The news of Volkswagen (VW) falsifying emissions tests of their diesel engines spread like wildfire last year. As shocking as it was, business leaders don’t always get it right, which is understandable, but the extent to which VW got it so wrong is just incomprehensible. Such behaviour is unacceptable from all standpoints - whether from a business leadership perspective, a corporate social responsibility viewpoint or even that of financial markets.
It is usually assumed that the ultimate goal from a finance function perspective is to maximise shareholder value. Whilst that is true to a certain extent, and investors primarily care about stock price; the hard lesson learned is that impact on society will come to severely affect it as well. Failure to look at the bigger picture and VW’s decision to install ‘defeat software’ to cheat on emissions tests perhaps came from such assumptions.
Shareholders’ standpoint of that decision was apparent from the instantaneous market reaction, where the share price dropped by a third; wiping off billions from VW’s value. Unethical behaviour destroys share value, period.
This is exactly why business schools have embraced a new paradigm, teaching managers that there is a constant need to consider the triple bottom line: people, planet and profit. This can only be done by balancing shareholders desire for increased earnings, aligning them with the objectives of stakeholders, and considering impact on the environment. This stipulates increased costs associated with implementing changes like environmentally friendly solutions. However, it is these decisions that will help create long-term shared value.
It is about time to get rid of the myth deeming finance and sustainability as incompatible. Actually, they are and should always be aligned. With business leaders increasingly focusing on not only meeting shareholders’ expectations, but also on society and the planet, this will ensure that the economy is balanced and sustained in the long-term. Clearly, VW’s efforts were too focused on short-term profits rather than the long-term sustainability and protecting its customers, environment and most importantly its brand.
The main giveaway from this is the fact that financial sustainability is about maintaining resilience. Sustainable businesses are the ones able to recover from shocks such as financial crises or even natural disasters. This resilience will only stem from strong relationships with employees and communities. VW’s actions, however, were the contrary of sustainability. It is unfathomable how VW’s managers thought that such decisions would help in the all-round betterment of their corporation. Knowingly deceiving consumers and regulators may have been a quick fix at the time, but eventually, it compromised its reputation and future. They had no justification whatsoever and their solid desire to increase market share was their Achilles heel.
The VW scandal was due to leadership failure not because of lack of competency or commitment but because of character. In similar cases, most of the leaders are highly educated with solid teams who have a strong desire to succeed. But this drive is only a singular dimension which makes a good leader. A well faceted leader needs to have so much more traits including humility, integrity, accountability, temperance, judgement, collaboration and so much more.