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A case study of ethical issue at Gucci in Shenzhen, China

• Published: 09 October 2012
• Volume 2 , pages 173–183, ( 2013 )

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• Li Wang 1 &
• Robin Stanley Snell 2  

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Introduction

Gucci is a multinational company with over 270 directly operated stores worldwide, serving customers of elite goods, and generating billions of dollars revenue per year. It has an iconic, even noble, luxury brand image in the Greater China region, where its revenue increased by 35.6% in the first half of year 2011. Gucci has expressed its intention to accelerate the process of opening stores on the Chinese mainland. Recently, however, the company came under fire after five former employees from its flagship store in Shenzhen revealed information online about inhumane working conditions and labor mistreatment in the company. This paper focuses on events that took place in a Gucci flagship store located in Shenzhen, China.

This paper has two main research objectives. The first is to analyze why labor abuses (as exemplified in the Gucci case) are allowed to occur and persist in foreign-invested firms that are located in the People’s Republic of China (PRC). The second is to develop a multi-stakeholder approach to preventing further abuses of this kind. The next section provides a description of the case, focusing on the ethically problematic labor management practices and arrangements and noting some legal violations. We shall then present three propositions regarding why some foreign firms operating in the PRC and host local governments ignore and/or tolerate labor abuses of this kind. We follow this with a section in which we apply two different approaches, traditional Confucian ethics on the one hand and modern labor rights theory on the other, to provide a robust ethical basis for stakeholders to argue from, while taking action to persuade others that such malpractices are ethically unacceptable. Next, after identifying four stakeholders for the Gucci case, we suggest how each of them may play a role in discontinuing and/or preventing future labor abuses. We conclude with some further theoretical and managerial implications.

Case description

The employees’ complaints.

On 8 October 2011, an open letter—<A Public Letter to the Top Management of Gucci from Former Employees who resigned collectively> was spread on the Internet. This letter was written by five former employees of the Gucci Shenzhen Flagship Store. In the letter, they alleged that employees caught an occupational disease, that there was one miscarriage attributable to excessive working hours and that there was no compensation for these hardships. Moreover, they stated that there were excessive restrictions on employees’ behavior, including the need to obtain permission before getting a drink or a snack, and strict limitations on toilet time. They stated that, while the restrictions were applied strictly to all frontline employees, including one who was pregnant, they were not applied to the managers. The letter also claimed that the employees had to pay compensation for any product that was stolen or went missing, even though these luxury products had already been insured. They also criticized Gucci’s goods exchange policies which appeared to be arbitrary and dependent on the manager’s mood. All in all, they accused Gucci of lacking systematic and humane management and complained that their rights and dignity were being violated.

Once revealed online, this report aroused widespread discussion among Internet users. Further information emerged, suggesting that the case also involved falsification of records about working hours, and the imposition of forced, unpaid overtime work. Gucci implemented a system of working one full day, followed by a day off. Officially, 1 day’s work was about 10 h. But the workers complained that, on their working days, they were required to clock off at a certain time to establish a false electronic record, and then continue their work, counting goods until two or three o’clock in the morning without compensation.

Some netizens labeled Gucci as a “sweatshop.” Many opined that the labor management practices of some multinational companies and brand owners failed to match their international status. Several days later, the Gucci headquarters in China issued a statement, saying that “Gucci does not and will not endorse or tolerate the alleged malpractices.” Gucci also stated that that the company had conducted thorough investigations and had implemented a series of measures, including the replacement of the store manager and assistant store manager. Meanwhile, the Human Resources Bureau within the Legal Department of Shenzhen’s Luohu District said they would further investigate the case. On 26 October 2011, Gucci and the former employees eventually arrived at a settlement in conjunction with Shenzhen Federation of Trade Unions.

How Gucci used the labor dispatch system

Dispatch is a labor management model which separates recruitment from employment. Relationships under the dispatch system are portrayed in Fig.  1 . The employee leasing companies have labor contracts with the workers, and they send workers to other companies in which these workers actually work. The labor contract relationship exists between the employee leasing companies and the dispatched workers, but the actual working relationship is between the workers and the companies in which they work.

Relationships under the dispatch system

In this form of employment, the company which actually “use” these workers is only responsible for paying wages, while other aspects, including social security and dismissal compensation are passed on to the employee leasing company. The labor dispatch arrangement serves to reduce the user companies’ costs and contractual responsibilities for the employee. They can incur lower training costs and are not required to make social security arrangements. Because of these features, this employment model is widely used in China. The Gucci stores in Shenzhen actually adopted an even more complex dispatch system, involving at least three employee leasing companies that were located in Shanghai.

