Companies must clean up their act or the scandals will continue

After it emerged last Friday that Volkswagen had fitted 11 million vehicles with software capable of cheating emissions tests, the value of the company fell by about €25 billion, or a third of its capitalisation. This should not come as a surprise: our recent book Connect presents evidence that suggests that a third of a company’s value is at risk when it does something to damage its relationship with society.

It is a reminder that there are very serious consequences when companies take people for a ride. VW faces fines of up to $18 billion in the United States, with further investigations from Britain to South Korea likely to follow.

Some are questioning whether the company can recover. The answer is probably yes, albeit at a huge cost.

We spoke to an Australian regulator who explained to us what he tells chief executives: “When the day comes that you screw up — and believe me, that day will come — I have two choices. If you have behaved well up until that point, I can slap you on the wrist. But if you have messed people around, I will have no option but to punch you in the face. The public will demand it.”

How things unfold for VW will depend on four things. First is the strength of the reputation it has established prior to this crisis. Reputation is best seen as a reservoir of goodwill, which takes years to fill up and only hours to empty. In a crisis, companies can draw on a well-stocked reservoir to give them the opportunity to set things right.

VW has a longstanding reputation for affordable quality and precise German engineering, which probably will give it the chance to make amends. Martin Winterkorn, the former chief executive, admitted that the deception violated “everything that Volkswagen stands for”. The company must hope that the public believes this to be the case. Second will be Volkswagen’s initial response to the scandal. It has apologised quickly and unreservedly and reports suggest that the company is co-operating with investigators seeking access to its documents.

History suggests that this response is better than most. Executives often start sounding evasive to avoid being incriminated. In the extreme, there is the example of Arthur Andersen, the accountancy group, which ran out of paper shredders on the first day of the investigation into its client Enron.

Third, VW must embrace radical transparency and start making amends to the consumers it has misled. It will not be easy, but BP’s recent settlement in the US shows that full co-operation can lead to far more productive outcomes.

Fourth, VW — and business more broadly — must ask why it keeps repeating the mistakes of the past. Its disgrace is only one in a long history of corporate scandals.

The problem is that corporate social responsibility does not work. CSR is fundamentally disconnected from the real activities of a company. The evidence shows time and again that a great record on CSR does not prevent a company doing great damage to society.

Instead, companies need to start integrating societal and environmental issues deeply into their strategy and everyday operations. If they do not, Volkswagen will not be the last corporate villain and this will not be the last corporate scandal.

Connect: How Companies Succeed by Engaging Radically with Society, by John Browne and Tommy Stadlen, co-founder of Giant, was published by WH Allen on September 10. Lord Browne of Madingley is the former chief executive of BP.

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