Question

Caterpillar, Inc. Encounters Challenges to Its Ethical Reputation

INTRODUCTION

Caterpillar, Inc. (CAT) is a global manufacturer of construction and mining equipment, machinery,

and engines. Best known for its machinery, including its tractors, off-highway trucks, wheel dozers,

and backhoe loaders, CAT has more than 500 dealer locations worldwide. In 2014 the company

achieved global revenues of more than $55.2 billion. As a result, CAT faces the challenging tasks of

managing a complex network of stakeholders. CAT has made a name for itself not only for quality

products but also for its ethical standards and corporate social responsibility (CSR). However, a

number of recent issues—including federal probes and conflicts with employees—have tainted

Caterpillar’s ethical image. This case will emphasize CAT’s ethical initiatives and CSR efforts, as well

as recent challenges to its ethical reputation. We start off by providing a brief background of CAT’s

history. We then examine CAT’s ethical progress in areas such as ethical conduct, stakeholder

relations, and sustainability. The case will conclude by looking at some current ethical issues and

risk areas CAT must address to fortify its ethical reputation.

ETHICAL ISSUES

Despite CAT’s achievements, the firm has several ethical issues that it must address. Some of these

issues deal more with the nature of the company’s products than with anything the company itself

has done. However, CAT has experienced some ethical challenges stemming from its own

operations as well.

As mentioned earlier, one ethical challenge CAT continues to face involves employee relations,

particularly regarding its unionized employees. Strikes and lockouts occurred at Caterpillar

facilities in 2012, resulting in a factory closure and employees having to adopt concessions they

believed were unfavorable. The compensation awarded to CAT CEO Douglas Oberhelman has also

been criticized. CAT has attempted to align the CEO’s pay with performance, and in 2014 the CEO’s

pay fell 33 percent due to poor corporate performance. However, the CEO still took home $15

million in compensation. Some criticized this move because they felt like Oberhelman should have

had a greater pay cut. One major reason is because under Oberhelman’s tenure, Caterpillar acquired

mining equipment maker Bucyrus International in 2010 due to the belief that mining was going to

take off. However, the exact opposite happened, and sales declined. Caterpillar also paid $886

million to acquire ERA Mining Machinery, parent company for Chinese firm Siwei, a manufacturer

of roof supports for mines. It later discovered that Siwei had inflated revenues, causing Caterpillar

to write down $580 million off its asset. Caterpillar, however, maintains that the amount of the

decrease in pay for its CEO was justified and reflected the company’s pay-for-performance

philosophy.

In the past, CAT has also gotten in trouble for violating environmental laws. In August 2000, the

Clean Air Trust named CAT the “Clean Air Villain of the Month.” The company had violated the

Clean Air Act after it sold defective diesel engines that emitted nearly three times the allowed limit

of nitrogen oxides (which creates smog). Other companies were found to have similar defects. It is

estimated that in 1998 these defective engines were responsible for emitting pollution comparable

to more than 60 million cars. CAT was required to pay over $128 million in penalties.

To restore its reputation, CAT began releasing more environmentally-friendly products that meet

or exceed Environmental Protection Agency standards. In 2004 CAT introduced Advanced

Combustion Emissions Reduction Technology (ACERT) engines. These engines exceeded federal

emissions guidelines. However, meeting emissions requirements continues to be a challenge for

CAT. Because it is a global company, CAT is encountering even more stringent emissions laws in

places such as the European Union. These laws, along with new regulations from the U.S. called Tier

4 standards, required CAT to undergo an extensive research and development program to

reengineer its non-road products. These reengineered products would have to meet standards

calling for almost zero emissions of particulates and nitrogen oxides—the same gases that got CAT

in trouble years before. To meet these new requirements, CAT partnered with Tenneco, Inc. to

create the Clean Emissions Module (CME). This module will be installed in its ACERT

TM

engines.

Another ethical issue touched upon earlier is the safety implications of CAT’s products. While CAT

might not be able to control how its customers use its products, it can limit to whom it sells.

Caterpillar has been criticized for the fact that the Israeli Defense Forces (IDF) have used CAT’s

bulldozers to destroy Palestinian homes, along with other violent acts. In 2003 a young American

activist was crushed to death by a Caterpillar tractor operated by the IDF. In spite of the

controversy over whether the death was accidental or intentional, the fact that CAT’s products are

being used in this manner creates an ethical dilemma. Critics argue that CAT’s complacency is

aiding human rights abuses. CAT claims that its bulldozers were sold to the U.S. government, which

then sent them to Israel through the U.S. Foreign Military Sales Program. Critics, however, are not

accepting CAT’s excuse; rather, they feel CAT should not participate in this program if its bulldozers

end up being used for violence. The question over how much responsibility CAT should have over

its products is not an easy one to answer.

More recently, the Securities & Exchange Commission (SEC) and the Internal Revenue Service (IRS)

launched probes into Caterpillar’s accounting and tax management. The SEC is questioning how

Caterpillar determined the value of the “goodwill” associated with Bucyrus when Caterpillar

acquired it in 2011 for $8.8 billion. Additionally, Caterpillar is being investigated for strategies it

had adopted to reduce its U.S. taxes. During the 1990s Caterpillar was able to significantly reduce

its U.S. taxes because it was making replacement parts outside of the United States. The parts were

made by outside suppliers, and a Swiss unit would then buy the parts from the suppliers. This

resulted in less taxes that needed to be paid to the United States. Caterpillar maintains that all of its

actions were legal, but the IRS is questioning some of the tax policies used by the Swiss unit.

