still at an experimental stage.

Buyer-supplier relationships that are perceived as positive by both partners are described as

being built on trust (Bendixen & Abratt, 2007). But how can trust be built in a situation where

the suppliers feel harassed into accepting demands which are contradictory and buyers fear

being deceived? In a survey of the suppliers of a large South African multinational

corporation in the consumer goods field, the adherence to moral principles and a candid

communication style were found to be the two most relevant factors for ensuring a positive

relationship (Bendixen & Abratt, 2007). In a case study conducted by Williams (2007) a

mutual learning process between supplier and buyer encouraged trust, openness and flexibility

in the partnership. Examination of the limited research on the subject reveals that no definite

list of success factors for a good partnership can be established. The factors leading to failure

are easier to name: exploitation and deceit, unkept promises, unrealistic expectations and the

violation of the partner’s corporate autonomy. In order to understand how initially good

partnerships can turn sour, the case of Mattel is described in the following section.

Ensuring product safety at Chinese suppliers: the case of Mattel, Inc.

17
The toy company Mattel, Inc. has been in the last ten years not only known for producing toys

that meet high safety standards, but also for its efforts in ensuring social and environmental

standards in its production. Since it has outsourced about 50 percent of its production to

suppliers (Committee on Energy and Commerce, 2007b), the company introduced a binding

code of conduct – called Global Manufacturing Principles – and a sophisticated monitoring

system in order to ensure standard implementation at all its production sites (Sethi, 2003). The

company’s engagement not only in protecting human rights at its suppliers, but also in

contributing to the community in a philanthropic manner and its effort to implement sound

guidelines for corporate governance and corporate social responsibility led in 2007 to a listing

among the 100 Best Corporate Citizens – a ranking that is published annually by the Business

Ethics Magazine (www.business-ethics.com). In 2009, the magazine ranked Mattel 7th,

despite the fact that the company was not listed in 2008 as a reaction to the recalls the

company had had to initiate in 2007 (www.thecro.com).

In order to gain the reputation of a responsible company, Mattel had to learn from some of its

mistakes and shortcomings. Like other multinational companies that source in low-cost

countries, Mattel had been criticized by NGOs and the media. A turning point was reached in

December 1996, when the television chain NBC aired a documentary entitled “Toy Story”

(Sethi, 2003). A week before Christmas, American consumers learned that the beloved Barbie

dolls, Fisher Price and Disney toys were produced by workers in Mexico, Indonesia and

China in factories with insufficient health and safety provision and a poor record of worker

rights. A year later, Mattel announced the establishment of its Global Manufacturing

Principles and the development of an audit and monitoring system for the code (Sethi, 2003).

18
The standard implementation is audited both by Mattel employees and – less frequently – by

external auditors. The external auditors’ role is to control the effectiveness of the internal

monitoring. The data collection during the audit is documented in a protocol that encompasses

information from a systematic walk-through of the plants, a control of payrolls and personnel

files, and worker interviews (Sethi, 2003). The frequency of the controls depends on the legal

relationship between Mattel and the production sites. Factories that are owned by Mattel are

audited every second year and conduct a self-audit in between (Mattel, 2007b). Its 75

suppliers are audited at least twice a year. In contrast, the monitoring at licensees that

manufacture products using Mattel’s logo and characters is still insufficient. Although Mattel

has been auditing licensees for eight years, it still cannot guarantee that all factories are

controlled regularly. The reasons are the large number of licensees (in 2007 approximately

1000 factories) and the comparably small relevance of Mattel to their business. On average,

the production of Mattel’s brands accounts for only 5 percent of these companies’ total

production (Mattel, 2007b).

In the summer of 2007 Mattel was confronted with a major problem in its supply chain.

According to the testimony of Mattel’s chairman and chief executive officer Robert A. Eckert

before the Committee on Energy and Commerce of the U.S. House of Representatives, the

scandal developed as follows (Committee on Energy and Commerce, 2007b): On June 8,

2007, an independent laboratory that performed pre-shipment testing for a French importer of

Mattel toys reported lead in the paint on some of the toys. Mattel’s sourcing department

contacted the manufacturer Lee Der Industrial Company, Ltd. in China, stopping all

shipments and requesting that they solve the problem. However, other products from the same

supplier that were analyzed in the same laboratory were tested as being lead-free. On June 27,

a client called Mattel because he or she had found lead paint using a home test kit on a

