WE HAVE TOTALLY SCREWED UP
“We have totally screwed up,” said Michael Horn the American boss of Volkswagen in a public apology. “We must fix the cars to prevent this from ever happening again and we have to make this right. This kind of behaviour is totally inconsistent with our qualities.”
Horn was apologising for the “dieselgate” cheat device scandal that engulfed Volkswagen in September 2015 and the largest transgression to rock the corporate world since the bank sector’s libor and BP’s Deepwater Horizon oil spill. Engineers at Volkswagen decided on their own accord, or acting on executive instruction to creating an emissions cheat devise by programming an algorithm, a few lines of smart code, into the cars software. The cheat device would detect when the car was being tested under laboratory conditions and commanded the diesel cars’ electronic brains to circumvent emissions testing.
In 2007, the now ousted CEO of the VW Group Martin Winterkorn proclaimed his sales goal was to surpass the 10 million units per year by 2018. Commentators argued that the strategy was too bold and ambitious for a company that was at that point only selling about 6 million units a year. Winterkorn was resolute; he wanted VW to become the largest automobile company during his tenure. In 2014, Winterkorn proudly announced to shareholders that his strategy to be a success. He achieved his goal, four years ahead of the planned schedule. VW had become the world’s largest car company and the first motor manufacturer to reach 10 million unit sales in a year. Winterkorn was the stock market’s darling except today we now know the real cost of his strategy, not only to the VW brand, shareholders but also society.
During the first five years of Winterkorn’s strategy, the VW Group drove business units relentlessly to focus on sales. This strategy resulted in an increased in sales of nearly 50 percent compared with 2007. It is plausible to assume that the pressure placed on regional and sales heads to hit stretch targets was considerable. By 2015 the rot caused by Winterkorn’s ambitious growth strategy began to surface in the ugly guise of the cheat devise scandal.
Olaf Lies a Volkswagen board member told the BBC in an interview: “We only found out about the problems in the last board meeting, shortly before the media did…Those people who allowed this to happen, or who made the decision to install this software – they acted criminally. They must take personal responsibility.”
Here in blinding daylight is the problem with how organisations are being managed and executives are motivated.
The knee-jerk reaction is for more control, greater compliance and further conformity. What Mr Lies seeks is the equivalent of a corporate Band-Aid plaster. If Volkswagen only seek out individuals or groups for punishment all that happens is we address the symptoms and not the causes of the disease. Regardless of who wrote and installed the code, the viruses being spread by the perversions of the proper uses of capitalism is engulfing great sways of the corporate world.
Responsibility goes all the way to the top and sits with the Volkswagen Board who agreed the corporate strategy. Their strategy has shaped Volkswagen’s corporate culture and ultimately the behaviour and belief – regardless of a direct or indirect involvement – that cheating the EPA to enhance sales was not only acceptable but also the preferred approach to achieve sales targets. The Volkswagen scandal is the result of a systematic failure of modern day capitalism and a management mindset that seeks to protect the prevailing paradigm of shareholder maximisation at the expense of the broader society.
This can no longer continue.
Recent corporate scandals are representative of a long depressing list. If leaders only focus on short-term shareholder value, quarterly sales and the bottom line, in a continuous battle to be the biggest, then the people they employ will focus on just the figures and not the awesome value creation that is possible when organisations embark on quests to deliver meaningful benefits.
Small Changes in the Corporate Code can Change the World
On April 13, 2010, Governor Martin O’Malley made history in the US State of Maryland when he passed a law creating a new type of for-profit corporation – the Benefit Corporation. With a stroke of his pen O’Malley constituted the power of commerce to generate profit as well as deliver meaningful and positive benefits for society, employees and the environment.
A benefit corporation, a new type of corporation, is in the simplest terms legally obligated to create benefits for both society and its shareholders. This modern movement is driven by astute leaders who recognise that delivering meaningful benefits to society can also generate significant competitive advantages. “It’s going to take time for that to get organised,” said Andrew Greenblatt from B Lab, a certification company, which consulted for the State of Maryland during the drafting of the benefit corporation legislation, “but 10 to 20 years from now this will be the standard way of doing business. And if you’re not a benefit corporation people are going to ask why not.”
