By Richard Hardyment
On Friday, Sept. 11, 2015, a press officer in Wolfsburg, Germany, sent on an announcement to the world’s media. “The Volkswagen Group has again been listed as the most sustainable automaker in the world’s leading sustainability ranking," it read. Martin Winterkorn, the chairman, commended “the entire team” for success in the Dow Jones Sustainability Index (DJSI) and drew attention to their top scores in codes of conduct, compliance, climate strategy and lifecycle assessment.
Exactly seven days later, the Environmental Protection Agency in Washington, D.C. announced officials would hold an urgent press call on “a recent development regarding a major automaker." In revelations that stunned the global business community, Volkswagen was accused of illegally using “cheat devices” to “evade clean air standards” for six years. So began a storm than has engulfed the automotive industry and raised profound questions for those working in responsible business and sustainability.
VW was quickly erased from the DJSI and automotive leaderboard. But critics have been queuing up to slam the whole concept of corporate responsibility based on self-assessment, assurance (provided for Volkswagen by PwC), ratings and awards. According to the U.K.’s Daily Telegraph, corporate social responsibility (CSR) has become a “dangerous racket” because “it allows companies to parade their virtue, and look good, while internal standards are allowed to slip."
Other commentators have alleged that VW will “severely tarnish this entire [CSR] movement” and “bad ethics is [now] good business." Even the Huffington Post lamented that “it’s going to be harder for anyone to believe a word” in sustainability reports.
In the weeks since the evidence of software manipulation first emerged, commentators have divided into two camps. Firstly, there are those who have sought to portray this as an isolated incident involving a few rogue employees. VW has been keen to push this line. Pick out the rotten apples, and the harvest will be saved. But this defense appears to be unravelling fast.
Media investigations allege systematic abuses over many years, involving managers at all levels of the organization. Far from being isolated, the bad behaviors appear endemic. The fact that the share prices of competitors have also fallen indicates that investors don’t believe this to be an isolated incident.
Those working in the auto industry know this type of cheating has been going on for years. In an effort to grow its diesel market rapidly, VW thought it could game the system and not get caught. Such unethical practices run counter to the automaker’s own code of conduct.
The company's code of conduct (downloadable as a PDF) is fascinating to read, in hindsight, and it has not received enough attention. It’s worth quoting a few extracts to illustrate the challenge in rebuilding responsible business:
Still, a pretty comprehensive, 24-page code of conduct exists. Perhaps it was ignored, given to new recruits and left in the desk drawer for evermore? Far from it. Here’s another fascinating fact from Volkswagen's website: More than 74,000 employees were trained in the company's code of conduct last year. Around 40 percent of these were face-to-face in a classroom, and the rest were online. In total, more than 185,000 employees received training on compliance topics in 2014. More than 1,700 audits were conducted at VW companies around the world; 140 cases on anti-corruption were investigated; 365 cases of suspected fraud were looked at; and 72 employees were fired as a result.
So, we have a conundrum. A seemingly extensive code of conduct was in place. Monitoring and compliance were up and running. But one of the biggest corporate scandals wasn’t caught. The company was clearly not asking the right questions or measuring and monitoring what really mattered.
So, does this mean that CSR is doomed? Nothing could be further from the truth. As a result of unethical and irresponsible business practices, VW’s share price fell by over 40 percent. In impacts that the Economist described as “cataclysmic," the company faces billions of dollars in fines as up to 11 million cars could be affected.
Around 230 lawsuits have already been filed, and requests for refunds could cause pain for years. In total, some analysts put the potential costs at around $33 billion. Meanwhile, the chief executive has resigned. Police raided the company's HQ, and untold damage has been done to the brand and its relationship with politicians, regulators, environmental groups, shareholders and consumers. If that doesn’t show why business integrity matters, what does?
It’s a severe body-blow to those who argue that corporate performance can be assessed on financial metrics alone. Far from dampening enthusiasm for responsible business practices, the VW scandal should accelerate it.
The question we must all ask is: How did everyone get it so wrong? Any assessment of how a company is performing requires honesty and transparency from the business. That is true across industries, whether disclosing sustainability or financial performance. Any system of assessment can only be based on what companies voluntarily share. When a company chooses to be less than transparent – or worse, deliberately falsify information – there is no system that will robustly and conclusively see through such deception.
The VW approach was such that even the Environmental Protection Agency, Federal Trade Commission and other regulatory bodies appear to have been unaware for some years of what the company was doing.
Time will tell, but it’s likely that Volkswagen’s internal compliance completely failed to pick up on this maleficence. However, a fascinating benchmark by data crunchers at eRevalue suggests that a careful look at the automaker's sustainability reports should have sounded alarm bells. References to particulate emissions and air quality in the company's sustainability reporting declining sharply compared to its competitors. Perhaps voluntarily disclosure – if analyzed properly – can help after all.
Whatever emerges from the ashes of VW, it is clear that this is not a failure of responsible business per se. Rather, it points to wider lessons for those who seek to plan, assess and report on companies’ non-financial performance. In particular, it requires all of us to ask how external agencies can better verify corporate claims so that information is not taken at face-value but subject to more careful scrutiny. The fact that investors have been dumping the shares and brand damage could last for years shows that responsible business is critical to success. It reinforces the basic premise of indices like the DJSI that a strong showing on social and environmental measures leads to enhanced shareholder returns in the long-run.
The story of VW is also a salutary reminder that there must never be a gap between performance and communications. Audi (part of the VW Group) has a slogan, “truth in engineering,” in the United States. As one professor of business ethics quipped, this could now be “engineering the truth."
Sustainability, and the values that underpin it, must be properly integrated into a business. If unethical business practices are not addressed and rectified, the company is at risk of major financial consequences. VW serves as a timely reminder that it’s fine to focus on rankings, reports, press releases and awards. But, fundamentally, it’s the outcomes and impacts of sustainability that create and destroy shareholder value.
Image credit: Pixabay
Richard Hardyment is an Associate Director at Corporate Citizenship, a global management consultancy specialising in corporate responsibility and sustainability.