19
product manufactured by the same supplier. Again, Mattel was unable to replicate the results

when several samples of the same product were tested. A few days later the laboratory testing

for the French importer found lead in the paint of another sample of toys produced by Lee

Der. This time Mattel was able to replicate the findings in 23 additional products that it

collected from the supplier. On the same day, Lee Der was notified that Mattel would no

longer accept any of its products. In mid-July Mattel launched an investigation and “traced the

nonconforming lead levels to yellow pigment in paint used on portions of certain toys

manufactured by Lee Der at a previously undisclosed plant located in Foshan City, China”

(Committee on Energy and Commerce, 2007b, p. 6). As a consequence, Mattel decided to

recall the products that potentially might contain paint with too high levels of lead.

Mattel’s problems with Asian suppliers continued. Again, lead was found in another type of

toy produced by a different supplier. A second recall was issued by Mattel and the company

started to test even more of its products. Consequently, Mattel found more toys that contained

too high a level of lead and more recalls followed in August 2007. In total Mattel is said to

have recalled 19 million toys worldwide (Story & Barboza, 2007). Faced with these problems,

Mattel supplemented its contractual requirements with a three-stage safety check that the

CEO Eckert describes as follows:

“First, every batch of paint must be purchased only from a certified paint supplier. Even

though the supplier is already certified, samples of the paint must still be tested before

use to ensure compliance with lead standards. Those sample tests must be performed

either by Mattel’s own laboratories or by laboratories certified by Mattel. Copies of the

test results must be made available to Mattel. Second, paint on samples of finished

product from every production run must be tested for lead by either Mattel’s own

laboratories or by laboratories certified by Mattel. Third, we have increased the

20
 frequency of random, unannounced inspections of vendors and subcontractors for

compliance with these new procedures. In addition, Mattel has been conducting

unannounced inspections of every one of our vendors and subcontractors worldwide”

(Committee on Energy and Commerce, 2007b, p. 12).

The question remains why the supplier took the risk of using paint from an unsafe source. The

New York Times investigated what happened at Lee Der (Barboza, 2007c). Zhang Shuhong,

the co-owner and manager of Lee Der, committed suicide (Barboza, 2007a) after Mattel

ended the business relationship. A few hours before his final act, Zhang Shuhong advised

some of his workers to look for other jobs and instructed his managers to sell the equipment

(Barboza, 2007c). His employees described him as the model of a responsible manager. He

was said to be devoted to the company that he took over when it faced financial problems.

Living in a “humble 25-square meter room in the factory” he invested “everything back into

the company”, according to Xie Yuguang, the chairman of Lee Der (Barboza, 2007c).

According to the same source, the workers at Lee Der were paid on time and were not forced

to work overtime. While Mattel’s spokeswoman explained that it was not yet determined

which of three paint suppliers had delivered the contaminated paint, contradicting versions of

the story are told by workers and the chairman Mr. Xie. According to the workers, the paint

was supplied by a close friend of Mr. Zhang. Mr. Xie claims that another company sold the

paint with fake quality inspection certificates and registration documents (Barboza, 2007c).

Are Mattel and Lee Der autonomous actors?

Reviewing the case, experts such as Marshall W. Meyer from the Wharton School at the

University Pennsylvania and Mary B. Teagarden from the Thunderbird School of Global

Management agree that long supply chains contribute to the control problem (Barboza, 2007c;

21
Committee on Energy and Commerce, 2007c). But will an increased number of controls really

solve the problem, or do some multinational corporations simply demand more from their

suppliers than they are willing and able to deliver? It is naïve to assume that perfect control

can be exercised in complex supply chains. Reflecting on the fact that similar forms of

mismanagement and deception are reported to be a frequent phenomenon (Anonymous, 2007;

Egels-Zandén, 2007; Harney, 2008), the explanation that Lee Der’s case is just another case

of cronyism is not satisfactory. Although cronyism can be the cause of dysfunctional

partnerships it may also be a symptom. In order to determine whether cronyism triggered or

was triggered by a dysfunctional partnership a closer analysis is necessary. Irrespective of

whether Zhang did believe in the fake quality certificate of his close friend and whether he

owes a favor to him or whether he was corrupt and did it for profit reasons, the fact remains

that he ignored testing procedures that were part of his contract with Mattel and to which he

had agreed. The fact that cultural norms concerning gift-giving, bribery payment and

cronyism differ among societies can contribute to a situation in which the corporate autonomy

of foreign contractors is jeopardized. Despite the possibility that Zhang Shuhong faced a

dilemma regarding his duties towards a friend and his contractual obligations towards Mattel,

the loss of reliability that took place in this partnership may have been caused by the threat the

partnership proposed to the autonomy of both partners and their consequent reaction to this

threat. In the following section, we evaluate to what extent Mattel’s and Lee Der’s autonomy

to define, implement and control corporate rules and objectives was compromised.