Legal considerations

One legal consideration is that, although the labor dispatch system has been officially adopted as way of arranging temporary employment only, Gucci used the system to employ people for durations of more than 2 years. Another is that many of the Gucci store employees are female and that pregnant employees legally enjoy special labor protection. According to the “Labor Contract Law,” female workers during their pregnancy should not participate in the state’s third-grade physical intensive work. Such work is deemed not suitable for female workers; for female workers who are more than 7 months pregnant, there should be no overtime work, and they should not be required to join night shifts. Furthermore, it is a legal requirement that sufficient rest periods should be arranged for such employees.

Why do labor abuses happen in China?

Underpinning the legal considerations, the basic ethical issue in this case is the violation of labor rights, through non-remunerated and forced work, inhuman restrictions, and other unreasonable policies. Gucci is by no means the first multinational company that has been accused of operating a “sweatshop” in Asia. For example, Nike was involved in abusive practices in Indonesia (Krueger 2007 ). What is especially interesting about this case is that it involves retail employees rather than factory workers. Also notable is that such labor abuses are generally uncommon in the Western countries, where these multinational corporations (MNCs) are quartered. Why did they come to China and “collectively fall ill”? We envisage that there are three possible reasons: First, overtime work without payment and other illegal employment arrangements are tolerated among local firms, and when foreign brands and multinational companies come to China, it is an easy temptation for them to slide into these malpractices, while giving themselves the excuse that it is a way of “adapting to the environment” (Hofstede 1993 ), i.e., moral relativism. Hence,

Proposition One: A philosophy of moral relativism allows some foreign firms in China to level down to abusive but locally condoned labor management practices.

The second possible reason for the persistence of labor abuses in China involving MNCs is that these large companies do not pay attention to the labor laws, let alone lobby to strengthen the laws and their enforcement, because they think their investment will furnish the local government with a good-looking GDP and that this is all that matters to them. Hence,

Proposition Two: Some foreign firms in China are preoccupied with economic goals, assume that local governments share their preoccupation, and believe that, because of shared economic imperatives, they can ignore the labor laws with impunity (Gao 2009 ; Ip 2009 ; McDonald 1995 ).

The third reason is closely related to the second one and concerns how the pressures faced by local governments are reflected in their actual preoccupations. Despite movement toward the balancing of economic imperatives with social and environmental concerns under the “Harmonious Society” policy platform (See 2009 ), local governments still remain under pressure to meet economic targets. Although there is a considerable body of labor laws in the PRC, officials may perceive there is little risk of being punished if it is discovered that they have failed to enforce them. Furthermore, some local governments may be afraid that the strict implementation of the labor law will drive investors away and may consciously turn a blind eye to illegal and unethical practices by firms under their purview, resulting in lax monitoring and non-enforcement.

Proposition Three: Because some local governments perceive that economic imperatives override social responsibility concerns, they are lax in enforcing labor laws.

Two perspectives—how can we tell right from wrong?

We shall draw on two very different perspectives to conduct a moral evaluation of the labor management practices in the Gucci case. The first perspective is that of traditional Confucian ethics, the second is modern labor rights theory.

Confucianism

The core of Confucian ethics is comprised of five values. We shall focus on three of them—Ren, Yi, and Li. Ren is a capacity for compassion or benevolence for fellow humans. It is essentially expressed in social relationships. One can have a harmonious relationship with others and thinking about others’ stakes when doing business draws on Ren (Wang and Juslin 2009 ). In effect, Ren expresses the Confucian formulation of the Golden Rule: People should not do to others things that they do not want others to do to them. Consideration for others, caring for others, and loving others means Ren. By contrast, in the Gucci case, the management operates only with the economic interest of company in mind, with no regard for workers’ basic needs. It abused the dispatch system for the sole purpose of lowering the cost of hiring people, without considering workers’ needs for adequate salaries, social insurance, training … etc, thereby failing to practice Ren.

Of equal importance in Confucian ethics is Yi, which concerns the morality of righteousness. It is the capacity to discern appropriateness and the right direction for actions, relationships, and other human matters. Helping people when they are in need is one expression of Yi, but in the Gucci case, Yi is absent. For example, the employee who was pregnant should have been treated with special care, and help should have been given to her when she needed it, but to the contrary, long working hours and strict working restrictions led to her miscarriage.

Third, Confucian morality is regulated by Li, or decorum. This consists of a body of norms, rites, and unwritten understandings that govern and regulate social action in every aspect of daily endeavor (Lau 1992 ). Respecting people and their dignity involves Li, but according to the employees’ allegations, the management did not respect their dignity. Subject to many unreasonable restrictions, they were treated as if they were mere instruments to make money, rather than as human beings with dignity, and did not receive due respect and appropriate treatment.

