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The value of core values

May 2017  |  SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD

Financier Worldwide Magazine

May 2017 Issue

May 2017 Issue


In January 2017, the US Environmental Protection Agency (EPA) reached the third of three partial settlements with Volkswagen AG, Audi AG, Dr. Ing. h.c. F. Porsche AG, Volkswagen Group of America, Inc., Volkswagen Group of America Chattanooga Operations, LLC, and Porsche Cars North America, Inc. (collectively Volkswagen).

Through this series of three partial settlements, the EPA completed a civil enforcement case, subject to their reservations, that resolves the allegations that Volkswagen violated the Clean Air Act (CAA) through the sale of approximately 590,000 model year 2009 to 2016 diesel motor vehicles equipped with ‘defeat devices’.

Under the third partial settlement, Volkswagen agreed to pay a $1.45bn civil penalty for the alleged civil violations of the Clean Air Act. $1.45bn is only a portion of the financial cost to Volkswagen, however, the partial settlement also requires Volkswagen to invest $2bn in zero emission vehicles (ZEV), charging infrastructure and in the promotion of ZEVs.

Added to the fines and settlements are the costs of the recall, public relations expenses to clean up the stain on the Volkswagen brand and the impact of lost sales to the company’s bottom line. You might say that the consequences were astronomical. Volkswagen AG’s net income fell from $10.85bn in 2014, to a $1.58bn loss in 2015 and only recovered to $5.14bn in 2016.

A failure in honouring core values

Interestingly, VW International, Inc. claims that it “is guided by a specific set of fundamental values. Each of these shapes the culture and defines the true character of our company and of our people”.

In addition to safety, people, respect, service, diversity, excellence, teamwork and professionalism, their values include: “Integrity: our everyday actions are based upon an internally-consistent framework of principles and values. We understand that integrity is more than just a word…it is a daily practice. Trust: trust is a relationship of reliance. Our employees, our clients and their clients rely on us to comply with all policies, laws and ethical/professional codes in the performance of our work; and we consistently honour that reliance”.

Each of Volkswagen’s stated core values are honourable. Unfortunately, they were not honoured.

We can only wonder where the break between stated values and honoured values occurred, but it is likely that it was not intentional. It is absurd to think that the board of directors approved a resolution that said “Ignore the plaques on the walls in our conference rooms and the page on our website dedicated to our core values. Do not be fooled by our claims of integrity. We are just kidding when we say that we are a company that is defined by these values”.

More profits v. moral fibre

Most likely, this catastrophic hit to Volkswagen’s reputation was due to unintentional consequences of market pressures to meet productivity goals. These are the same pressures faced by every business, and lead many to believe that living according to core values is not profitable. Many executives have the mistaken notion that core values and profitability are mutually exclusive. However, Volkswagen, Wells Fargo, Mylan and others, offer evidence that not upholding the company’s core values is extraordinarily unprofitable. And these examples are just the tip of the iceberg.

The cost of failure

Every day, companies are suffering from expensive, time-consuming and energy-draining problems with customers, employees and vendors that result from a lack of attention to honouring their core values. These issues may not get them in trouble with the law, but they are costly nonetheless.

By some estimates, it costs five times as much to attract a new customer as it does to retain an existing one. Companies with high employee turnover are at a competitive disadvantage because it is estimated that replacing an employee costs, on average, one to three times the annual salary of the employee. Even worse, disgruntled or disengaged employees that remain on the payroll can curtail productivity, damage morale and create personnel problems that consume management’s time and energy.

A return on investment

On the other hand, honouring core values increases trust, trust increases loyalty and loyalty is good for business. Over the years, Fortune’s research and consulting firm, Great Place to Work, and many other scholars have consistently found that the workplaces that score high on metrics of trustworthiness also finish first in profitability, revenue growth, stock performance and other key business metrics. A hypothetical portfolio of publicly-traded companies on the Fortune 100 ‘best companies to work for’ list substantially outperformed the market overall for the period of 1998-2016 by providing almost three times the return.