The problem of rule autonomy

Rule autonomy is defined as a company’s ability to set rules in accordance with its objectives.

Mattel did so when it established the “Global Manufacturing Principles” (GMP) as a binding

standard for all its suppliers, responding to criticism that mounted when child labor at Mattel

22
suppliers became public. With the GMP, Mattel defines some basic rules that shape its

supplier relationships. “Mattel expects all its business partners to adhere to GMP, and will

assist them in meeting GMP requirements. However, Mattel is prepared to end partnerships

with those who do not comply. Compromise is not an option” (Mattel, 2001). These standards

are understood as dynamic principles that are continually updated and refined. To ensure the

efficiency of the GMP, Mattel introduced a comprehensive monitoring and audit system with

the aim not only of guaranteeing standard compliance, but also of assuring that the standards

are frequently adjusted in line with new developments.

Mattel chose the well-being of children as a core value of the GMP, as an early version of the

code points out: “The well being of children is an inherent part of the reason that Mattel exists

and this is reflected in all aspects of our business. A child’s well-being is our primary concern in

considering the quality and type of toys produced, and in the way Mattel toys are manufactured.

[…] Accordingly, Mattel is committed to creating safe and quality products for children around

the world” (Mattel, 2001). The current code includes commitments to national and international

law, environmental protection, stakeholder relationships and detailed paragraphs about labor

conditions (Mattel, 2007c). By and large, Mattel was successful in setting its own ethical

standards and obliging its business partners to act in accordance with its policy. When the

GMP were developed, much attention was given to making them realistic and relevant, since

it was assumed that too demanding or too general standards would lead to less commitment

on the side of the suppliers (Sethi, 2003). Thus, specific GMP Standards Check Lists were

developed for each country, spelling out what exactly was expected from the supplier

concerning ethical issues such as safety standards, environmental behavior, product safety and

so forth.

23
Like all other suppliers of Mattel, the Chinese manufacturer Lee Der consented to the GMP

and implemented them during the 15 years the firm worked for Mattel (Barboza, 2007b). This

can be interpreted as a choice to restrict their rule autonomy voluntarily or even as a choice to

apply Mattel’s GMP to Lee Der’s principles. Since complyiance with the GMP is a

prerequisite for working for Mattel, the first interpretation seems likelier. Mattel can be

considered as a client of strategic importance for Lee Der due to the fact that the corporation

buys between 30 and 90 percent of the annual production of the suppliers (Mattel, 2007b). In

accordance with Mattel’s policy for suppliers, Lee Der was audited twice a year and had to

submit its products to various quality tests assuring its compliance to the GMP. In any case,

we can conclude that both Mattel and the supplier Lee Der exercised their rule autonomy:

Mattel by developing the GMP, and Lee Der by committing to them voluntarily.

The problem of executive autonomy

Executive autonomy is defined as the ability to create a corporate identity and a corporate

culture reflecting the corporation’s objectives by implementing related processes, policies and

strategies. With respect to the initial failure of Mattel to ensure its product’s quality, the

question arises whether the corporation was restricted in its executive autonomy. To a large

extent, Mattel seemed to be the master of the process. Even when announcing the recall of

Lee Der toys, Mattel’s officials stated that Lee Der has always been a reliable supplier

(Barboza, 2007b). Once the lead was detected in some toys, the recall went smoothly and

Mattel’s transparent communication style helped to minimize the potential negative effect of

the events on the company’s reputation.

In theory, threats to Mattel’s executive autonomy could originate from both internal and

external sources. Internal threats can result from the misbehavior of individual employees or

24
managers. External threats can be caused by partners, such as suppliers or retailers, and by the

environment, such as when societal practices undermine the execution of corporate standards.

