The catastrophic plunge of Volkswagen share price last year, following news that the automotive legend has been systematically gaming the system and faking measured emissions of nitrogen dioxide, is yet another cautionary tale of capitalism gone awry. More specifically, it is tale of wasted opportunity and innovation failure.
Given the degree of ingenuity required to develop special software that closed down nitrogen dioxide emissions during tests and fooled American regulators, I can’t help wondering if the culprits had put as much energy into actually solving the problem of emissions, what the outcome might have been.
At the risk of sounding like Pollyanna, it is worth focusing on the right things in business – by which I mean things other than profit. And when it comes to innovation, you just might be rewarded, not only with good returns, but with a business that is more sustainable in the long-term.
A recent study from Harvard and the London Business School shows that over 18 years, businesses committed to sustainability delivered annual financial returns 4.8% higher than those that did not. The hypothesis is that in order to deliver sustainably they had to organise themselves around a core purpose, and then embed checks and balances to keep themselves honest. This included factoring in outside stakeholders with whom they checked their strategy and embedding metrics beyond share price in their reporting measures.
A focus on sustainability worked for these companies in the longer term, in part because they were able to attract better human capital, establish more reliable supply chains, and avoid conflicts and costly controversies with nearby communities. This allowed them to engage in more product and process innovations in order to be competitive under the constraints that they experienced. Purpose and sustainability are also, it seems, good for innovation.
By contrast, in traditional firms, the authors wrote, “executive compensation based on short-term metrics may push managers towards making decisions that deliver short-term performance at the expense of long-term value creation.” Sound familiar Martin Winterkorn?
Imagine what Volkswagen – a company with a great brand and engineering excellence – could have achieved if it also committed itself to a more sustainable future for itself and the planet? Or what about just being honest with its customers and stakeholders?
In the business of tomorrow, we can’t underestimate the role of values and purpose as key drivers of sustainable success. We are living in the “shift age”, a term coined by futurist David Houle, where change is the new normal. And in these times, it is not enough simply to be faster, better, cheaper, we also need to think bigger – not just literally, in terms of expansion, but holistically, in terms of purpose.
A strong purpose can act as a compass for business in chaotic times. It can keep us oriented. It can assist leaders to match the need to the possibility, knowing when to commit resources for the right purpose. Without it, we can lose ourselves and run the risk of barrelling forward without ever asking where our path leads.
The issues at stake may sound abstract, but really, purpose is ultimately very concrete. The success of every aspect of business depends on a search for meaning. As Archbishop Thabo Makgoba, who teaches a course on the role of purpose in leadership at the UCT Graduate School of Business, says, “We are all searching for meaning. We are all looking for dignity.” If a product or service does not offer meaning, or does not add to the purpose and dignity of the consumer’s life, and to the lives of the people who are producing it, it will have a limited shelf-life.
Robert Haas, former chairman and CEO of Levi Strauss sums it up with these words: “A company’s values – what it stands for, what its people believe in – are crucial to its competitive success. Indeed, values drive the business.”