Learning From Volkswagen's $10 Billion Sustainability Mistake

06/27/2016 07:58 am ET Updated Jun 28, 2017

As Volkswagen continues to struggle in the aftermath of their deceptive emissions reporting scheme, they are starting to pay for some of the costs of their mistake. In a recent Wall Street Journal article, Mike Spector and Sara Randazzo reported that Volkswagen:

...is nearing a $10 billion civil settlement, the largest in the auto industry's history, to compensate U.S. owners of vehicles affected by the German car maker's emissions-cheating scandal, said people familiar with the matter. Under the proposed deal, Volkswagen would offer to buy back cars and provide additional compensation for owners of almost 500,000 diesel-powered vehicles with two-liter engines that contain software capable of duping government emissions tests, the people said. In addition, Volkswagen is expected to pay more than $4 billion for environmental impacts and to promote so-called zero-emission vehicles...

Other payments in the U.S. and overseas are expected, and although the company has set aside $18 billion to pay the costs of damages, it is not clear that this will be enough. The company's retail dealers have still not recovered from the public relations nightmare caused by the company's lies, and VW's customers report being misled and disappointed by a company they trusted to be honest.

The market and government regulators are sending a message that is clear and ought not be misunderstood: people care about the environment and the quality of their air. If people did not support air pollution regulations they would not have cared about Volkswagen's disregard of environmental law. Government is obligated to enforce the law, but in this case you can sense that the U.S. government is devoting extra effort to this highly visible case.

In the fog of political nonsense we call a presidential election, the issue of environmental policy is mostly absent. As I observed a few weeks ago, Trump is saying nothing, and although Hillary says the right things, environment is far from the center of her campaign.

But even if political reporters are ignoring sustainability, corporate leaders are taking note of this settlement. It may set a precedent for future deals to settle environmental mismanagement. While Volkswagen is rich enough to take a $10-20 billion dollar hit, most companies would be driven out of business by a penalty of that size.

The risk of such a mistake provides leverage to people inside corporations attempting to bring the physical dimensions of sustainability into routine corporate decision-making. This includes careful consideration of the environmental impacts of the company's production processes and products. Much of the damage done by Volkswagen's deception has already taken place and been absorbed by the environment. The question for Volkswagen and for other companies is: What are the lessons learned from this error and how do we reduce the probability of a repeat?

Most of the management experts who have reviewed Volkswagen's emissions scandal consider it a failure of an insular corporate culture. The diesel engine designed by VW's heralded engineers could not meet environmental emissions standards. Rather than look outside the company for help in designing a better engine that could meet standards, VW's engineers designed deceptive software that fooled emissions-testing equipment. Quite the creative "workaround"--talk about imaginative engineering. The corporate culture was focused on selling the most cars of any company in world history, and that single-minded focus made it difficult for information that might slow the pace of sales to get any type of hearing.

At the time of the emissions scandal, Volkswagen was run by Martin Winterkorn, a strong-willed leader who resigned in September 2015, when he took responsibility for the scandal. While Winterkorn did not have specific knowledge of the deception, Jack Ewing, New York Times business reporter, observed at the time that:

Volkswagen's command-and-control structure probably made it difficult for Mr. Winterkorn to escape responsibility, even if there was no direct culpability. Critics, including management experts and analysts, have long faulted what they say is a company culture that hampers internal communication and may discourage midlevel managers from delivering bad news.

However, even organizations that have a less directive management culture and more open communications may still ignore environmental costs, benefits, and risks. In some organizations, "soft" issues--not directly related to revenues and profits--are considered frills. These include occupational health and safety, rigorous adherence to ethical standards of behavior, fairness in human resource management, including biases related to race, gender, ethnic origin and sexual orientation, and of course, environmental sustainability. But as the values of fairness, ethics, and environmental sustainability become more widespread, the most sought after employees want to be sure that the organizations they are working for adhere to these standards. Google famously asserted that "you can make money without doing evil." While some question Google's devotion to that principle, it remains a powerful and attractive element of the company's vision of its corporate culture.

In a world economy and society dominated by instantaneous, global, and sometimes viral communication, image and messages matter. I like to think that facts matter too. We live in a more observed world. Satellites, drones, smartphone videos, and security cameras have made secrecy and, unfortunately, privacy more difficult then ever. Only information overload prevents everything from being known by everyone. But in the new world we live in and in a brain-based economy where competition requires new and creative ideas all the time, organizations cannot be run by dictatorial fiat. A leader's vision must be tempered by the vision and ideas of the organization's members and stakeholders. The 21st century manager not only articulates a vision and manages against it, but must develop a vision based on a process of facilitation among stakeholders and other key players within the organization. By definition, the most talented people within your organization are the most mobile and sought after. Incorporating their views into organizational strategy and management may not be easy, but it is typically necessary. Leaders that ignore their key people risk losing them to the competition.

However, although more open and effective management is necessary, it is not a sufficient condition for sustainability management; another step must be taken. Management must explicitly add the costs of energy, water, raw materials, and waste to the organization's financial control system. They must also add the risk of damage to the environment into the organization's strategic and operational planning process. Senior management must ask if the potential cost of environmental impact has been considered and, if not calculated, at least estimated. The key lesson of the Volkswagen emissions scandal is that no one seemed to think that the damage to the environment was a factor worth considering. Even if that was not assessed, what about the potential reputational damage that might be caused if the company was caught installing deceptive software?

The International Council On Clean Transportation, a small but determined nonprofit organization, uncovered VW's emission testing scheme. For several years, VW tried to counter their claims, but in the end the truth prevailed. One element of living in an observed world is that no one has a monopoly on information. The Clean Transportation group partnered with a team of researchers at West Virginia University and ultimately with the U.S. EPA to discover and publicize the truth. A key lesson from the VW emissions scandal is the same one your parents and first grade teacher probably taught you: if you lie, you will probably get caught.