In our case, Mattel’s employees, as far as we know, acted in accordance with Mattel’s

standards when they conducted business with Lee Der. We assume that all regular inspections

and audits took place. Once lead was found, the information reached all relevant persons and

deliveries from Lee Der was stopped. Accordingly, Mattel’s executive autonomy was not

compromised by internal threats.

However, Mattel’s executive autonomy was threatened by external factors: Lee Der’s non-

compliance and environmental factors, in particular societal expectations and the cost

pressure. These probably contributed to the decision to use paint from an obviously

uncertified supplier. The fact that Mattel is not the only company facing problems with

Chinese suppliers provides evidence for the latter. For example, in June 2007 the RC2

Corporation also had to recall 1.5 million wooden toy railways that were painted with toxic

color (Barboza, 2007b, Ramzy, 2007). In November of the same year, Marvel Toys recalled

175,000 dolls because the plastic used in them contained excessive levels of lead (U.S.

Consumer Product Safety Commission, 2007). Earlier, in 2003, Toys “R” Us voluntarily

recalled 50,000 lead-laden pieces of sidewalk chalk (Spencer & Casey, 2007). Altogether, in

over 30 cases companies had to recall toys due to a lead poisoning hazard in 2007 in the USA

(U.S. Consumer Product Safety Commission, 2007). Chinese manufacturers still continue to

use colors containing lead because it is cheaper, easier to handle and readily available.

In the case of Lee Der, the contaminated color was delivered by Zhang’s best friend

(cnn.com, 2007). Because the firm had the reputation of being a reliable supplier, Mattel

delegated the responsibility to control the quality of the paint to Lee Der. Although Lee Der

25
had the equipment for testing paints on site and could have detected lead paint (Barboza,

2007b), it seems that Zhang either had confidence in the fake quality inspection certificates of

his friend or ignored contradictory results on purpose. Given the known facts, it would be

naïve to explain the non-compliance as resulting from fraud committed by Zhang’s best friend

and to declare Zhang to be solely a victim. Reflecting on the high number of recalls in the toy

industry, it is equally unlikely that cronyism and personal obligations have been crucial in

overriding the quality standards in all cases. China’s export industry is under pressure to

deliver cheap products but at the same time to fulfill the more and more demanding quality,

social and environmental standards of its customers. These contradictory demands are

incentives for suppliers to practice fraud and deception (Harney 2008; Egels-Zandén, 2007;

Spencer & Casey, 2007).

Looking at these circumstances, the question arises whether similar cases can be prevented by

any company operating in China. Prevention is difficult, if not impossible, if the actor

responsible for non-compliance is willing to break the rules, disregarding any sanctions. This

would be the case if Zhang had an obligation to his friend which was more important to him

than his company’s business with Mattel. Equally difficult to approach would be non-

compliance resulting from compliance with national culture. For example, if the moral norms

of a national culture dictate that social obligations to friends and kinship prevail over

agreements with foreigners, a multinational corporation has only limited means to enforce its

own interpretation of the contract with a local supplier. By contrast, if the non-compliance

was induced by contradictory demands, the problem is – at least in part – the responsibility of

the international toy industry. Strict cost-cutting strategies that do not sufficiently reflect

increasing production costs and rising prices force suppliers into illegal and unethical

practices. In such a situation, the demand of social and environmental standards is likely to be

26
answered with double bookkeeping and undisclosed production sites. Mattel and other

multinationals can help to address this problem by ensuring that they pay realistic prices and

by convincing their suppliers of the advantages of sound social and environmental practices.

In summary, although Mattel’s executive autonomy is potentially jeopardized by non-

compliance of individual managers and differences in the interpretation of contractual

agreements due to different national cultures, it can address non-compliance caused by cost

pressures and high demands which accordingly do not restrict Mattel’s executive autonomy.

An analysis of Lee Der’s situation leads to different results. Notwithstanding the fact that Lee

Der signed its contracts voluntarily, contractual specifications and restrictions limit Lee Der’s

scope of action. The following external factors might have contributed to restricting Lee Der’s

executive autonomy: the increasing price of energy and raw materials in China and the

international price structure and quality expectations on the toy market. Complying with all

standards under these conditions was likely to be a difficult – maybe unrealistic – task.

However, Lee Der’s executive autonomy was not solely restricted by external factors. Since

Zhang Shuhong accepted the paint from his friend without controlling it, because he felt an

obligation towards him, the autonomy of Lee Der was jeopardized by an internal factor: the

individual behavior of Zhang Shuhong. Similar to the conception of governmental autonomy,

corporate autonomy demands compliance of all members of a company, including its CEO.

