VW & “Maximising Shareholder Value”

Short Termism

Global equity investors have endured a difficult few months, amid concern about plunging commodity prices, the outlook for the global economy and the direction of US monetary policy. Against this uncertain backdrop, the confession from Volkswagen that they had used software to cheat US emission standards, heaped further pressure on an already fragile market. The risk now is how far-reaching it may be within the company and across the industry.

It is ironic that the scandal broke the same week the Pope was in the US preaching for the need for real action on climate change. How hopeful can we be when one of the world’s leading companies so blatantly acts to defraud environmental regulation? Volkswagen’s “defeat device” software placed in diesel cars was designed to recognise when the car was being tested in order to produce compliant emission levels. However, in normal operation the cars produced nitrogen oxide levels “10 to 40 times above standards”.

This latest fraud is not the first corporate scandal to shock the world, nor will it be the last. It is just another example of the type of behaviour that is a by-product of a business model that focuses purely on “maximising shareholder value”. This is not to denigrate the profit motive at the heart of capitalism. While it can be a corrupting force, the bigger issue is the fact that the current ‘shareholder’ model fails to take account of all costs. The impact on society and the environment is often an afterthought.

The “radical” change the Pope is calling for is unlikely to happen, unless a new model is adopted that more explicitly considers all stakeholders, not just shareholders. There are some CEOs on board, including Salesforce CEO Marc Benioff, who has been a voice for a more stakeholder friendly model.  However, they are in the minority. Many companies will talk about sustainable business practice but often it is just lip service. The obsession with beating ‘the street’s quarterly earnings estimates’ and rapidly gaining market share perpetuates a culture of short-termism.

Volkswagen recently moved ahead of Toyota as the world’s largest car-manufacturer, based on sales for the first half of 2015. With their single minded focus to be number one, Volkswagen compromised their ethics and in the process did untold damage to the reputation and long term future of the company.

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