A related aspect of Confucianism concerns the respective duties of the parties in a dyadic relationship. The junior party has the obligation to serve and obey the senior party, and the senior party has the responsibility to teach, lead, and look after the junior party. Applied to modern employment relationships, this would entail a benign arrangement under which the employees would be recognized and cherished as a key stakeholder group of the company, with which the company would build and maintain a cooperative relationship and seek win–win outcomes. “Squeezing” rather than nurturing employees may save economic costs and lead to more profits in the short-term, but, as in this particular case, is likely to give rise to low morale among employees and may lead to emotional distress and physical harm. The long-term risks include that employees will make their grievances public and that the company’s reputation will be harmed as a result.

Labor rights

In the advanced Western economies, the moral basis of human rights has been incorporated into legal rights. There are strong and well-enforced government laws and regulations and established labor to advocate and negotiate on behalf of workers; well-developed nongovernmental organizations (NGOs) and independent media make problems transparent and advocate remedies. There are also high levels of citizenship education. Worker rights and protections have thus been institutionalized within a system of law and democratic political accountability, and are monitored by unions, NGOs, and educators. Through these processes, public expectations of the ethical behavior of corporations have become progressively stricter; cases of labor abuse still occur but appear to be relatively uncommon rather than endemic (Greenwood 2012 ).

In China, however, labor rights turn out not be widely institutionalized and legal rights turn out not to be strongly enforced, allowing employers as the stronger party to exploit the employees as the weaker party. While there are differences between Western countries and China, all people in the world share the need for some basic characteristics of human dignity that ought never to be violated, regardless of social context (e.g., whether one lives in a rich or poor society) and thus regardless of whether they have an abundance of employment choices or nearly none, or whether they have adequate institutional mechanisms to protect their interests.

It is ethically insufficient for corporations merely to “do in Rome as Romans do.” Expedient moral relativism should be replaced by broader and “thicker” moral norms that have universal application. The Universal Declaration of Human Rights Article 5 states that “No one shall be subjected to torture or to cruel, inhuman or degrading treatment or punishment.” And Article 23 section (3) states that “Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.” The practices adopted by the management of Gucci in Shenzhen appear to have violated the Universal Declaration of Human Rights.

Stakeholders and their relevant stakes

To prevent the further occurrence of abusive practices in labor management requires efforts from various groups. In working out who needs to do what, we first need to define who the relevant stakeholders are (Argandona 1998 ). According to Freeman ( 1998 ), the stakeholders are defined as “any group or individual who can affect or is affected by the achievement of the firm’s objectives.” That is, we need to identify which groups can be affected by these abuses and which groups can prevent them (Carson 1993 ; Maak and Pless 2006 ). Stakeholders include the following.

The company and its shareholders, whose stake is that the company’s reputation should be rebuilt. This scandal may disrupt Gucci’s expansion plans in China, so the company has a strong incentive to take positive action repair the harm to its reputation there.

Employees: Regardless of whether an employee has resigned or still remains in employment with Gucci, he or she will require apologies and appropriate compensation. In addition, the current employees are likely to desire the adoption of more systematic management methods and improved working conditions.

Chinese government: It is the Chinese government’s responsibility to ensure that worker’s rights are enforced, especially on its own territory and that companies operate in accordance with the laws there.

Foreign (home) governments: Foreign governments have a stake in every firm that is headquartered in their territory, including those with subsidies in overseas countries, such as China. They can take action to reduce the incidence of labor abuses in China by enacting laws that are similar to the anti-bribery treaties that have been passed in many countries (OECD 2001 ).

Possible solutions

Action coordinated by Gucci: One means for a solution is for Gucci to lead efforts in developing and implementing industry-wide and worldwide codes of ethics, thereby creating a comprehensive set of explicit norms and expectation about ethical standards. This code should apply to all branches and stores in both developed and less developed countries (Beschorner and Müller 2007 ). Such codes have been successfully implemented by industries such as toys, textiles, and electronics. Those kinds of products are sold to mass markets. It is something of a paradox that Gucci, which sells a high-end product, has provided a poor working environment in China; surely a company like this is even more subject to public scrutiny and now under public pressure to adopt higher standards. We do not wish to imply that employees in mass market industries should be treated any worse, but one may expecte high-end providers to exert stronger ethical leadership worldwide in improving labor standards. The code should require every branch and stores of companies in the luxury industry to embrace ethical principles and embed them into management systems and policies and internal review processes.