By having regard to personal relations in company decisions, Mr. Zhang violated the

principles that the company had consented to when it signed the contract with Mattel. We

conclude that Lee Der’s executive autonomy was restricted either by internal or external

factors, or by a combination of both.

The problem of control autonomy

27
Control autonomy is defined as the ability to monitor internal rules and sanction non-

conformist behavior. Both Mattel and Lee Der faced a number of challenges in this area. Due

to the increasing number of suppliers and the large number of licensees, Mattel is virtually

unable to control compliance effectively. The longer a supply chain and the larger the number

of suppliers and subcontractors, the more difficult is it to constantly monitor the situation at

each single production site. When auditors are confronted with structures interlaced with

personal relationships and mutual obligations between suppliers and subcontractors, as is the

case in China, the number of uncertainties in the monitoring process rises. Ending the contract

with one supplier has little impact in a situation where other potential suppliers are exposed to

the same cost pressure and source their materials from the same firms.

Regardless of whether non-compliance is caused by an internal factor such as a greedy

company owner or by an external factor such as a client’s cost-cutting policy, suppliers try to

hide any irregular activities. Because of their specific knowledge of auditing procedures, they

are able to bypass the control and develop sophisticated ways of lowering their production

standards without the customer’s knowledge. In order to keep their order books full and to

avoid disappointing their clients, companies tend to accept more and larger orders than they

can execute. In order to deliver on time, they work excessive overtime or employ non-

authorized sub-contractors which often do not implement the social and environmental

standards demanded by the client. Mattel is also confronted with such practices, according to

Egels-Zandén (2007). In his study employees from nine Chinese toy suppliers were

interviewed in order to determine how reliable their clients’ monitoring is. Egels-Zandén

found “one supplier (breaching eight of the nine studied criteria) was monitored several times

a year by Mattel, yearly by Coop and likely also yearly by other large toy retailers” (2007, p.

53). The criteria used in the study were the number of work hours and work days, the payment

28
of minimum wages and overtime compensation, the provision of health and safety education,

physical examinations, pension and accident insurances and of employee contracts as well as

the absence of child labor.

Mattel’s reaction to the scandal, increasing the frequency and number of controls of products

and materials, can be viewed as an only partially adequate solution. On the one hand, more

tests increase the probability of finding contaminated products and enhance the safety for

Mattel’s customers. In addition, some suppliers might refrain from incorrect practices when

the likelihood of being discovered and punished is growing. On the other hand, more controls

challenge those companies that are more experienced in cheating controllers to find new ways

to bypass the new tests. Given the repeated reports of sophisticated deception techniques, it

can be argued that no multinational company will ever be able to control multilayered supply

chains perfectly. All control systems have gaps and such gaps will always be exploited by

those companies that are not truly committed to the client’s rules.

Today, toy producers such as Mattel depend to a large degree on producing at low cost in

China. Almost 80 percent of toys that are sold on the US-market are manufactured in China

(Spencer & Casey, 2007). With approximately 30,000 different toy products on sale in the

USA (Barboza, 2007b), controlling production standards throughout the supply chain is an

enormous task. Even Mattel with its detailed and tested manufacturing principles and auditing

standards is not able to control its production in China completely. Considering this, we

conclude that Mattel has lost its control autonomy. It can be assumed that the same is true for

other multinational corporations that deal with complex supply chains in markets as

complicated as China.

29
As the case shows, Mattel has delegated a part of its control problems to its suppliers. For

example, Lee Der was expected to perform its own test on paints bought for the production of

Mattel toys. In sharing the control with suppliers, Mattel became dependent on their integrity

and corporate culture. In the case discussed, this resulted in the loss of Mattel’s autonomy.

Since Lee Der had the equipment and the know-how for testing the paint, the interpretation

can be that the supplier’s control autonomy was less restricted than Mattel’s. Lee Der works

in greater proximity to its subcontractors and thus ought to be able to judge and predict their

behavior with more precision than can Mattel. However, companies such as Lee Der work

with a variety of suppliers and subcontractors of which some have their own subcontractors

and so forth. As a result, manufacturing firms are also unable to guarantee a specific set of

production standards in their supply chains. As mentioned before, perfect control is

impossible to achieve. To conclude, Lee Der’s control autonomy was restricted in the case,

but not completely diminished.

