Volkswagen is closing in on a final settlement slated for June 21st to offer buybacks or repairs to nearly half a million owners of polluting Volkswagen diesel cars that were sold in the U.S. Nine months ago the shocking news broke that Volkswagen had been installing illegal software in their diesel cars since 2005 to cheat on nitrous oxide emissions tests. It is time to take stock, not only of the 11 million Volkswagen cars on the road worldwide now rigged to emit up to 40 times the U.S. legal level of nitrous oxides, but also of the fatal flaws in the company’s decision-making apparatus.
Scandals like the one at Volkswagen are not the product of erroneous decision-making on the part of a few corporate villains. Volkswagen had all the conditions in place that led up to their engineers’ initial decision to start cheating in 2005 and the subsequent decisions to keep cheating year after year until they were caught ten years later.
- Volkswagen had highly centralized top-down leadership that didn’t take no for an answer and gave generous bonus incentives for financial performance results.
- A nearly impossible challenge was issued to diesel automobile makers in 2004 when the United States EPA (Environmental Protection Agency) reduced the amount of nitrogen oxides it allowed cars to emit by more than 94%.
- By reducing emissions during testing and allowing greater emissions while driving, Volkswagen cars increase their fuel efficiency, since it burns fuel to decrease emissions.
- The cheating software that Volkswagen installed was coded by a third party and buried under the 100 million of lines of code used to program a single vehicle, which made it unlikely to be found.
The thing that propelled Volkswagen engineers to cheat was the pressure to deliver on the impossible challenge of meeting competitive profit targets while meeting drastically reduced emissions standards, and what kept them going was the belief that they would not get caught. Perhaps they rationalized that the increased fuel efficiency from the cheating software was worth the trade-off.
The Volkswagen scandal reflects an epic dilemma that the private sector faces to deliver enormous profits and growth, while reducing negative effects on people’s lives and the environment. But collective lapses in judgment like that of Volkswagen surface the flawed assumption that the pursuit of short-term profit is the hallmark of rational business decision-making.
Behavioral science has repeatedly debunked the myth of the rational economic actor, a person who makes decisions solely to maximize his or her self-interest, but who does not in fact exist. Business leaders, at Volkswagen and beyond, need to update their decision-making tools and frameworks to incorporate the glorious and terrifying human propensity to be swept up by fear, passion, and even deep caring in the workplace.
We still mostly measure value in the corporate world in terms of monetary value, without unpacking the human emotions and personal values that are implied or muted in the process. A business decision, whether it’s made in favor of a short-term profit motive or the lasting value of people’s lives or the earth’s climate, is always a values-based decision.
As a thought experiment, consider:
- What if Dupont Chemical had decided to risk a billion dollars a year of profit by replacing the PFOA (perfluorooctanoic acid) used in many of their products with safer alternatives in 1993 when their scientists concluded the PFOA causes birth defects, cancer, and death?
- What if General Motors had started recalling their cars when they first discovered a faulty ignition switch in 2005 that can cause fatal car crashes?
- What if ExxonMobil had decided to invest in the renewable energy sector when their scientists concluded in 1981 that climate change was real and was largely caused by burning fossil fuels, like oil and coal?
If any one of these business decisions had been tipped in favor of people’s lives and the environment, perhaps Volkswagen would have made a different choice in 2005. But each of these flawed decision processes occurred over time with numerous critical inflection points, where profit trumped the value of people’s lives or the earth’s climate. Over time, the cumulative outcomes of such decision processes have reached mind-boggling proportions, such that we can look back and see that none of these decisions make sense.
Until we come to terms with the human emotions and personal values often underlying the profit-motive, which are not always rational, we will continue to be shocked when the pressure to perform runs amok in the workplace and breaks the news with another big corporate scandal. It is time to update our business decision-making tools and frameworks to support leaders to care enough about people’s lives and the earth’s climate to put them first in every decision.
Leaders and investors can start by putting as much stock, if not more, in protecting people’s lives and the environment, as they do in profit and growth. They need to incent their teams for being transparent about their decision assumptions, openly considering all the alternatives when faced with tough trade-offs like Volkswagen was, and extending the horizon for creating business value by at least ten years. Think about where Volkswagen leaders would be today if they had done so.
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