Buad 301

casereading.PDF

Home >Business & Finance homework help >Management homework help >Buad 301

UV1166 Rev. Aug. 18, 2010

This case was prepared by Timothy D. Boswell (MBA ’08), Jenny Mead, Senior Ethics Research Associate, and R. Edward Freeman, Elis & Signe Olsson Professor of Business Ethics. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 8/10.

HYDROFRUIT, INC.: RIPE FOR HARVEST OR ROTTEN TOMATO?

It was a clear, cool night in May 2006. Judson Dillon was sitting alone at the table in the

25th-floor conference room of MegaBank, one of the world’s largest financial institutions. He looked out the window and watched as the city lights slowly expired one by one. The lights on his own floor had turned off automatically several hours before, and he had gone through what had become an all-too-familiar routine of calling the building administrator and requesting a few more hours of electricity. As he washed down yet another Chinese dinner with his daily ration of Pepto-Bismol, Dillon contemplated the recent public demonstrations by millions of Latinos throughout the United States. The U.S. Congress was mired in what promised to be a highly sensitive debate regarding immigration reform, and while it was unlikely that Congress would take any action prior to the midterm elections later in 2006, the protests reminded him of the gravity of the issue, which had been weighing heavily on his conscience.

Dillon was preparing for a meeting the next morning in which he was to finalize a $65

million equity investment in the world’s largest tomato greenhouse, HydroFruit, Inc. The project had consumed him for the past six months, and he expected to serve on the company’s board of directors for several years to come. Dillon firmly believed that HydroFruit, located 100 miles from the Mexican border in Arizona, represented an attractive investment opportunity for MegaBank, but he also suspected that the company frequently employed illegal immigrants.

“A Day Without Immigrants” During the past several months, as Dillon and his team at MegaBank conducted their due

diligence, they had paid close attention to the debate in the United States over immigration reform, which had intensified dramatically. Immigration was a highly sensitive issue and energized people with a diverse range of interests, including civil-rights groups, pro-business lobbies (particularly in the agriculture, construction, and services industries), national-security hawks, and immigrants themselves. In December 2005, the U.S. House of Representatives had passed a controversial bill (the Border Protection, Antiterrorism, and Illegal Immigration Control Act of 2005) that would have added 700 miles of fencing along the U.S. border with Mexico, increased fines and potential prison terms for employers that hired illegal immigrants, and made

This document is authorized for use only by WANYING XUE (wtao118@gmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies.

-2- UV1166 illegal presence in the United States a felony.1 The bill failed to advance in the Senate, largely because it was a highly partisan proposal and was biased toward national security and anti- immigration interests, but it succeeded in mobilizing other groups favoring more open and balanced immigration policy.

A stark example of this occurred on May 1, 2006, when pro-immigration groups

coordinated demonstrations across the United States to oppose many of the policies laid out in the failed House bill. More than a million supporters of immigrants’ rights boycotted businesses and schools or attended rallies in at least 40 states, closing businesses and attending demonstrations across the nation. The protests, labeled “A Day Without Immigrants” or el gran paro (“the big stop”), were meant to disrupt commerce and highlight the U.S. economy’s dependence on immigrant workers. Police estimated that more than 600,000 people marched in Los Angeles and 400,000 rallied in Chicago. Protesters in New York City formed human chains on sidewalks to oppose the recent House legislation. As one demonstrator commented, debate in Congress over changes in immigration law had “woken up a sleeping giant…we can make a difference.”2 Although the overall economic impact was hard to determine, many large companies such as Tyson Foods, Inc., Perdue Farms, Cargill Meats Solutions Corporation, and Goya Foods had to close some of their plants for the day. Many McDonald’s restaurants throughout the country operated with reduced staff.3 Given HydroFruit’s rural location, management had reported only a minimal labor disruption due to the rallies. Dillon believed that the obvious lack of public consensus on immigration policy would make significant reform nearly impossible without a clearer mandate in the upcoming 2006 Congressional elections or perhaps even in the 2008 presidential elections.