Informed by common areas of worker rights identified in the literature on international labor management ethics, this code could include items on the following: use of written employment contracts with all workers, avoiding abuse of the dispatch system, equal pay for work of equal value, prohibition of compulsory and unpaid work, adherence to laws and regulations on working hours, provision of wages and benefits not below minimum legal requirements, anti-discrimination, anti-harassment, anti-abuse, and respect for occupational health and safety.

In addition, the establishment of a socially responsible management systems should include a statement of social responsibility objectives and targets, along with sufficient human and financial resources to ensure that these objects and targets are clearly communicated, that the system is adequately implemented, and that there are mechanisms for regular monitoring and auditing of the system and for corrective action in the event of shortfalls (Carroll 1991 ; Carroll and Horton 1994 ; Gond et al. 2011 ).

Simply implementing an industry code is not enough. The headquarters of Gucci, Italy, should urge and encourage its branches in China to comply with the necessary ethical standards in China (and every other host country). The encouragement needs to be strong, because managements in China may seek excuses and claim that there would be inordinate financial costs, or that the code may be difficult to implement because of cultural barriers. The headquarters may arrange for auditing by independent third parties, such as NGOs. Otherwise the enforcement might be weak or non-existent.

Action by employees : “Tolerance” is deeply rooted in Chinese people’s thoughts, and most of the time, it is even considered as a virtue (in contrast to assertiveness). In this case, we may notice that employees were tolerant of abusive practices until severe harm actually happened (the female employee’s miscarriage). The Chinese workers’ awareness of their rights may have been weak, and they appear to be accustomed to enduring their unjust treatment, which perpetuates the abusive practices. As China’s capitalism has been rapidly evolving, the institutional arrangements involved in human resource management, such as the labor dispatch system, have become increasingly complex and subject to abuse. In order to protect employees, it is of utmost importance to challenge the mindset of tolerance and to equip employees with a strong awareness of rights and of suitable ways to protect themselves collectively. They should be encouraged to get together and make their voice heard (like writing a public letter on the Internet). By voicing their grievances, they can attract more attention, thus win more support, and the relevant government departments are more likely to investigate into their concerns. Furthermore, they could express their hope to form organizations which have similar functions to those of independent trade unions in western countries, thereby helping them gain bargaining power vis-à-vis employers (Preuss et al. 2009 ).

Action by the Chinese government : It is recommended that the Chinese government should revise its entire approach to the monitoring and regulation of labor rights. “Harmonious Society” pronouncements have been a step in the right direction (See 2009 ), but there is much further to go. Workers in China are under-protected because there are few organizations that workers can appeal to, and trade unions in China do not serve the same purpose as in Western countries. It’s difficult for workers to stand up for themselves when their rights are at stake. In Western countries, companies are under the scrutiny of various NGOs and trade unions; these organizations protect workers’ labor rights through collective bargaining power. On the surface, this is paralleled in China by The Constitution of the People’s Republic of China, which requires that all its citizens have the rights of freedom of speech, freedom of the press, and freedom to peaceably assemble, organize, demonstrate, and petition. However, in practice, in order to organize in mainland China (i.e., to establish an NGO), one has to register the organization according to the Social Organizations Registration and Administration Act. If the organization does not do this, it is not protected under the law. It is criminal for such an organization to publicly accept outside donations without a legal status. In addition, to establish such an NGO, they must have a regular business location, full-time staff, a registration capital of more than thirty thousand yuan and official documents with a stamp of approval from the governmental agencies, which have been designated as “supervising offices.” This complex and time-consuming process makes it virtually impossible to form a NGO in China unless the government is prepared to champion and support the process. Another barrier is that every non-governmental organization will be co-administered by a civil affairs governmental office. This unique “Chinese way” of double administration weakens the independence of an NGO. Nonetheless, the Chinese government could consider having experiments in certain industries. China is now the biggest luxury-product-consuming country, as well as the biggest luxury-product-manufacturing country, so it has both the biggest customer group and labor force of the luxury industry worldwide. The Chinese government should consider giving permission to set up such a non-governmental organization with independent powers, to monitor these luxury multinational companies’ operations in China.

Action by foreign governments : A foreign government is typically responsible for creating and enforcing laws that apply to all the companies operating in their country, including MNCs that are operating subsidiaries all around the world, including China. A Western country could simply enact a law requiring all companies to apply fair and decent labor standards worldwide. The detail of such legislation is of course a much more complex matter that we can discuss in this article. The basic idea is that, if a company violates labor standards in China, it could then be prosecuted in the home country by the respective Western government. This arrangement might be championed by supra-national bodies, such as the United Nations, but again, we do not have space in this article in detail of the legislation process; it would help greatly if there is close collaboration between the Chinese government, Western countries, and supra-national bodies.

