Expert view: Volkswagen failed at more than just the emissions tests

Be it VW or any XYZ, a company fails to be a sustainable leader if it cannot engage honestly with its stakeholders, say experts from Switzerland’s Global Center for Sustainability Leadership.

Sustainable leadership means engaging honestly with your stakeholders: VW failed the test

Volkswagen fitted 500,000 VW and Audi diesel cars with code that tricked regulators into under-recording noxious emissions. The turbodiesel engine cars had been marketed as “clean diesel” automobiles. This action – which has negatively affected all European auto companies which produce cars with diesel engines and plummeted VW’s share price by 20% – also causes problems for regulators, consumers and the environment.

Europe has always favored the use of diesel engines as an “environmentally-friendlier” technology. As a result, 75% of all diesel car engines have been sold in Europe. While it is true that diesel engines emit less carbon and are more energy efficient, they have other environmental problems that make them undesirable. Diesel engines generate higher nitrogen oxide emissions (NOx).

Accordingly, Government authorities have established stringent standards on nitrogen oxides because these pollutants – in combination with volatile organic compounds and sunlight – cause smog, respiratory illness and increase the chances of death from heart and lung diseases. Children, people with respiratory diseases such as asthma, and people who work or exercise outside are particularly susceptible to adverse effects of smog such as damage to the lungs.

Sustainability is a topic that lies at the heart of business strategy. Manipulating sustainability performance data to achieve greater market share is not only highly unethical but it has a significant impact on the business performance of a company. The case of Volkswagen – which might affect up to 11 million of its vehicles – proves this. VW faces criminal charges in the US which will impact the economic performance of the company. In the first three months of 2015, VW had surpassed Toyota as the number one car maker in the world. Today VW said it would set aside 6.5 billion euros – the equivalent of half a year’s profits – to cover the cost of making the cars comply with pollution standards.

The impact of this failed leadership goes beyond VW since shares in European car makers such as Daimler, Renault, and BMW also fell on September 22nd. A number of governments have reacted by immediately launching investigations. Besides the US, Germany, and France have started investigating VW. Mexico – which hosts the second largest VW plant in the world in the city of Puebla – has demanded an immediate investigation on all Jettas and Golfs made from 2009 -2014 to make sure that VW has not cheated on its environmental standards.

Martin Winterkorn, VW chief executive, produced a video where he says that he was “endlessly sorry” and that the misconduct was a result of “the grave errors of very few” employees. But this is a leadership issue and Winterkom resigned on Wednesday September 23rd.

How could VW’s senior management have allowed the installation of a technology designed to mislead regulators and its own costumers as well as create greater damage to the environment with higher levels of pollutants? Consumers don’t want false promises about the environmental performance of companies. They expect honesty and want the truth. In fact, companies such as Patagonia – far from giving false promises admit that they have important sustainability challenges that they are actively trying to resolve – earn the trust of consumers and regulators and have better economic results over the long-term.

“No company should be allowed to evade our environmental laws or promise consumers a fake bill of goods,” said New York Attorney General Eric Schneiderman.

Sustainability stakeholder engagement means more than promises to consumers. It means honesty and transparency. And that is the meaning of long-term sustainable success for business.

Volkswagen didn’t keep it real

The broadsheets and social media are currently rife with commentary about the dramatic fall from grace of one of the world’s largest and most trustworthy automotive brands; Volkswagen. The fallout is massive. This means billions in losses for the company. The CEO has resigned and it remains to be seen what the legal and long-term consequences are for the decision-makers involved in this debacle and even for the brand, no matter how resilient it might be. As a result of the scandal, even “brand Germany” reputed its for trustworthy, squeaky clean engineering excellence, is coming under scrutiny.

The economic and political clout of the global corporation is growing constantly, going well beyond regional or national boundaries. With globalization, a company’s purpose defined solely around profit is inadequately articulated since it does not reflect the world’s vastly changing dynamic.

Like it or not, companies are fundamentally social institutions, playing their own explicit and defined role within society. For a long time, their purpose was defined – not so much as promoting the common good, but as meeting market needs while making a profit as an indicator that they added more value to society than the resources they used up. However as of late, some prominent business leaders – but by far not enough – have realized that companies simply cannot do business as usual on a failing planet with dwindling resources and rising social inequity.

Volkswagen, as an industry leader had – at least on paper – recognized that. The very name of the brand exudes a societal purpose: Volkswagen after all, is the “People’s car”. But the company went further, defining its corporate purpose in a more meaningful way, seemingly taking a holistic view of its role in and contribution to society: “make Volkswagen the most successful, fascinating and sustainable automaker in the world by 2018”. Its Strategy 2018 puts environment, its clients and its people at the center of the company’s strategic vision.

There can be no doubt that Volkswagen clients and the public at large now perceive its lofty purpose to lack authenticity. Greenwashing would be putting it mildly. Right now, Volkswagen’s reputation lies in tatters. How could it have gone so wrong?

Let’s surmise basing ourselves on IMD’s “Keeping it real: How authentic is your corporate purpose?,” empirical research carried out in 2015 in partnership with Burson Marsteller, a top public relations firm. First, the hundreds of executives we surveyed had great difficulty identifying a single company with a truly authentic corporate purpose. This means that while many companies “talk the talk” on corporate purpose, they do not necessarily “walk the walk”. This also means that strategies and linked internal and external communications efforts need revision across industries.

Our survey also indicated that executives do not generally rely on their own company’s stated purpose to guide their decision-making processes. There is a serious disconnect. It is highly likely that similar scenarios were playing out at Volkswagen.

In fact, stating purpose is actually the easy part and only the first step. It is important that purpose also be embedded in the organization. It’s may not seem like rocket science but so often important aspects are ignored that allow companies to take a holistic perspective on purpose and strategically align values, organizational culture, activities and operations around it; in other words, ensuring that one hand knows what the other is doing and above all, keeping it real.

Taking a holistic approach helps avoid any disconnect between what companies say they do and what changes are truly being made to how they operate. It also helps avoid the substantial risks to brand and reputation that Volkswagen is currently experiencing. In other words, companies absolutely have to– and particularly in today’s digitally connected world– mercilessly walk their talk before they talk their walk. This starts within the company, top down and bottom up.

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