HydroFruit Overview HydroFruit operated 265 acres of climate-controlled greenhouse area that produced more

than 150 million pounds of hydroponic4 gourmet tomatoes annually on a year-round growing schedule. The ability to supply world-class retailers (major customers included Costco, Kroger, Albertson’s, and Whole Foods) with branded, premium-quality fruit all year long, in what traditionally had been a highly seasonal commodity industry, was a significant competitive advantage for the company and its customers.

Although shielded from weather hazards, greenhouse crops still varied according to

season, with summer yields 50% to 100% higher than winter yields. Even so, winter tomatoes

1 Border Protection, Antiterrorism, and Illegal Immigration Control Act of 2005. HR 4437, 109th Cong., 2nd

sess., http://www.govtrack.us/congress/bill.xpd?bill=h109-4437 (accessed April 8, 2008). 2 Judy Keen and Martin Kasindorf, “From Coast to Coast ‘We Need to be Heard,’” USA Today, May 2, 2006,

3A. 3 “Thousands March for Immigrant Rights,” CNN.com, May 1, 2006,

http://www.cnn.com/2006/US/05/01/immigrant.day/index.html (accessed January 25, 2008). 4 Hydroponic produce was grown without soil, usually by embedding the root stock of a plant in a synthetic

substrate, through which water and fertilizer could be transmitted in precise quantities.

-3- UV1166 benefited from a seasonal pricing increase of even greater magnitude. As a result, HydroFruit’s work force fluctuated from roughly 500 to 900 workers throughout the year.

Human Resources Concerns and Legal Obligations By virtue of HydroFruit’s location and its predominantly Latino work force, Dillon

speculated that the company employed illegal immigrants. HydroFruit was located only 100 miles from the Mexican border and the Sonora Desert entry point, which accounted for an estimated 40% of the 1 million immigrants who illegally crossed U.S. borders each year.5 Furthermore, HydroFruit’s location was very remote: Tucson was the nearest city, and was several hours away, and the area had almost no local labor pool. HydroFruit had a contract with the Arizona Department of Corrections for convict labor, which was used primarily to harvest tomatoes, but the company relied heavily on migrant labor to pack and ship the fruit, particularly important functions, as it began to position itself more as a branded consumer products company than simply as a commodity tomato farm. The practice of hiring and employing illegal immigrants raised obvious business risks, so Dillon and his team had conducted significant due diligence on the issue to try and quantify any potential exposure.

When workers approached a company for a job, the employer was required to review

documentation presented by the employee and record related information on an I-9 form, which was kept for company records in case of government audit. Proper documentation established both that the employee was authorized to work in the United States and that the employee who presented the employment authorization document was the person to whom it had been issued. An employer had to examine the documents and accept them if they appeared to be genuine. If the documentation presented did not appear legitimate to a reasonable employer, the company had to refuse acceptance and ask for other documentation from a list of approved sources. An employer could not retain an employee who could not present sufficient documentation.6

Employers were not, however, required to be document experts. In reviewing the

authenticity of the documents presented, employers were held to a reasonableness standard. As such, it was possible that an employer would accept a document that was not genuine, or belonged to someone other than the person who presented it. Such employers were not held responsible so long as the document reasonably appeared to be authentic. An employer who received a document that appeared not to be genuine could request assistance from an immigration field office or other government agencies.7

But HydroFruit voluntarily participated in a pilot program established in the 1986

Immigration Reform and Control Act (IRCA) that allowed employers to verify the accuracy of information presented by potential employees. Because illegal immigrants were common in the

5 “Don’t Fence Us In,” Economist, October 21, 2006, 381. 6 “Employment Eligibility Verification,” U.S. Citizenship and Immigration Services, http://www.uscis.gov/i-9,

(accessed October 16, 2007). 7 “Employment Eligibility Verification.”

