Over the years I have become used to hearing about yet another unethical corporate act, eg the inter-bank lending scandal (Libor) or Exxon lying to customers and shareholders about climate change. Knowing it can be a few individuals who rot the barrel, or economic system flaws that can force decision-makers to act without broader society in mind, I actively try not to condemn all companies because of the worst offenders.
However, I have to admit being especially shocked on hearing of how Volkswagen (VW) fitted at least 11 million cars with a “defeat” device that fooled pollution tests across large parts of their fleet, with another deception around carbon dioxide emissions still emerging.
Keeping a comparison with the Libor scandal in mind, I would like to outline the four ways in which in which I was more shocked than normal.
- Libor was about skimming profits. There is always an ultimate human cost, but Libor was a few stages removed in this case. VW was dishonest about emissions that directly affect human health (nitrogen oxides) and planetary stability (carbon dioxide). The data on the effect of these pollutants (which I discussed in the last issue) is so strong that purposefully producing 11 million cars that are up to 40 times worse than a baseline that is already too high, is akin to some kind of manslaughter.
- Perhaps precisely because fixing Libor doesn’t directly kill people, bank employees could find excuses by pretending it was “harmless”. This was compounded by the involvement of many companies, which acted to normalise the behaviour and make it part cultural practice. What happened in VW was unlikely to be excusable in the same way — it appears to have been very much behind closed doors, but nonetheless had to be endorsed at the very highest levels of leadership. It therefore involved conscious dishonesty of entrusted people of the highest order.
- From a more systems perspective I am shocked at the short-term thinking that the VW scandal belies. One of the most toxic side-effects of our current economic system is the short-sighted decisions it gives false logic to, and for traders this is potent. But if there were examples of companies you thought might be winning the battle towards a more robust long-term business model logic, then VW (the brand built on being for the “people”), would be towards the top of the list. However, this scandal shows that whatever long-term social purpose the company may once have had, it has now been eroded.
- The scandal also shows that marketing is not at the heart of VW. A company that knows the real power of marketing, ie to make sure what a company is producing (and decisions related to communicating this) meets the real needs of customers and other stakeholders in the long-term, could never make such a deceptive decision. A marketing mindset would also make clear the huge value of the VW brand which, until the scandal, was intricately connected with feelings of trust and citizenship. That kind of value takes decades, big money and consistent authentic action to build. To consciously risk it, rather than do the hard work of changing the business model, is to undervalue pretty much everything VW had ever worked to build.
Business “purpose” is a concept that has rapidly taken hold in business in the last few years. I am currently working with a colleague, Jaideep Prabhu from Judge Business School, on the concept of a purpose driven organisation (PDO) — how precisely this is defined, and how organisations can replicate it and the success it brings.
We are at the beginning of unpicking the concept, but what is already clear is that purpose is beyond a statement of intent. It is a DNA-level thread that connects all parts of the organisation and stakeholders — including future generations — towards a meaningful goal that really meets the needs of certain stakeholders and doesnot knowingly trample over the needs of others. It is therefore quite possible to conclude, using this framework and its actions, that VW is not a PDO.
Being a PDO is about head, heart, soul. It is not about compliance. The VW affair shows yet again that a monotheistic “legislate for sustainability” approach is not a fruitful one. Neither can we trust that an invisible hand will drive compliant behaviour.
We need culture and system change, and that requires looking critically at the systems barriers to positive behaviour and implementing common frameworks, codes and standards. These must:
- bring those barriers (like endemic shorttermist attitudes) out of murky corners and into the light
- show what “good” and “leading edge” look like at this moment in time
- provide a common language to drive a whole organisation and industry towards that goal.
Shares have fallen by about one third since the VW scandal broke and Credit Suisse estimates the costs could reach $86 billion. I hope this will be a clear warning for all investors that they should be pushing for proof of marketing-driven PDOs that are assured not only to comply but to innovate to create the sustainable business models of the future.
This article originally featured in the Croner Environment Magazine, reproduced with permission from Wolters Kluwer UK. Find out more