Volkswagen's deliberate and systematic effort to violate clean air rules is a shameful scandal, but it is also an example of management incompetence. Like BP's inability to manage its drilling contractors in the Gulf of Mexico, it is an example of massive and predictable management failure. In contrast, you can find companies like Walmart requiring its suppliers to detail their efforts to reduce energy and water use and carefully manage its waste and environmental impact. We also find that Microsoft and over 400 other companies are now using their internal financial accounting system to encourage energy efficiency and renewable energy. According to David Gelles of the New York Times:
When Microsoft business unit managers calculate their profits or losses each quarter, they consider more than just sales and expenses. They also factor in the price of carbon. Even more radically, the business units are charged an internal tax by Microsoft based on their energy usage. The money goes into a common fund that invests in environmental sustainability projects.
Microsoft estimates this program saved them $10 million in energy costs last year. Perhaps pocket change in a company as large as Microsoft, but a million here and a million there and pretty soon you're talking about real money... This idea is not new. For a number of years, New York State and California have taxed the public's energy use and then allocated those funds to promote energy efficiency and renewable energy within their states.
In contrast, BP will end up spending over $60 billion due to their mismanagement in the Gulf of Mexico, and VW has already set aside over $7 billion to help cover the costs of the management incompetence that led to lying about the emissions discharged from its diesel autos. And that is just the start.
What is happening here is that companies like VW and BP are using 20th century techniques to manage organizations that must compete in the 21st century's global economy. While VW was likely involved in fraud, I am arguing that this is not simply fraud, it's an indication of outmoded management. It's time for these companies to update their management systems.
Here at Columbia University I teach a course called "Sustainability Management." It is a required course for students in our Sustainability Management master's program and in our Master of Public Administration in Environmental Science and Policy, and it fulfills the management core requirement in the master's programs offered by the School of International and Public Affairs. The course covers the standard management topics of strategy, operations, financial management, human resource management, information management, marketing, organizational innovation and outsourcing. But then we spend about half a semester on what we have come to call the physical dimensions of sustainability: the use of energy, water, and raw materials, waste management, environmental impact and regulation.
Today's corporations, nonprofits and governments are operating on a more crowded and interconnected planet that provides great opportunities, but also poses great threats. The threats are not simply coming from competitors but from the organization's own actions. Greater care and thought must be devoted to the use of natural resources and the impact of an organization's production, outputs and consumption on ecosystems. It is not enough to call production errors "breakage" and argue that if we are going to make an omelet we have to break some eggs. Those are 20th century principles of macho-management that have no place in the complex environment of the 21st century economy.
Management education and managers must meet the challenges of complex contemporary conditions. Energy, water and other raw materials are becoming a larger element of the cost structure of all organizations. Water is no longer free. Waste disposal costs more and more each year. These increased costs are not limited to manufacturing but include the growing number of service organizations as well. Microsoft, Walmart and thousands of other organizations are learning to build these factors into their operations and their internal control systems because they are sound management practices that lead to the accomplishment of the organization's goals. While some of those goals may be reputational, some are also related to lowering the costs of operations.
In addition to these operational issues, organizations must learn to develop a sophisticated and productive relationship with the regulatory environment. Compliance with environmental regulations, labor law, the tax code, and occupational health and safety rules are part of operating and managing a modern organization. Noncompliance with the law is not clever management; it is an accident waiting to happen. We live in a global economy that is connected by endless communication, millions of computers, and billions of smart phones, not to mention satellites, drones, and ubiquitous video surveillance. We live on planet with over seven billion people. Is there any reason to believe that an organization's misbehavior and environmental destruction will go undetected for very long?
While it is true that many nations do not enforce their environmental and occupational health and safety rules, a quick study of economic history demonstrates that the trend is toward more enforcement rather than less enforcement. And even when the government ignores noncompliance with the law, NGOs and consumers notice it. Volkswagen's noncompliant vehicles are losing market value faster than Volkswagen's stock. Last week, VW retail dealers reported empty and silent showrooms and that is a sound they will probably need to get used to.
We learned this week that VW's shameful behavior was actually a part of its effort to become the world's number one carmaker. There was technology available to comply with the air pollution rules, but VW rejected it due to expense and fears of customer inconvenience. We also learned that for over a year the company accused regulators of incompetent testing and argued that their cars complied with environmental rules. It is clear that the company was not only managed poorly, but had incorporated fraud and deceit into its operating strategy and corporate culture.
The story keeps getting worse. The lessons are obvious but will not be easy to implement. It is clear that some of Volkswagen's engineers consider environmental rules an annoyance. They do not think customers buy cars based on environmental performance. When dealing with safety rules like seat belts and airbags, their predecessors made the same mistake. I'm sure many consumers do not pay attention to safety and pollution equipment when they buy a car, but many do. Moreover, it can't help car sales if potential customers find out the car they are looking at is unsafe or pollutes more than it should.
One of they key factors in developing and managing an organization's strategy is to set priorities and focus attention on a limited number of factors. Volkswagen decided that environmental performance was not a priority. The environment was an afterthought, and a nuisance to deal with. VW is not unique in thinking that way. Many businesses believe that all regulation disrupts the free market and is not needed. It would be smarter for them to accept the rules and learn to operate creatively within them. That approach works in baseball and basketball; my guess is that it can work in auto manufacturing. One adapts to the changing business and regulatory environment and, as long as you're not the New York Knicks, you learn to thrive under new conditions. The world is changing. Technology has changed it and the rules and business environment will continue to be a moving target. Get used to it. Learn to adapt and thrive. I often say in my classes that within a decade or so all competent management will be sustainability management and managers who do not understand the principles of sustainability will be considered incompetent dinosaurs.