Theoretical and managerial implications

There are some key theoretical and managerial implications of this case. The first of these concerns the limitations and possible distortions of the virtue-based approach to business ethics as it has been applied in China. While some managers may recognize that a virtue-based Confucian firm should seek harmony by expressing benevolence to its employees, who would reciprocate with loyalty and gratitude, some key aspects of this approach can be forgotten when facing modern economic pressures. What may be remembered by managements is that Confucian ethics is based on the premise of inequality between the senior and junior parties in the relationship and that the junior party is expected to go along with whatever treatment they receive without direct protestation. What may be forgotten by managements is that all this is premised on the assumption that the senior party should consider, respect, and be responsive to the needs of the junior party. Such empathic concern is unlikely to flourish without a channel for listening and without a powerful incentive to listen. In their absence, all-powerful managements become de-sensitized from the concerns of their employees, and labor abuses will ensue.

From this, a second implication can be inferred. In order to prevent labor abuses in the PRC, it is necessary to institute strong, legally based mechanisms for enforcing and protecting labor rights. Conveying legitimate bargaining rights to labor organizations that correspond to their independent trade union counterparts in the West is one key step in this process. The second key step is for the national and local governments in the PRC to join hands in assigning a higher priority to encouraging and supporting corporate social responsibility, no longer relegating this to an afterthought or empty, token slogan. This, in turn, implies a role for foreign firms and foreign governments. Strengthening legal safeguards for labor rights in Chinese organizations is likely to require cross-national dialogues within corporations and between foreign governments and the government of the PRC.

Does this need for legal underpinning imply that the Confucian cultural legacy has no role to play in underpinning labor rights and preventing labor abuses in the PRC? Actually, this is not the case. Although concern about the Confucian virtues appear insufficient to constitute a safeguard against ethical violations in China-based firms, the picture may be radically transformed if legal imperatives are introduced that would serve to remind managements about the need to listen, understand, and respond to the needs of their employees. Confucian values originated in ancient times, when “rule of man” prevailed and when modern rule of law was inconceivable. China, having rapidly and breathtakingly developed into a modern society within the last two decades, is probably ready now to undergo the truly revolutionary process of blending Confucian morality and the Western rights-based paradigm into a moral compass that is more suitable for the contemporary world (Snell 2001 ).

Conclusions

Allegations of abusive labor practices in MNCs are by no means new phenomena but have typically referred to manufacturing sites in less developed countries. This paper highlights a less-extensively documented phenomenon, featuring abuses happening at a retail store—Gucci’s Shenzhen flagship store. Specifically, Gucci abused the dispatch system, which is a labor system with Chinese characteristics, and neglected some key labor rights. In considering how an MNC can operate ethically in China, we have considered some universal interpretations of labor rights, while taking account of Confucianism and the One-Party state, which are foundational components of China’s culture and institutional framework (Liou 2010 ). We have made recommendations for action by MNCs and other stakeholders, namely, employees, the Chinese government, and even foreign governments, where these can exert legal influence over MNCs that are headquartered in their jurisdictions. We have also foreshadowed the possibility, in the near future, of a fusion between Confucian virtue ethics and Western rational–legal approaches to the assertion and protection of labor rights and the profound practical and theoretical implications that would ensue.

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Wang, L., Snell, R.S. A case study of ethical issue at Gucci in Shenzhen, China. Asian J Bus Ethics 2 , 173–183 (2013). https://doi.org/10.1007/s13520-012-0024-6

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Received : 27 February 2012

Accepted : 25 September 2012

Published : 09 October 2012

Issue Date : July 2013

DOI : https://doi.org/10.1007/s13520-012-0024-6

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Case Studies

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Ethics and Business Ethics Mini Case Studies

I feel great pleasure in introducing the work “ETHICS & BUSINESS ETHICS”---Mini Case Studies. This humble effort expects to raise great hope for individuals in all fields especially Management Sciences. The case studies on ETHICS & BUSINESS ETHICS” is based on the practices (ethical or unethical) in business and our daily life. These case studies have also been presented in the course Business Ethics of MBA program and can also be presented in other courses of Management Sciences.

Related Papers

International Business Research

Citation Classics from the Journal of Business Ethics

White Crystal

African Journal of Biotechnology

Afam Jideani

The article takes its point of departure in 12 Sámi sacrificial places from Northern Sweden and Norway. It is argued that the sites with metal objects of the ninth to fourteenth centuries in a number of ways are comparable to acts of deposition in south Scandinavia. These Viking Age depositions consisted of partly the same types of artefacts, took place on the shores of wetlands with sacral names and were in use in the same time period as the Sámi sacrificial places. The similarities and differences between the two traditions are discussed, focusing on some possible links between aspects of animistic world views and biographical perspectives on artefacts. This opens up the possibility that not only the Sámi, but even the Old Norse world views contained elements of animistic perspectives. It is claimed that the two traditions reflect partially parallel ways of handling the landscape and dealing with objects among the Sámi of Øvre Norrland and the Norse population of south Scandinavia.