Another government investigation is trying to determine whether Caterpillar’s Progress Rail ended

up cheating consumers by billing railcar owners for repairs they did not require. Part of this inquiry

is also examining whether it improperly discarded parts. Authorities have accused Progress Rail of

dumping parts into the ocean so it could carry on the scheme of billing owners for parts they did

not need. These are serious accusations that—if true—could have a profound impact on

Caterpillar’s reputation and result in legal fines.

Finally, the nature of CAT products and its extensive network of suppliers and dealers create a

number of risks that CAT must manage to avoid ethical conflicts. Because CAT sells heavy

equipment such as tractors and wheel dozers, the chances of injury can be high if safety precautions

are not followed. This is likely the reason why CAT provides so many safety resources for its

employees and customers. Still, some consumers have used CAT products in ways not anticipated

or approved of by the company. This can create liability issues for the company if stakeholders

believe that CAT knew or should have known that the product might be used in such a way—even if

the product was being improperly used. CAT must be diligent in anticipating foreseeable problems

and taking appropriate precautions to protect itself should injuries occur.

CAT also sells its products to independently owned dealers and contracts much of its local parts

production to outside parties. Both situations require CAT to exert proper oversight in ensuring

that suppliers and dealers are following appropriate compliance procedures. Because quality is

such an important part of the CAT brand, the company must carefully monitor its suppliers to

ensure that the parts meet its standards. In terms of dealers, one might assume that CAT does not

have to worry about oversight as these dealers are independently owned. However, serious

misconduct on the part of CAT dealers could jeopardize the brand name. These risks involving third

parties become harder to manage as CAT’s network of suppliers and dealers grows. CAT must have

effective controls in place to monitor these risks and take corrective action when necessary to

prevent a misconduct disaster.

CONCLUSION

CAT has made impressive achievements in the corporate social responsibility area. Its shared

values, strong stakeholder relationships, and extensive sustainability initiatives have earned it

recognition from a variety of sources. CAT’s persistence in obtaining a more sustainable future is an

important step in light of today’s current social concerns. Its inclusion as one of the “World’s Most

Admired Companies” list demonstrates the admiration stakeholders feel for the firm.

However, CAT has encountered many ethical challenges and will face many more in the future.

Employee relations have become strained at some of its global facilities, and a slump in global

product sales is forcing CAT to lay off more employees. Additionally, due to the nature of the

construction industry, it can be challenging to maintain good environmental practices. CAT has the

added concern of trying to anticipate how its products will be used and of monitoring its suppliers

and dealers. Federal probes are being launched against CAT to investigate misconduct.

One trap that companies tend to fall into is underestimating these types of risks. Since these issues

involve stakeholders external to the company, many businesses believe that they are not

responsible for their actions. However, without proper oversight, CAT may be considered negligent

if stakeholders engage in serious misconduct or injure themselves (or others). Hence, CAT’s major

challenge beyond its internal operations is to manage the risks that come with selling large

products and working with third parties. CAT must be diligent in maintaining proper oversight,

ensuring that customers are aware of the safety implications of its products, complying with—and

even exceeding—environmental laws, and maintaining solid relationships with employees,

customers, and regulators.

Based on caterpillar, inc. encounters challenges to its ethical reputation reading, answer the following:

1. how has caterpillar's mission and code of conduct influenced how it has handled various ethical issues?

2. Based upon the ethical philosophies we have read in this case, do you feel a firm can truly be ethical in all its operations and dealings?

Answer 1

1.

Caterpillar's mission is to provide the best value to customers, grow a profitable business, develop and reward people, and encourage social responsibility.

The Code of Conduct helps Caterpillar employees to put their values and principles into action every day by providing detailed guidance on the behaviours and actions that support our values of Integrity, Excellence, Teamwork, Commitment and Sustainability.

Caterpillar has always included social responsibility & sustainability as key values to be considered in the growth of the organisation. They have always put sustainability & social responsibility before lucrative profits. These values encourage their employees, dealers, suppliers etc to always put the benefits of the society & environment before their profits. They have always supported the development of society & have been a major inspiration for sustainable development. When the ethical gaps are identified, they have always taken steps to solve the problem. The various ethical issues faced by the organisation have been majorly influenced by their principle values of social responsibility & sustainability.

2.

Ethics in today's world plays an important role in the growth of the organisation. It is most challenging to maintain ethical standards in operations & dealings in today's world. While some firms might succumb to the circumstances & use the excuse that it is not possible to be ethical in all aspects, they are wrong. Ethics is nothing but to follow the things that are considered right by society. If a firm wants to follow the right path, nothing can stop them from being ethical. It is not a process or strategy that the firm applies. Ethics is just a mindset of being morally right. If the organisation develops strategies, plans, operations etc by just being morally right, it will be very rare, that they face ethical issues or challenges. Although, sometimes due to failure in understanding the society, a firm might make an ethical mistake. It can be rectified by taking corrective decisions based on ethical principles. Hence, a firm can truly be ethical in all its operations & dealings if they have a mindset of being morally right.