By Shuili Du and Deborah Merrill-Sands
Over the last decade, corporate social responsibility and sustainability has occupied a prominent place on the global corporate agenda, with an ever increasing number of corporations engaging in responsible and sustainable business practices to create social and business value. Nevertheless, from Nike’s sweatshop crisis in the 1990s, ethical controversies of Walmart in mid-2000s, to BP’s Deepwater Horizon oil spill in 2010, and now Volkswagen’s emissions scandal in 2015, we see that every few years a severe, high-profile corporate ethical scandal occurs, capturing the attention of the media and damaging the public’s trust in the corporations and their social accountability.
On Jan. 4, the U.S. justice department sued Volkswagen in federal court, questioning Volkswagen’s efforts to restore its credibility and accusing the company of impeding and obstructing regulators’ inquiries and providing misleading information. Back in December 2015, Volkswagen characterized its emissions scandal as a “chain of mistakes,” which is a gross understatement. The company has equipped a staggering 11 million diesel cars since the 2009 model year with software – called a “defeat device” — used to cheat on emissions tests; when not being tested, the cars emit up to 40 times the allowable levels of nitrogen oxide pollution. This emissions scandal is a disturbing case of systematic corporate fraud that has harmed customers, governments, and the health and well-being of citizens in the societies in which Volkswagen has been given the license to operate.
The effects of such corporate crises are profound and lasting. Volkswagen’s market value dropped by 23 percent in September 2015, after admitting diesel emissions cheat. The company’s sales in the U.S. declined almost 25 percent in November 2015 alone. The estimated total cost of the scandal is projected to exceed $8 billion. Much more difficult to estimate are the invisible and long term damages to the company, such as the negative impact on brand trust and reputation, customer satisfaction, employee morale and loyalty, and investor confidence. Trust, once lost, is notoriously hard to regain.
Even more importantly, there is an externality effect. Deceptions such as those perpetrated by Volkswagen not only tarnish the reputation of other automakers and even corporations in unrelated industries, but they also undermine the public’s trust in the business, and heighten consumers’ cynicism about greenwashing – and now greenfrauding.
It is yet to be seen if Volkswagen can salvage itself from the scandal. Its actions to date in handling this scandal are far from adequate. If history is a mirror, Volkswagen should draw lessons from companies that have encountered similar crises in the past. For example, Nike witnessed public outrage and massive consumer boycotts against its sweatshop labor practices in 1990s, and ever since has executed one of the greatest image turnarounds. Nike established and reinforced a code of conduct for labor practices, hired external professionals to audit its suppliers, and increased transparency of its labor practices by detailing its performance in its annual corporate social responsibility reports. Indeed, Nike has been applauded for its leadership in partnering with independent industry organizations, such as the Fair Labor Association, to foster industry-wide changes in building sustainable supply chains.
If Volkswagen is to succeed in resurrecting its image, it should act decisively. It needs to accept full responsibility as an organization, not as a constellation of individuals, for its emissions scandal. It has to lay out a credible plan for how it will truly reduce emissions and verify its compliance with regulatory standards. It needs to counter its stigma by making significant, long-term R&D investment to position itself as a leader, rather than a laggard, in technology development to reduce emissions while enhancing performance. And, it needs to establish stronger accountability structures and practices, as well as fostering positive changes in its corporate culture, to hold the short-term profit motive in check and prevent any future fraud.
Volkswagen gives us a stark lesson in how businesses should (not) approach social responsibility and sustainability. Deceiving stakeholders by paying lip-service and treating sustainability as façade is never going to deliver true value for the company nor for society. Indeed, as we have seen, it engenders significant costs. Research shows that business value is created when social responsibility and sustainability are embedded in the company’s culture and core business strategies. When done right, companies benefit from a more favorable corporate image, greater customer loyalty, higher employee morale, and enhanced organizational learning and core competence. And, in turn, societies benefit from harnessing the power and resources of corporations to address pressing social and environmental challenges.
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Dr. Shuili Du is a marketing professor at the Peter T. Paul College of Business and Economics, University of New Hampshire. Her research expertise lies in understanding various ways corporate social responsibility (CSR) and sustainability initiatives create business value. She has published research in many premier journals and has consulted to various corporations on their CSR and sustainability strategies.
Dr. Deborah Merrill-Sands is Dean of the Peter T. Paul College of Business and Economics at the University of New Hampshire. Trained as an anthropologist, she is an expert in diversity and women and leadership. She has worked in the area of socially responsible business for the past 10 years. Prior to her career in academic administration, she worked internationally as an applied researcher on issues of food, poverty, and economic development.