Journal of Nepal Chemical Society

Birendra Gautam

Nepal abounds a vast array of freshwater bodies, from sub-tropical lowlands to glacier-fed highlands with varying water quality. This study evaluated the spatial variations in water quality at the Koshi Tappu Wetland, the first Ramsar site of Nepal, located in the eastern Tarai region within the Koshi Tappu Wildlife Reserve. Nineteen water quality parameters were chosen and analyzed from twenty-one different sampling points within the wetland. Parameters including pH, EC, TDS, turbidity, and DO were analyzed on-site, whereas HCO3-, Cl-, NH4+, NO3-, SO42- PO43-, K+, TH, Ca2+, Mg2+, CaH, MgH, Na+, and Fe3+ were analyzed in the laboratory. Multivariate methods such as hierarchical agglomerative cluster analysis (CA) and principal component analysis (PCA), and geochemical indices such as piper and mixing diagrams were applied to assess the spatial variation in water quality. Findings indicated Ca2+ as the principal cation and HCO3- as the principal anion regulating the hydrochemistry of...

Burak Fazıl ÇABUK

Journal of the American Psychoanalytic Association

The direction of time is often defined by describing asymmetries between past and future events, referred to as “time-arrows”. Two important time-arrows are the mutability time-arrow, which specifies that the past is unalterable, while the future is not; and the causal time-arrow, which stipulates that past events may cause future events, but not vice-versa. This paper argues that the unconscious conception of causation expressed in both the oedipal myth and certain oedipal wishes negates the mutability and causal time-arrows. I suggest, therefore, distinguishing between oedipal phantasies that undermine the ordinary conceptions of causation and time (such as the wish of being one’s own parent), and classical content that is in line with our time perception (such as sexual and aggressive wishes towards parents). Analysing clinical examples suggests that some patients' Oedipal phantasies are combined with unconscious sexual satisfaction from the asymmetric conception of time. When this sexual satisfaction is analysed, they might expose the Oedipal phantasies founded on the symmetric conception of time.

Ririh Widiya

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University Module Series: Integrity & Ethics

Module 12: integrity, ethics and law.

  This module is a resource for lecturers  

Case studies.

Choose one or more of the following case studies and lead a discussion which allows students to address and debate issues of integrity, ethics and law. If time allows, let the students vote on which case studies they want to discuss.

For lecturers teaching large classes, case studies with multiple parts and different methods of solution lend themselves well to the group size and energy in such an environment. Lecturers can begin by having students vote on which case study they prefer. Lecturers could break down analysis of the chosen case study into steps which appear to students in sequential order, thereby ensuring that larger groups stay on track. Lecturers may instruct students to discuss questions in a small group without moving from their seat, and nominate one person to speak for the group if called upon. There is no need to provide excessive amounts of time for group discussion, as ideas can be developed further with the class as a whole. Lecturers can vary the group they call upon to encourage responsive participation.

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The state of AI in early 2024: Gen AI adoption spikes and starts to generate value

If 2023 was the year the world discovered generative AI (gen AI) , 2024 is the year organizations truly began using—and deriving business value from—this new technology. In the latest McKinsey Global Survey  on AI, 65 percent of respondents report that their organizations are regularly using gen AI, nearly double the percentage from our previous survey just ten months ago. Respondents’ expectations for gen AI’s impact remain as high as they were last year , with three-quarters predicting that gen AI will lead to significant or disruptive change in their industries in the years ahead.

About the authors

This article is a collaborative effort by Alex Singla , Alexander Sukharevsky , Lareina Yee , and Michael Chui , with Bryce Hall , representing views from QuantumBlack, AI by McKinsey, and McKinsey Digital.

Organizations are already seeing material benefits from gen AI use, reporting both cost decreases and revenue jumps in the business units deploying the technology. The survey also provides insights into the kinds of risks presented by gen AI—most notably, inaccuracy—as well as the emerging practices of top performers to mitigate those challenges and capture value.