This leads us to the deeper issue, and one that confounds boards, executive teams and leaders at all levels of organisations, and that is the notion that honouring core values is not possible. This belief – that creating a culture focused on a company’s core values is not possible – is by far the greatest obstacle companies will face because it keeps leaders from even trying.

The philosopher Francis Bacon said: “Things alter for the worse spontaneously, if they be not altered for the better designedly”. It is a lack of trying that leads to the demise of values-centered cultures.

A winning culture takes intentional effort to cultivate, while a toxic culture is the result of neglect. Just like weeds will flourish in a garden and choke out the plants around them, a toxic company culture flourishes when values are neglected.

Setting the tone at the top

The board of directors’ leadership is essential to create a winning culture, lest they be the source of performance-based pressure that leads the company astray. The board plays an integral role in setting the tone for how results are to be achieved, and not just the results themselves. By embracing the following five principles, the board can ensure the company’s success through values-centred leadership.

First, owning the values. The degree of success or failure of the organisational unit hinges on whether the values of the leadership are aligned with those of the organisation. The board is the rudder of the organisation. If you have a weak board, you are going to have a weak organisation. However, because many companies recruit board members primarily based on their positions in business or the community, they offer limited, if any, accountability to core values. For a board to provide truly meaningful accountability, its members must be committed to the core values of the organisation. Otherwise, conflicts and poor decisions will arise as the leaders of the organisation try to live according to values the board does not understand or share.

Second, define core values. It is essential to give meaning to the company’s values by creating clear definitions so everyone concerned understands what behaviours they advocate and forbid. When the board has clearly defined the company’s core values, decision making is efficient and straightforward. That does not mean that every decision is easy, but it does mean that most decisions, even the most difficult ones, are clear.

Third, communicate core values. Any good marketing executive knows that repetition increases impact. The same is true when communicating the company’s most important message – its core values. The board is responsible for communicating core values constantly and consistently so that everyone on the leadership team understands and owns them.

However, it does not stop there. Successful leaders also model core values. Words unsupported by actions are hollow. Core values must be modelled as well as spoken. Therefore, each decision taken by the board should uphold the organisation’s values.

Fourth, institutionalise core values. The best definitions and the best intentions will not be upheld if the systems, policies and procedures do not align with the company’s core values. If the values are not integrated into the company’s operations, if they are not institutionalised, they will have little sustained impact. Hiring, performance planning, performance appraisal and reward and recognition practices that only consider talent and productivity will lead to failures, such as those seen at Volkswagen, Wells Fargo, Mylan and others. On the other hand, when people are supported by structure, they are able to achieve greater results.

Finally, honour core values. A company’s mission statement and core values should be more than mere words. They are the non-negotiable standards for guiding and measuring every action, decision and expenditure. Everyone associated with the organisation should be held accountable to them. Without accountability, human nature is prone to the pressures that can lead an individual astray.

For this reason, the board should ensure that internal and external evaluations are integrated into the company’s operations to ensure that its core values are honoured. A formal accountability review of adherence to core values should be incorporated into the responsibilities of the board, in the same way that the board oversees internal and external auditors to confirm compliance with generally accepted accounting principles.

A winning culture starts with a belief that commitment to the company’s core values is both profitable and possible. This commitment begins with the board and must be shared by each person, from the chief executive, to the customer service representative, to the custodian. Although honouring core values promotes business success – and the definition of business success includes profitability – organisations that benefit most from living their core values tend to define success in light of their values. They are working for rewards that are substantially greater than profitability alone. They have grown to appreciate that the greatest value of their core values is ultimately in the values themselves.

 

Lisa Huetteman is the managing partner at Black Diamond Associates. She can be contacted on +1 (813) 785 9768 or by email: lisa@the-black-diamond.com.

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