-4- UV1166 U.S. agricultural industry, particularly in the Southwest, HydroFruit could be viewed as having a high risk of employing illegal immigrants; therefore, the company’s lawyers believed that voluntary participation in the program could help insulate HydroFruit from prosecution if an investigation found that the company did indeed employ illegal immigrants. If a worker’s personal information did not match government records, the Social Security Administration would provide HydroFruit with a “no-match” letter. HydroFruit was obligated to then inform the worker of the discrepancy and give him or her a reasonable amount of time to resolve it. If resolution was not possible, the company had to ultimately terminate the employee. Overall, this process could take up to six months, so in practice, most seasonal employees arrived, worked, and left the company before documentation could be verified. Roughly 10% of HydroFruit’s workers received no-match letters.

According to leading counsel in the industry, HydroFruit was in compliance with all

minimum legal requirements, it voluntarily participated in a program to authenticate its employees, and its management could plausibly contend that it did not “know” with certainty that any of its employees were illegal. Knowingly hiring an illegal immigrant was punishable by fines beginning at $250 per infraction for first-time offenders. That said, one evening after a long due diligence session and several beers, HydroFruit’s CFO had admitted in characteristically cavalier fashion, “Obviously, Jud, without illegals, our industry stops dead.” In Dillon’s mind, this comment reinforced both his suspicion that HydroFruit was no different from many other employers of illegal immigrants in the agricultural industry, as well as his belief that it simply wouldn’t be practical for Congress to do anything to disrupt such an important segment of the U.S. economy.

Privacy and Right-to-Work Lawsuits

Although HydroFruit’s efforts to comply with the letter of the law could be viewed as disingenuous, the issue of hiring illegal immigrants was complicated by the fact that employers were required by law (1) not to hire illegals and (2) not to discriminate against individuals seeking employment. HydroFruit’s work force was highly unionized (the convict labor was also well organized), and companies in several industries had been sued successfully for discriminating against Latinos by prying too deeply to determine an individual’s right to work. One such precedent-setting case was particularly relevant, because it involved a field-grown tomato farm company in Florida called Strano Farms. Rosario and Vito Strano had refused to hire six seasonal workers for their tomato farm because their documents did not look authentic, and they were unable to provide additional material to support their claims of legality. The Stranos, who had been forced to pay $100,000 in fines a year earlier for hiring illegals, were complying with the rules of the IRCA prohibiting the hiring of illegal workers.

The six workers then successfully sued Strano Farms for discrimination. As one court

explained, the fact that the employer “was performing its obligation to verify employment

-5- UV1166 eligibility did not insulate it from a charge of document abuse.”8 Because of this lawsuit, Strano Farms and other employers were fearful of continuing to comply with the IRCA in case they were once again accused of discrimination. A law student wrote in an article for Drake Law Review:

Like many employers in the United States, Strano is a victim of the direct conflict between the IRCA’s antidiscrimination and document verification provisions. On one hand, employers must verify employment eligibility, on the other, they face discrimination lawsuits if they check documents too diligently.9 Based on this and other precedents, HydroFruit’s lawyers believed the company’s current

policy of voluntary participation in the IRCA employment verification pilot, submitting minimum-required documentation to the government, and pursuing what amounted to a “don’t ask, don’t tell” policy regarding the authenticity of employees’ documentation was the most prudent alternative. Given the seasonal turnover of most of HydroFruit’s employees, the policy had the added practical benefit of allowing the company to utilize migrant laborers, some of whom might be illegal, in a very rural, labor-scarce part of the country.