To date twenty-eight US states have joined the State of Maryland in passing benefit corporation legislation. The growth and development of the benefit corporation movement, is being supported by B Lab who offer independent certification to companies aiming to do well, by doing good. The B Lab certificate provides a recognisable label in much the same way the Fairtrade mark offers consumers an easily identifiable independent guarantee of a better deal for third-world producers.
“The desire to balance profit and purpose is arguably a return to the model that many American companies once followed,” argues James Surowiecki, a journalist with The New Yorker magazine in an article he wrote about this exciting new development in capitalism’s history. “Henry Ford declared that, instead of boosting dividends, he’d rather use the money to build better cars and pay better wages. And Johnson & Johnson’s credo, written in 1943, stated that the company’s ‘first responsibility’ was not to investors but to doctors, nurses, and patients.”
Working in tandem the B Lab, certification and benefit corporation legislation is having a profound impact on the future of capitalism. “Corporations primarily create wealth for one group of people and don’t add a lot of other value to society,” says Andrew Kassoy from B Lab. “If we want to solve a lot of our big social and environmental problems, we need the private sector to play a role because it dominates our economy and fixing those problems requires scale.” Leaders who wish to make a difference to the bottom line as well as deliver meaningful benefits to their co-workers, customers and society now have powerful statutory and certification frameworks that support this quest.
Benefit corporations or B Corps as B Lab calls them are required to meet rigorous standards of social and environmental performance, accountability and transparency. In turn, they are protected by legislation that gives directors a fiduciary responsibility to deliver meaningful benefits to society over and above profit. This is not a marketing gimmick or bandwagon to be jumped on to. By signing up to become a benefit corporation the directors and shareholders agree to greater degrees of transparency and accountability. If they fall short for example, on social issues such as treating employees or the environment fairly, directors can be taken to court and sued.
Conversely the legislation also protects directors who want to pursue social business practices from unscrupulous investors looking for a quick return. Businesses that switch to benefit corporation status have to be serious about the role they want to play in society and the legislation offers them protection from profiteering shareholders. Milton Friedman must be turning in his grave at the growing community of over 1,300 certified B Corps from 41 countries in over 121 industries that are working together towards one unifying quest: to redefine success in business to deliver meaningful benefits for the people they work with and society.
Today competitive advantage and success in business is no longer measured in terms of profit and shareholder value. This is the old paradigm. The rise of the Benefit Corporation represents the new paradigm. Successful leaders now recognise that real value creation requires delivering benefits to the communities and society they serve, not only shareholders.
In Quest I point out that: “Even the former champion of shareholder capitalism Jack Welch and the man voted by Forbes as the greatest manager of the twentieth century, has recognised the failings of the capitalist shareholder model and in doing so become one of its strongest critics.
Following the global financial collapse of 2008 Welch came out batting hard saying in an interview with Francesco Guerrera of the Financial Times, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. The main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. Short-term profits should be allied with an increase in the long-term value of a company.”
On the 29 September 2015, in the midst of the corporate storm engulfing VW, Elon Musk a supreme quester, inventor, disruptor and founder of Tesla Motors unveiled Tesla Model X electric crossover SUV. Following this in quick succession, on the 15 October, Tesla Motors announced that their Model S has new autopilot technology, enable the car to steer itself, change lanes on its own, and parallel park for you. The timing of these launches may be coincidental; nevertheless I’m sure Musk is revelling in the irony and the opportunity that VW has presented him with for Tesla is on a quest “to accelerate the advent of sustainable transport.” This is a strategy that delivers real benefits to the world.
Here is What VW’s Executives Should do to Turn Dieselgate into an Advantage
1. Set up a Truth and Reconciliation Council similar to the one created in South Africa in 1996. Allow the people involved in the scandal to come forward, without fear of incrimination and give statements about their experiences. These hearings should be made public – The wounds within VW run deep and the culture is damaged, a TRC styled hearing would go a long way to openly expose what went wrong, why and help heal the company and employees – VW needs to demonstrate compassion, humility and accept overall responsibility. VW needs to learn and unlearn from its past. A TRC would be a bold and courageous move, but it would allow the brand to regain the significant trust that has been lost.
2. Become a Benefit Corporation. The company should seek B Corp certification and open up its way of business to a more transparent way of operation.
3. Embark on a quest to make truly great cars that deliver meaningful benefits to the world. This should become VW leadership’s over-arching quest and strategy.
These three actions will go a long way to helping regain trust and then over time VW will regain a position of leadership in the motor manufacturer.