AI adoption surges

Interest in generative AI has also brightened the spotlight on a broader set of AI capabilities. For the past six years, AI adoption by respondents’ organizations has hovered at about 50 percent. This year, the survey finds that adoption has jumped to 72 percent (Exhibit 1). And the interest is truly global in scope. Our 2023 survey found that AI adoption did not reach 66 percent in any region; however, this year more than two-thirds of respondents in nearly every region say their organizations are using AI. 1 Organizations based in Central and South America are the exception, with 58 percent of respondents working for organizations based in Central and South America reporting AI adoption. Looking by industry, the biggest increase in adoption can be found in professional services. 2 Includes respondents working for organizations focused on human resources, legal services, management consulting, market research, R&D, tax preparation, and training.

Also, responses suggest that companies are now using AI in more parts of the business. Half of respondents say their organizations have adopted AI in two or more business functions, up from less than a third of respondents in 2023 (Exhibit 2).

Gen AI adoption is most common in the functions where it can create the most value

Most respondents now report that their organizations—and they as individuals—are using gen AI. Sixty-five percent of respondents say their organizations are regularly using gen AI in at least one business function, up from one-third last year. The average organization using gen AI is doing so in two functions, most often in marketing and sales and in product and service development—two functions in which previous research  determined that gen AI adoption could generate the most value 3 “ The economic potential of generative AI: The next productivity frontier ,” McKinsey, June 14, 2023. —as well as in IT (Exhibit 3). The biggest increase from 2023 is found in marketing and sales, where reported adoption has more than doubled. Yet across functions, only two use cases, both within marketing and sales, are reported by 15 percent or more of respondents.

Gen AI also is weaving its way into respondents’ personal lives. Compared with 2023, respondents are much more likely to be using gen AI at work and even more likely to be using gen AI both at work and in their personal lives (Exhibit 4). The survey finds upticks in gen AI use across all regions, with the largest increases in Asia–Pacific and Greater China. Respondents at the highest seniority levels, meanwhile, show larger jumps in the use of gen Al tools for work and outside of work compared with their midlevel-management peers. Looking at specific industries, respondents working in energy and materials and in professional services report the largest increase in gen AI use.

Investments in gen AI and analytical AI are beginning to create value

The latest survey also shows how different industries are budgeting for gen AI. Responses suggest that, in many industries, organizations are about equally as likely to be investing more than 5 percent of their digital budgets in gen AI as they are in nongenerative, analytical-AI solutions (Exhibit 5). Yet in most industries, larger shares of respondents report that their organizations spend more than 20 percent on analytical AI than on gen AI. Looking ahead, most respondents—67 percent—expect their organizations to invest more in AI over the next three years.

Where are those investments paying off? For the first time, our latest survey explored the value created by gen AI use by business function. The function in which the largest share of respondents report seeing cost decreases is human resources. Respondents most commonly report meaningful revenue increases (of more than 5 percent) in supply chain and inventory management (Exhibit 6). For analytical AI, respondents most often report seeing cost benefits in service operations—in line with what we found last year —as well as meaningful revenue increases from AI use in marketing and sales.

Inaccuracy: The most recognized and experienced risk of gen AI use

As businesses begin to see the benefits of gen AI, they’re also recognizing the diverse risks associated with the technology. These can range from data management risks such as data privacy, bias, or intellectual property (IP) infringement to model management risks, which tend to focus on inaccurate output or lack of explainability. A third big risk category is security and incorrect use.

Respondents to the latest survey are more likely than they were last year to say their organizations consider inaccuracy and IP infringement to be relevant to their use of gen AI, and about half continue to view cybersecurity as a risk (Exhibit 7).

Conversely, respondents are less likely than they were last year to say their organizations consider workforce and labor displacement to be relevant risks and are not increasing efforts to mitigate them.

In fact, inaccuracy— which can affect use cases across the gen AI value chain , ranging from customer journeys and summarization to coding and creative content—is the only risk that respondents are significantly more likely than last year to say their organizations are actively working to mitigate.

Some organizations have already experienced negative consequences from the use of gen AI, with 44 percent of respondents saying their organizations have experienced at least one consequence (Exhibit 8). Respondents most often report inaccuracy as a risk that has affected their organizations, followed by cybersecurity and explainability.

Our previous research has found that there are several elements of governance that can help in scaling gen AI use responsibly, yet few respondents report having these risk-related practices in place. 4 “ Implementing generative AI with speed and safety ,” McKinsey Quarterly , March 13, 2024. For example, just 18 percent say their organizations have an enterprise-wide council or board with the authority to make decisions involving responsible AI governance, and only one-third say gen AI risk awareness and risk mitigation controls are required skill sets for technical talent.