Mexican Border Towns As a future director of HydroFruit and a current director of several other companies,

Dillon tried to be conscientious of the impact his businesses had on society and the environment. He believed the activities of a company were a direct reflection of that company’s leadership, which began with the board of directors. One of the reasons Dillon enjoyed working with MegaBank’s private equity team was the challenge to grow businesses and provide opportunities for employees who might not otherwise have them. Working illegally in the United States obviously was the best economic alternative for many Latin Americans, and Dillon knew that they performed jobs that most Americans were no longer willing to do. From a liberal capitalist perspective, Dillon saw no reason why HydroFruit should not provide jobs to people who often endured great hardship and made many sacrifices to obtain work. Mexico’s president, Vicente Fox, went so far as to call these economic migrants “heroes.” They remitted approximately $14 billion a year to Mexican families, more than Mexico’s tourism industry brought in each year. From Mexico’s perspective, migrants kept the American economy afloat on cheap and reliable labor while providing for Mexican households.10

Implicit in the rise of illegal immigration, however, was the development of a

sophisticated smuggling industry south of the U.S. border. Smugglers, sometimes referred to as los polleros (“the coyotes”), totaled several hundred in the Arizona area alone and led well- coordinated smuggling organizations, according to the U.S. Border Patrol in Tucson. Some used

8 Natalie Prescott, “Immigration Reform Fuels Employment Discrimination,” Drake Law Review (Fall 2006):

55. 9 Prescott, 103. 10 “Dangerous Desert, Breached Border; Mexico’s Northern Border,” Economist, January 8, 2005,: 374.

-6- UV1166 the migrants as vessels to carry drugs over the border as payment for their passage. Others charged them between $1,500 and $5,000 for entry into the United States, depending on their ultimate destination, and up to $50,000 for individuals from other countries such as Iraq and China. American officials worried that these smuggling gangs could serve as conduits for terrorists or their weapons. According to U.S. officials, Al-Qaeda had been in contact with Honduran coyotes.11

Furthermore, from a humanitarian perspective, lured by economic opportunity in the

United States, migrants often endured wretched living conditions in Mexican towns that provided access to the U.S. border. Dillon had watched them commute (legally in some cases since the passage of North American Free Trade Agreement [NAFTA] in 1994) many miles into the country each day in pickup truck beds, only to return to crime-ridden squalor each night. Crude dormitories with triple-decker bunk beds and wooden boards in place of mattresses had become temporary homes for migrants awaiting their journeys across the border—it would all be worth the suffering and risk if they could get a job on the other side.12 In Nogales (a key trade and immigration hub on the Arizona–Mexico border), migrants in three such hostels were robbed of their meager possessions at knife- and gunpoint by organized gangs.13 In Nuevo Laredo (on the border halfway between Monterrey, Mexico, and San Antonio, Texas), the number of drug- related killings was increasing dramatically, grenades had been used to attack media outlets, and the U.S. Border Patrol had watched well-armed Mexican military units escort smugglers into the United States.14 Dillon genuinely believed that most immigrants in the United States were honest, hard-working people seeking to improve their lives and those of their families. But in employing them, would he and MegaBank be complicit in the other dreadful acts taking place along the border with Mexico?

MegaBank in the News As one of its agents, Dillon did not believe that MegaBank had any stated institutional

business position on the issue of illegal immigration. But he was aware that MegaBank and many other leading financial institutions in the United States had recently received significant undesirable publicity for creating financial products that targeted the fast-growing immigrant population. For example, MegaBank had developed special ATM cards, which allowed a party in the United States to deposit funds that could be safely withdrawn by recipients abroad, creating an alternative to more expensive wire-transfer services. As a tacit acknowledgment of the millions of illegal immigrants in the country, many U.S. banks accepted the matricula consular, a Mexican government ID card, as sufficient identification to open a bank account regardless of applicants’ legal status.15 The $14 billion of annual remittances from the United States to Mexico

11 Ginger Thompson, “In Border Town, Migrant Crackdown Rankles,” New York Times, June 5, 2003, A3. 12 Thompson. 13 “Dangerous Desert, Breached Border; Mexico’s Northern Border.” 14 Rick Amato, “Protect the Border; Assaults and Tunnels Highlight the Need,” Washington Times, April 4,

2006, A21. 15 “Reaching Out,” Economist, February 22, 2003.

