Volkswagen didn't keep it real

...nicht nur für den english Unterricht in der Berufsschule Aileen Ionescu-Somers on the VW scandal

The broadsheets and social media are currently rife with commentary about the dramatic fall from grace of one of the world's largest and most trustworthy automotive brands; Volkswagen. The fallout is massive. This means billions in losses for the company. The CEO has resigned and it remains to be seen what the legal and long-term consequences are for the decision-makers involved in this debacle and even for the brand, no matter how resilient it might be. As a result of the scandal, even "brand Germany" reputed its for trustworthy, squeaky clean engineering excellence, is coming under scrutiny.

The economic and political clout of the global corporation is growing constantly, going well beyond regional or national boundaries. With globalization, a company's purpose defined solely around profit is inadequately articulated since it does not reflect the world's vastly changing dynamic. Like it or not, companies are fundamentally social institutions, playing their own explicit and defined role within society. For a long time, their purpose was defined – not so much as promoting the common good, but as meeting market needs while making a profit as an indicator that they added more value to society than the resources they used up. However as of late, some prominent business leaders – but by far not enough – have realized that companies simply cannot do business as usual on a failing planet with dwindling resources and rising social inequity.

Volkswagen, as an industry leader had – at least on paper – recognized that. The very name of the brand exudes a societal purpose: Volkswagen after all, is the "People's car". But the company went further, defining its corporate purpose in a more meaningful way, seemingly taking a holistic view of its role in and contribution to society: "make Volkswagen the most successful, fascinating and sustainable automaker in the world by 2018". Its Strategy 2018 puts environment, its clients and its people at the center of the company's strategic vision.

There can be no doubt that Volkswagen clients and the public at large now perceive its lofty purpose to lack authenticity. Greenwashing would be putting it mildly. Right now, Volkswagen's reputation lies in tatters. How could it have gone so wrong?

Let's surmise basing ourselves on IMD's "Keeping it real: How authentic is your corporate purpose?," empirical research carried out in 2015 in partnership with Burson Marsteller, a top public relations firm. First, the hundreds of executives we surveyed had great difficulty identifying a single company with a truly authentic corporate purpose. This means that while many companies "talk the talk" on corporate purpose, they do not necessarily "walk the walk". This also means that strategies and linked internal and external communications efforts need revision across industries. Our survey also indicated that executives do not generally rely on their own company's stated purpose to guide their decision-making processes. There is a serious disconnect. It is highly likely that similar scenarios were playing out at Volkswagen.

In fact, stating purpose is actually the easy part and only the first step. It is important that purpose also be embedded in the organization. It's may not seem like rocket science but so often important aspects are ignored that allow companies to take a holistic perspective on purpose and strategically align values, organizational culture, activities and operations around it; in other words, ensuring that one hand knows what the other is doing and above all, keeping it real. Taking a holistic approach helps avoid any disconnect between what companies say they do and what changes are truly being made to how they operate. It also helps avoid the substantial risks to brand and reputation that Volkswagen is currently experiencing. In other words, companies absolutely have to– and particularly in today's digitally connected world– mercilessly walk their talk before they talk their walk. This starts within the company, top down and bottom up.

That said, much as walking the talk is crucial for any corporation, too few are shifting away from the sole short-term profit focus dictated by capital markets. The managerial mindset this promotes has clearly fundamentally affected the way Volkswagen operated in some of its key markets. We can deduct from the mayhem around Volkswagen this week that there are a increasing number of external factors requiring companies to adoptable broader purpose-driven strategies that are also authentic. Currently it's a perfect storm where on the one hand we are reaching planetary boundaries and simply running out of resources, feeling the impact of climate change as never before, while on the other, issues around social equity need urgently to be addressed and this includes by corporations also. Now more than ever, companies have power to effect change both internally and externally by acting out and communicating purpose more holistically and effectively. If they can keep it real, better business is the result.

Dr Aileen Ionescu-Somers is the director of IMD's Global Center for Sustainability Leadership (CSL) Learning Platform.