Discussion

From the analysis above, we conclude that corporate autonomy can be harmed in supplier-

buyer partnerships either by mistakes made by the company itself or by mistakes and the

misguided behavior of partners. In this case both companies lost to some extent their

autonomy, for different reasons (see table 1 and 2). Mattel’s executive autonomy was

threatened by the failure of Lee Der to use safe paint. Fortunately, this threat can be addressed

and Mattel can regain its executive autonomy. Its control autonomy, however, is violated. The

reasons are two-fold: First, Mattel’s strategy to outsource a part of its production made the

company vulnerable to abuse, because it now had to control a long supply chain. In addition,

Mattel decided to empower long-standing suppliers to perform a part of the control –

delegating a part of its control autonomy. Once the one supplier did not honor this agreement,

30
Mattel’s control autonomy was violated. Differences in national cultures might have

contributed to the supplier’s non-compliance and high expectations of consumers and civil

society regarding ethical production standards might have aggravated the problem.

Nevertheless, the delegation of control and the lack of commitment of the foreign partner

must be seen as crucial factor for Mattel’s loss of control autonomy.

*********************************************

Insert Table 1 about here

*********************************************

As table 2 shows, neither did the corporate autonomy of Mattel’s supplier Lee Der remain

intact. While Lee Der’s ability to control its suppliers might be somewhat greater than

Mattel’s, the extent of its control is probably not sufficient to ensure that Mattel’s Global

Manufacturing Principles are implemented by every subcontractor Lee Der deals with.

Accordingly, Lee Der experienced reduced control autonomy when it was acting in the role of

a purchaser. The greater harm to Lee Der’s corporate autonomy, however, stems from a

violation of its executive autonomy. Two potential causes for the violation were identified:

the CEO Zhang Shuhong might have deliberately ignored the agreement Lee Der had with

Mattel when he bought the paint – possibly from a friend – causing a loss of executive

autonomy; secondly, many Chinese manufacturers find it difficult to produce at low cost

while meeting the social and environmental standards demanded by their western clients.

Thus, they bend some of the rules and hide the violations in order to stay in business with

clients that demand both low prices and high ethical standards. If a company is not able to

stay in business while respecting the standards it set for itself or consented to, its executive

autonomy is violated.

31
 *********************************************

Insert Table 2 about here

*********************************************

However, it is important to note that not every restriction of autonomy has to be considered as

a loss of autonomy. Christman (2003) argues that it is possible to restrict one’s own autonomy

as a result of a decision that reflects a person’s free will. Fisher (2001) makes a similar

argument when analyzing employees’ autonomy – expressed in their right to privacy. For

example, questions concerning the age or possible physical disabilities of job applicants might

violate their right to privacy and thus their autonomy to some extent, but can be necessary and

relevant for the employer’s decision (Fisher, 2001). Such restrictions of autonomy are

acceptable when all parties submitted to the rules have consented to them, either implicitly by

abiding with them or explicitly, e.g. in a contract. Transferred to the organizational context

this means that companies do restrict their autonomy by consenting to rules and obligations

but this does not imply an automatic loss of autonomy. For example, when Mattel delegated

its control rights, its control autonomy was not yet restricted. As long as the partners in such

an agreement respect each others’ autonomy as such, it remains unaffected.

Corporate autonomy should thus not be interpreted as a firm’s full control over all external

and internal structures. This is neither realistic nor desirable. In any interaction, contract and

partnership that a company has with consumers and business partners, the company chooses

to restrict its autonomy to some degree in order to allow successful cooperation. In general, all

interactions imply that the actors abstain from their autonomy claims to some degree. In the

32
case of Mattel and Lee Der, the question was not whether Mattel was able to control its whole

environment and to bind all employees and business partners strictly to its Global

Manufacturing Principles, but rather whether the influence of individuals or other

organizations would be strong enough to compromise Mattel’s autonomy. In the situation

described above, Mattel lost its control autonomy in a way that was strong enough to

jeopardize the company’s autonomy as a whole.

Conclusion

The concept of corporate autonomy consisting of the firm’s ability to set rules, implement and

control them provides an analytical framework for evaluating under what conditions a

company’s ability to interact in a mutually beneficial manner with other collective actors is

jeopardized. The case study illustrates that the ability to choose how the business is

conducted, the free choice to sign or reject a contract and the ability to execute and to monitor

contract regulations are important for forging mutually beneficial contracts and partnerships.