-7- UV1166 represented a growing, largely unbanked capital flow, an opportunity for U.S. banks to access new funds and demographics, and an opportunity for many Latin Americans to adopt more sophisticated financial management tools. Only 20% of people in Latin America had bank accounts, as compared with 40% of Latin American immigrants in the United States. In many Latin American countries, banks were controlled by the oligarchy and were perceived to be available only to the elite, whereas in the United States, banking services were more universally accepted and part of a more highly evolved and democratic financial system.16

The Investment Decision Dillon was well aware that MegaBank paid his bills each month and, as he did all other

risks related to an investment, wanted to disclose potential issues related to illegal immigration fully to the investment committee. See Exhibit 1 for an excerpt from Dillon’s initial investment approval memorandum, which introduced the possibility that HydroFruit employed illegal immigrants and discussed related risks and potential mitigating factors. During the meeting with the investment committee, the treasurer of MegaBank identified immigration risk as a key concern and asked Dillon to elaborate more fully on the issue during the final approval meeting. For that meeting, Dillon provided a summary of the status of legislation addressing immigration reform, as well as recent news articles that touched on many of the issues discussed above, in an effort to place the HydroFruit dilemma in its appropriate business context (Exhibit 2). This discussion had satisfied MegaBank’s treasurer and risk-management personnel, and the investment committee enthusiastically approved the transaction, which Dillon expected would yield annual returns in the 25% to 35% range.

It was now up to Dillon to finalize the transaction, and he wondered whether or not the

decision to follow through with the investment in HydroFruit was the right thing to do. He suspected that the company was facilitating illegal immigration but, thinking back to his high school ethics class, recalled that sometimes higher-level ethical reasoning could conflict with the law. After all, even if HydroFruit’s conduct was illegal, Dillon personally believed that the law was nonsensical, and he was strongly in favor of allowing temporary workers into the country, given that such liberal movement of labor was in the best interests of the U.S. economy. There was also the practical fact that HydroFruit could make a coherent case that it was not only abiding by the letter of existing laws but taking additional voluntary precautions to prevent the employment of illegals, whereas many other companies in the industry were guilty of much more egregious immigration violations. Nevertheless, if aware of the situation, the U.S. Department of Justice quite possibly could take a less accommodating view of HydroFruit’s business practices and the board’s governance responsibilities. Given the current climate, there was no telling if future immigration reforms would result in more open or closed policies. The highly regarded managing partner of Dillon’s group had scoffed, “If we let this issue stop us, we essentially won’t be able to do any deals in the agriculture, construction, or manufacturing sectors.”

16 John Authers, “Mexican Wave of Remittances for U.S. Banks: Big Four Target the Tide of Money Sent

Home by Migrant Workers,” Financial Times, June 18, 2004, 29.

-8- UV1166

As a future director of HydroFruit, Dillon would have significant leadership responsibility as well as legally binding duties of care and supervision. He would be in a position to influence the company’s future human resources decisions, and he was aware of several actions (e.g., expanding a pilot packaging program in Mexico and taking advantage of a new visa program for seasonal workers) that HydroFruit might take to reduce its dependence on migrant labor. That said, he and his other MegaBank partner were alone in wanting to do things differently; the other five board directors seemed content with the status quo. Most important, Dillon wondered if the prospect of participating in a potentially highly lucrative transaction had impaired his judgment.

-9- UV1166

Exhibit 1

HYDROFRUIT, INC.: RIPE FOR HARVEST OR ROTTEN TOMATO?

