The scandal surrounding Volkswagen’s rigged emissions tests, which may affect 11m vehicles, has rightly caused outrage. The carmaker is in crisis, its chief executive has resigned, consumers are shocked, and Volkswagen’s share price has dropped by nearly a third.
The company announced that it is setting aside almost £5bn to cover the costs, although suggestions are that fines in the US alone may reach $18bn (£11.7bn). But we may never discover how much the loss of customer trust and brand reputation costs over the longer term.
This should send a clear message to business: integrity is vital at every level in a company and, where it fails, the costs are huge. Management must lead the way but this is not enough.
Ethics must be embedded at every level throughout an organisation. If those at lower levels believe making sales targets is more valued than behaving with integrity, things will fall down.
As well as having the right tone from the top, companies must foster a culture that encourages open discussion of ethics, where employees are encouraged to query things they are not comfortable with.
There must be proper support for whistleblowers, so they are not ostracised or “punished” for bringing wrongdoing to light.
Finally, we have conducted research that found companies are most likely to behave ethically when they publicly state their company values so they can be held to account. But what should those values be?
In the 1990s, ICAEW helped write the UK’s Corporate Governance code, the Cadbury Code. It takes a principles-based approach, following the comply-or-explain method whereby companies can choose a different path so long as they can justify why this was appropriate.
The problem is that the code has grown over the last quarter-century. It now has 18 principles, 27 supporting principles, and a host of provisions and footnotes.
The effect is that corporate governance is becoming a compliance culture, where ticking the right box matters more than doing the right thing.
I believe that we need to redraw a new corporate governance approach that is fit for twenty-first century businesses. Our work has distilled the code down to four fundamental principles. Companies should first have a clear business purpose.
Second, they must behave in a socially acceptable way. Third, they must meet legal and regulatory requirements. Finally, they should publicly state how their responsibilities are being met.
These clear principles should be easy to memorise and apply – and can be communicated to staff and external stakeholders.
Anyone in any company can then ask themselves “am I doing the right thing?”
If the answer is not immediately obvious, then in an open culture they know they can ask their managers.
If they know management is committed to integrity, and will support them, they can raise challenges if they think something unethical is happening.
Volkswagen has clearly failed to live up to these principles. The results have already proved painful, and may be more costly still.
Nor is the damage limited to Volkswagen; trust in business is at an historic low, and this could really harm consumer confidence more widely.
Unless we can make it easy to understand what being ethical means, Volkswagen will not be the last company to have to answer tough questions about its behaviour.