Bringing gen AI capabilities to bear

The latest survey also sought to understand how, and how quickly, organizations are deploying these new gen AI tools. We have found three archetypes for implementing gen AI solutions : takers use off-the-shelf, publicly available solutions; shapers customize those tools with proprietary data and systems; and makers develop their own foundation models from scratch. 5 “ Technology’s generational moment with generative AI: A CIO and CTO guide ,” McKinsey, July 11, 2023. Across most industries, the survey results suggest that organizations are finding off-the-shelf offerings applicable to their business needs—though many are pursuing opportunities to customize models or even develop their own (Exhibit 9). About half of reported gen AI uses within respondents’ business functions are utilizing off-the-shelf, publicly available models or tools, with little or no customization. Respondents in energy and materials, technology, and media and telecommunications are more likely to report significant customization or tuning of publicly available models or developing their own proprietary models to address specific business needs.

Respondents most often report that their organizations required one to four months from the start of a project to put gen AI into production, though the time it takes varies by business function (Exhibit 10). It also depends upon the approach for acquiring those capabilities. Not surprisingly, reported uses of highly customized or proprietary models are 1.5 times more likely than off-the-shelf, publicly available models to take five months or more to implement.

Gen AI high performers are excelling despite facing challenges

Gen AI is a new technology, and organizations are still early in the journey of pursuing its opportunities and scaling it across functions. So it’s little surprise that only a small subset of respondents (46 out of 876) report that a meaningful share of their organizations’ EBIT can be attributed to their deployment of gen AI. Still, these gen AI leaders are worth examining closely. These, after all, are the early movers, who already attribute more than 10 percent of their organizations’ EBIT to their use of gen AI. Forty-two percent of these high performers say more than 20 percent of their EBIT is attributable to their use of nongenerative, analytical AI, and they span industries and regions—though most are at organizations with less than $1 billion in annual revenue. The AI-related practices at these organizations can offer guidance to those looking to create value from gen AI adoption at their own organizations.

To start, gen AI high performers are using gen AI in more business functions—an average of three functions, while others average two. They, like other organizations, are most likely to use gen AI in marketing and sales and product or service development, but they’re much more likely than others to use gen AI solutions in risk, legal, and compliance; in strategy and corporate finance; and in supply chain and inventory management. They’re more than three times as likely as others to be using gen AI in activities ranging from processing of accounting documents and risk assessment to R&D testing and pricing and promotions. While, overall, about half of reported gen AI applications within business functions are utilizing publicly available models or tools, gen AI high performers are less likely to use those off-the-shelf options than to either implement significantly customized versions of those tools or to develop their own proprietary foundation models.

What else are these high performers doing differently? For one thing, they are paying more attention to gen-AI-related risks. Perhaps because they are further along on their journeys, they are more likely than others to say their organizations have experienced every negative consequence from gen AI we asked about, from cybersecurity and personal privacy to explainability and IP infringement. Given that, they are more likely than others to report that their organizations consider those risks, as well as regulatory compliance, environmental impacts, and political stability, to be relevant to their gen AI use, and they say they take steps to mitigate more risks than others do.

Gen AI high performers are also much more likely to say their organizations follow a set of risk-related best practices (Exhibit 11). For example, they are nearly twice as likely as others to involve the legal function and embed risk reviews early on in the development of gen AI solutions—that is, to “ shift left .” They’re also much more likely than others to employ a wide range of other best practices, from strategy-related practices to those related to scaling.

In addition to experiencing the risks of gen AI adoption, high performers have encountered other challenges that can serve as warnings to others (Exhibit 12). Seventy percent say they have experienced difficulties with data, including defining processes for data governance, developing the ability to quickly integrate data into AI models, and an insufficient amount of training data, highlighting the essential role that data play in capturing value. High performers are also more likely than others to report experiencing challenges with their operating models, such as implementing agile ways of working and effective sprint performance management.

About the research

The online survey was in the field from February 22 to March 5, 2024, and garnered responses from 1,363 participants representing the full range of regions, industries, company sizes, functional specialties, and tenures. Of those respondents, 981 said their organizations had adopted AI in at least one business function, and 878 said their organizations were regularly using gen AI in at least one function. To adjust for differences in response rates, the data are weighted by the contribution of each respondent’s nation to global GDP.

Alex Singla and Alexander Sukharevsky  are global coleaders of QuantumBlack, AI by McKinsey, and senior partners in McKinsey’s Chicago and London offices, respectively; Lareina Yee  is a senior partner in the Bay Area office, where Michael Chui , a McKinsey Global Institute partner, is a partner; and Bryce Hall  is an associate partner in the Washington, DC, office.

They wish to thank Kaitlin Noe, Larry Kanter, Mallika Jhamb, and Shinjini Srivastava for their contributions to this work.

This article was edited by Heather Hanselman, a senior editor in McKinsey’s Atlanta office.

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