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Tuesday, September 22, 2015

Volkswagen bombshell shows RBC is crucial to the bottom line

Volkswagen AG's share price collapsed after the uncovering of VW's "defeat devices" that conceal massively non-compliant emissions during testing of diesel cars like the Jetta (pictured below) in the United States. CEO Winterkorn has lost his post as a result. Reputational damage is likely to spread not only to other companies in the VW stable but to the whole German motor industry, to German industry in general and to diesel car manufacturers in other countries. Nor will this damage be limited to the US: regulators in Europe and Asia are already checking to see what has been happening in their own jurisdictions. First estimates of VW's liability total USD 18 billion, but the potential loss via reduced sales could be many times higher.

This is the clearest demonstration of the failure of current procedures for ensuring good behavior in major companies, despite the plethora of "CSR" and other corporate conduct standards to which most of them claim to adhere.

What companies need is a thorough RBC (responsible business conduct) audit and business plan. The costs of such a program are a minute fraction of the potential losses from such masssive reputational damage. CEOs who want to keep their jobs should heed this lesson.

Many other companies are vulnerable because they have not yet oriented themselves to behave in ways that will not only build a solid reputation for social responsibility but will contribute substantially to maximizing long-term risk-weighted returns to investment.

Such companies (too many to name) think they have covered themselves by hiring all the right people, signing pledges to comply with national, international and industry-specific standards, and giving money to good causes. But they have missed the point. They have failed to absorb the necessary behavioral norms into their everyday working practices, from their blueprints to their customer service.

You can tell when you are dealing with such a company. Instead of doing the right thing, they will frequently do something indefensible, then, when discovered, their legal team gets together with the PR team to cobble together an apology that is really a non-apology because it is designed to avoid legal responsibility while covering backsides with lame excuses and promises to do better in future.

Other signs are the lack of a customer service phone number anywhere on the company's website; usually, the "Contact Us" area will lead you through a series of unhelpful FAQ pages until you finally get back to the page you started with. A diligent search on Google will often help you find the actual customer service phone number. Another trick is to force you through a series of menu options that look exhaustive but do not include anything that looks like your problem, so you eventually have to give up. Either this is deliberate, and therefore deception, or it isn't, so it's just incompetent and uncaring.

What can companies do to develop, maintain and protect their reputations?

Let's first of all look at several important things you need to do, but which are not by themselves sufficient to achieve this objective, before looking at what Growing Capacity's approach can do for your bottom line and your career.

It's not as simple as hiring a PR firm and/or paying Reputation.Com to manage your online reputation. I have nothing against doing both of those things. In fact, I recommend that you do them, but at the end of the process, not the beginning. Clean up before the show.

Good corporate governance is an essential basis for improving company behavior. Companies need to be accountable to their shareholders and the public. But corporate governance is how a company is organized internally. It does not include the web of stakeholder and social relations and responsibilities that need to be effectively managed to improve a company's reputation.

Every company needs legal counsel and accountants to ensure compliance with applicable law wherever it operates. Obeying the law is the first and most fundamental form of corporate responsibility. It is a necessary, but not sufficient, form of social compliance. Societies have a wide range of expectations of corporate behavior; not all of them are expressed in law. In developing countries, laws and judicial systems are inadequate; companies that limit themselves to complying only with statute law may end up doing things for which they would be severely punished in more developed countries. Their reputations are likely to suffer as a consequence.

There are many codes and standards of corporate conduct to which companies can adhere publicly to demonstrate their ethical orientation. Used creatively and sincerely, these can provide an excellent framework for improving the way the company does business. But too often these are treated as check-box exercises and PR material. They do not penetrate to the core work of the company. If they did, you would not find a major multinational like Volkswagen deliberately concocting and implementing technology to fool emissions inspectors.

 Many producers of goods or services hire consultants to conduct audits of their operating practices. Such surveys often result in significant process improvements that enable the firm to work consistently and efficiently, increasing profitability and improving the delivery of those goods and services to the public.

Companies now need to focus also on external RBC audits to see how they can work in a holistic, sustainable way to benefit producers, consumers, the wider society and future generations. Through structural change, training and other improvements, these companies can avoid disasters like Deepwater Horizon and Volkswagen's "defeat devices".

The gains to companies that value and understand RBC can be enormous. Not only can they avoid reputational damage, they can sell their safer, more convenient products at a premium price and they can attract the best talent. The reputational gain of good RBC can spread to other companies in a sector or a country -- just as bad behavior can tarnish them.

So, as they say, "who you gonna call?"

Growing Capacity. Do it now.

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