People often ask me whether it’s profitable for businesses to worry about ethics?
Whether it is profitable is hard to say. However, it is indisputable that a lack of concern for ethics can have extremely high costs. The recent Volkswagen scandal is a perfect example of how this can happen.
Volkswagen has been ordered to pay 18 billion dollars in fines, in the United States alone, because of its emissions-cheating diesel engines. Without going into a comprehensive analysis of the case, it is evident that this will not be the last fine for Volkswagen. It is a glaring example of what we can call the unethical tax.
The so-called unethical tax encompasses all the costs that result from a lack of ethical oversight or conduct. These costs, which include both fines and payments resulting from class action suits, are often obvious, as in the case of Volkswagen, but they can also be less apparent if one is not aware of them.
Beyond the direct costs associated with litigation and lack of quality, there are also insidious indirect costs that can manifest themselves as increased management costs, employee turnover, and even poor employee’s health. Financial losses can also result from a damaged reputation or a lack of trust in the company. This lack of trust can then makes it difficult to attract and retain the best talent and suppliers, and it leads to costs related to lost opportunities – sales that are foregone because of a damaged reputation. In a few words, the unethical tax represents the cost of unethical practices.
Business leaders who actually act in an ethical manner rather than implementing ethical standards merely for show, contribute directly to reducing their unethical tax.
For the time being, Volkswagen can evaluate the direct costs of the lawsuits against it, but ultimately, it will never know the number of potential clients it has lost, or the number of people who will now abstain from buying its vehicles and choose to purchase from a competitor instead because ethics matter to them.
It will also be difficult for it to evaluate how many employees will choose to leave Volkswagen, how many will be ashamed to work for an unethical company, how many potential employees will not apply for jobs at the company, or how much additional training it will have to provide as a result of the scandal. The final bill for these breaches of ethics, including all the direct and indirect costs, is impossible to calculate. The only thing that can be known with any certainty is that the total sum of Volkswagen’s unethical actions will cost the company billions of dollars and cause irreparable damage to its reputation.
All this in spite of the fact that Volkswagen had signed several environmental agreements, submitted certificates of compliance, affirmed its commitment to the main international emissions standards, and claimed that its diesel vehicles were clean in all of their advertising. Its ethics were all for show.
For years, Volkswagen lied blatantly while maintaining a veneer of high ethical standards.
How can we believe a company that lies shamelessly?
A number of corporate leaders will apologize, while others will be dismissed, and it will appear as though the problem has been dealt with.
Meanwhile, shareholders will be paying millions of dollars in unethical taxes.
So, are ethical business practices profitable? As it turns out, the answer is in the question…
What will Volkswagen’s shareholders do?
A great leader leads by example, not by force.
– Sun Tzu