Investment Risks (Page 9 of 11) Risk #14: Potential Immigrations and Customs Issues Based on Hiring Predominantly Latino Workers. Most of HydroFruit’s work force is Latino, which exposes the Company and its investors to two potentially significant legal risks. First is the combined risk of hiring illegal immigrants, being audited by Homeland Security’s Department of Immigration and Customs Enforcement (ICE), and being prosecuted by the U.S. Department of Justice. Second is the risk of discrimination lawsuits based on prying too deeply to determine a Latino worker’s right to work. Probability of Risk: Low/Medium Financial Magnitude of Risk: Medium Mitigant #1: We conducted extensive due diligence on this issue and have determined that the Company follows a defensible protocol in having ICE forms completed and taking reasonable action in response to “no-match” letters received from the Social Security Administration. Mitigant #2: HydroFruit has a low relative percentage of employees that receive no-match letters, as compared with other Sun-Belt employers that rely on Latino workers. Mitigant #3: The Company employs a top labor attorney who is very aware of high-profile immigration issues in post-9/11 America. He and management are in regular communication regarding risk management and best practices and are always considering ways to reduce risks related to hiring immigrant workers. HydroFruit’s labor attorney represents numerous large corporations in the agribusiness sector, particularly in the Imperial Valley, with substantially more exposure to immigration risk than HydroFruit. Source: MegaBank investment memorandum.

-10- UV1166

Exhibit 2

HYDROFRUIT, INC.: RIPE FOR HARVEST OR ROTTEN TOMATO?

Further Discussion of Immigration Risk In the investment approval memorandum (Exhibit 1), we introduced potential legal and regulatory risks

related to HydroFruit’s practice of hiring predominantly Latino workers. In response to subsequent high-profile developments related to impending immigration legislation, we felt it was prudent to readdress this issue from a business perspective with management and the Company’s labor attorney and discuss related risks in detail with the investment committee. Risk #14B: Business Risk Related to Potential Short-Term Worker Shortages From Immigration Legislation and Enforcement Uncertainty. President Bush has made several high-profile appearances this week in Tucson, Arizona, and El Paso, Texas, to discuss his proposals regarding changes to U.S. immigration policy. Although Congress is unlikely to pass legislation until after the midterm elections later this year, the elevated scrutiny of immigration issues has resulted in serious labor disruptions for some agriculture companies, particularly in the Imperial Valley, as Latino workers (both legal and illegal) are not going to work due to concerns about potentially being detained or deported by ICE or civilian “minutemen” groups. In particular, HydroFruit’s attorney indicated that some of his other clients had been unable to harvest crops due to labor shortages, resulting in substantial business disruptions and spoilage. Probability of Risk: Medium Financial Magnitude of Risk: Medium Mitigant #1: We addressed this issue again with management, and the CEO indicated that HydroFruit has experienced “no material disruption” to its business as a result current increased scrutiny of U.S. immigration policy. HydroFruit’s rural location is a mixed blessing. On one hand, the Company is highly dependent on migrant workers. On the other, HydroFruit is rather far removed from the major labor disruptions in the Imperial Valley and urban America. Mitigant #2: All evidence indicates that current disruptions are the result of temporary increased enforcement resulting from political whims and uncertainty regarding potential changes to U.S. immigration policy. Our research suggests that any economically viable legislation will accommodate immigrant labor or “guest workers” in the future, thereby alleviating such labor shortages. It is worth noting that a coalition of, for example, the agriculture, homebuilding, and travel and tourism (hotels and restaurants) lobbies, would represent a formidable force in Washington with aligned interests on this issue. Mitigant #3: Management is pursuing three initiatives that will insulate the Company from potential labor disruptions, regardless of changes to U.S. immigration policy. They include: (i) establishing an H2A visa program whereby HydroFruit can legally bus workers from Mexico each day, while incurring costs of transportation, paperwork, and lodging, (ii) expanding the Company’s use of inmate labor, as allowed by the newly ratified collective bargaining agreement, and (iii) outsourcing certain packaging and distribution functions, the most likely to be disrupted by labor shortages, to any number of distribution companies based in nearby Nogales, Arizona. Source: Addendum to MegaBank investment memorandum.