When a company’s autonomy is seriously compromised, the likelihood of conflict in the

company and between the firm and its stakeholders increases. Corporate autonomy can be

restricted by various actors and events: members of the firm, other organizations and external

forces such as unforeseen governmental regulations or changing societal expectations. Some

restriction are freely – and, thus, autonomously – chosen by a company as, for example, the

loss of autonomy resulting from committing to social, environmental or quality standards or

delegating certain control functions to another organization. Other restrictions are forced on a

company, e.g. trade barriers and stricter environmental regulation, or affect it by chance, e.g.

an economic crisis.

33
Since supplier-buyer partnerships and the accompanying supplier development are today quite

widespread, it is of vital importance to manage them in a manner which does not compromise

the partners’ autonomy. As the case study of Mattel and Lee Der shows, each partner can both

gain and lose in a partnership. Agreements and contracts that are desirable at the beginning of

a partnership can become difficult to honor when circumstances change. Functional

relationships that were chosen freely by buyer and supplier can develop into dysfunctional

ones when the corporate autonomy not only is restricted but is also violated in the

relationship. We propose that a functional buyer-supplier relationship is one in which the

partners freely choose to which degree they decline to exercise their autonomy and in which

they are able to fully regain their autonomy, for example, by ending the relationship. This

requires that ending one particular relationship does not lead to bankruptcy. In a dysfunctional

relationship, the corporate autonomy is violated to such a degree that the company is unable

to regain it. Managers should try to avoid the latter by honoring the agreements made with the

partner and by remaining open to the discussion of any changes of the terms of the partnership

that may become necessary. In the current situation this also implies that buyers have to

review critically how prices, product quality, production standards and ethical values can be

realistically achieved without violating their suppliers’ – and their own – corporate autonomy.

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Figure 1: The Concept of Corporate Autonomy

Corporate Autonomy

Rule Autonomy Executive Autonomy Control Autonomy

(potestas legislatoria) (potestas executoria) (potestas iudiciaria)

Ability to set rules in Ability to create a Ability to monitor

accordance with the
corporation’s objectives,
e.g. production standards
and codes of conduct
corporate identity
and a corporate culture
reflecting the
corporation’s objectives
internal rules and
sanction non-conformist
behaviour by establishing
corporate governance
structures

Figure 2: Restrictions of Corporate Autonomy

[Note: Another version of figure 2 is attached in a separate PowerPoint-file.]

40
Table 1: Threats and Restrictions of Mattel’s Corporate Autonomy

Element of Rule Executive Control

autonomy Autonomy Autonomy Autonomy

Source of
restriction
External threats No restriction: Mattel Restriction: Restriction:
developed GMP. National cultural Development of
differences of sophisticated forms
interpreting and of deception and
implementing related professional
contracts. services (double
Consumers and civil bookkeeping, audit
society expect the training, etc.)
application of high
social, environmental
and quality standards
as well as affordable
toys.
Internal threats No restriction: Mattel No restriction: Crisis No restriction:
developed GMP. procedures and other Control procedures
rules were followed. were applied.
Threats resulting No restriction: Mattel Restriction: Lee Restriction:
from collaboration developed GMP. Der’s non- Delegation of control
complaince. to Lee Der.
In general long
supply chains are
difficult to control.
Fraud and deception
of suppliers makes
control inefficient.

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Table 2: Threats and Restrictions of Lee Der’s Corporate Autonomy

Element of Rule Executive Control

autonomy Autonomy Autonomy Autonomy

Source of
restriction
External threats Restriction: Restriction: Restriction:
Potential problems of Higher prices for Difficulties in
harmonizing Lee energy and other controlling
Der’s rules and resources result in compliance of all
procedures with the higher costs, while suppliers and
GMP due to product prices are subcontractors.
differences of low.
national cultures.
Internal threats Restriction: Restriction: Restriction:
Potential problems of CEO brakes rules Failure to control the
harmonizing and allows the use of paint.
manager’s lead tainted paint. Failure to control the
professional ethics CEO’s and other
with GMP. employees’ behavior.
Threats resulting No restriction: Lee Restriction: Restriction: Control
from collaboration Der consented to Contradictory of paint supplier
GMP. demands by Mattel failed for
and other clients. undetermined
reasons.
Successfully cheating
competitors create
unrealistic
expectations.

42