Tag Archives: Volkswagen

Why Companies Must Care about How They Achieve Revenue

Search online for the phrases crush your quota and rapid revenue growth, and you’ll get about 4,400 and 49,000 results, respectively. As a society, we not only adore revenue, we covet its fast and furious capture. As my district manager used to say to me, “I don’t care how you make your number, as long as you make it!” His comment reflected the culture that permeated the organization.

I could have taken his comment as license to embark on devious pathways. If he had any concerns, he didn’t share them. He should have. Dishonesty, heavy-handed persuasion, and customer harm are common problems in sales execution. It’s never wrong to discuss them. If you have worked inside a sales organization even a short time, you can probably relate an incident or two.

At my company at the time, sales reps pursued a single objective: make quota. Almost three decades later you’ll still find make quota as a top priority in most sales organizations. For many sales reps, quota shortfalls mean losing your job.  That creates other problems. When you wake up every day with a knife-sharp pink slip suspended above your neck, ethical scruples can interfere with job security. The ethical dissonance salespeople experience over their careers would stun outsiders. You would think that ethical conundrums would be a major topic at sales meetings. But over many years as a sales rep, I logged countless hours in meetings dedicated to “quota-busting tips and tricks”, but I don’t recall a single conversation where ethics, honesty, integrity, or moral conduct were even discussed.

That doesn’t prevent people from pointing the finger at “aggressive, manipulative sales reps” whenever a news story breaks about a company’s systemic deceit. The blame is often misplaced. Unethical business development practices are often a leadership issue that can be traced to the top of the org chart.

Consider the way companies hype their revenue machismo, while sweeping their ethical dirt under the rug. In its 2016 annual report, 21st Century Fox, parent company of Fox News, wrote,

“The Fox News Channel, under new leadership, is stronger than ever, and is on track to have its highest rated year in its 20-year history. There has been some speculation that Fox News’ unique voice and positioning will change. It will not.”

and,

“Selling, general and administrative expenses decreased 3% for fiscal 2016, as compared to fiscal 2015, primarily due to the sale of the DBS businesses and Shine Group partially offset by higher selling, general and administrative expenses at the Cable Network Programming segment.”

VW’s 2014 annual report reported revenue this way:

“The Volkswagen Group continued its successful course in fiscal year 2014, again generating record sales revenue and operating profit in an ongoing difficult market environment . . . The Volkswagen Group generated sales revenue of €202.5 billion in fiscal year 2014, 2.8% higher than in the previous year. The clearly negative exchange rate effects seen in the first half of the year in particular were offset by higher volumes and improvements in the mix. At 80.6% (80.9%), a large majority of sales revenue was recorded outside of Germany.”

At the very moment these self-congratulatory passages were crafted, 21st Century Fox was paying hush money to victims of Bill O’Reilly’s predations, and VW was violating regulations by rolling carbon-spewing vehicles off their assembly lines. That’s a truckload of eeeeeeewwwwwww fluffing up the financial reports for investors. These companies could write a how-to for converting their operational stench into the sweet-smelling perfume of ka-ching. They’re far from alone.

A more transparent 21st Century Fox would have written,

“Revenue and profits were up this year at Fox News due to lower than expected payouts to silence Bill O’Reilly’s sexual harassment victims. Legal costs decreased as well. As a result, SG&A expenses as a percent of revenue achieved its biggest decrease in five years. We expect that trend to continue, despite the obvious risks from Mr. O’Reilly’s unchecked predilections.”

And VW would have shared, “While our vehicle portfolio has achieved dramatic improvements in average mileage, VW has not reduced fleet CO2 emissions. However, the company has developed technology to circumvent environmental standards enforcement worldwide, resulting in unhindered sales, and significantly higher profits than could be achieved with legally-compliant vehicles.”

Fat chance! The excerpted passages are lies by omission. But we’re reminded of the intoxicating power of the word revenue. By itself, revenue commands gravitas and respect. Pad it with punchy words like “Achieve geometric revenue growth . . .” and readers willingly downplay ethical concerns – if they had them in the first place.

Don’t look for a change anytime soon. FASB guidelines don’t require companies to differentiate ethical revenue from unethical. We anoint it with a catchy catch-all: “The Top Line.” Not everyone realizes that some bucks are toxic, though I’m certain that the CFO’s at 21st Century and VW have since shared that epiphany with their successors.

On April 3, 2017, Forbes published an editorial stating that O’Reilly’s job was “safe” at Fox News. The reason? Money. The writer presented what he believed were forceful facts: “The O’Reilly Factor generated $446 million in advertising revenue for the network from 2014 through 2016, according to Kantar Media. Last year, the show brought in an estimated $110.8 million in ad revenue, according to iSpot.tv. That compares to the 2016 of $20.7 million in advertising for MSNBC’s biggest star, Rachel Maddow, who is on an hour later. Fox News makes up about 10% of its parent company 21st Century Fox’s revenue and about 25% of its operating income.” Given this adulation, it’s little wonder that O’Reilly felt unassailable. I’ve seen the same pattern within other organizations. The indiscretions of “top rainmakers” are tolerated – so long as they’re making rain.

Yesterday, the New York Times reported that Douglas Greenberg, among Morgan Stanley’s top 2% of brokers by revenue produced, continued to work at the company, despite four women in Lake Oswego, Oregon reporting that his violent behavior drove them to seek police protection. “For years, Morgan Stanley executives knew about his alleged conduct, according to seven former Morgan Stanley employees.” (Morgan Stanley Knew of a Star’s Alleged Abuse. He Still Works There, New York Times, March 28, 2018).

“’21st Century Fox certainly has an economic incentive to keep Bill O’Reilly on air,’ said Brett Harriss, an analyst at Gabelli & Company, adding that any backlash the company faces from advertisers would be temporary.” Just 16 days after the Forbes column published, Fox fired O’Reilly. Apparently, in his smug surety that revenue is king, Mr. Harriss forgot that preventing a valuable brand from winding up in the dumpster is an important economic issue, too. Poignantly, we should remind ourselves that no matter what, this debate brings no solace to O’Reilley’s victims.

The US Equal Employment Opportunity Commission (EEOC) reported that since 2010, employers have paid $699 million to employees who have alleged they were harassed in the workplace. The report “cited an estimate of settlements and court judgments in 2012 that racked up more than $356 million in costs. These don’t include indirect costs such as lower productivity or higher turnover,” according to reporter Jena McGregor of The Washington Post. The EEOC report didn’t distinguish how much of those fines costs were attributed to top revenue producers, but I’m willing to wager based on this evidence, it was a sizable chunk.

Here’s what “I don’t care how you make your number as long as you make it” looks like when it reaches the headlines:

  • We don’t care if our employees are grievously harmed. (Wells Fargo)
  • We don’t care if innocent people are sickened using our products. (Peanut Corporation of America)
  • We don’t care if our exploding airbags make people die. (Takata)
  • We don’t care if preserving our profit margins endangers the lives of our customers. (GM)
  • We don’t care if our pharmaceutical price hikes make life-saving medications unaffordable (Turing)
  • We don’t care if our customers are harmed in the boarding process. (United Airlines)
  • We don’t care if we deceive our customers. (Trump University)

What’s the remedy?

  1. Care. “I don’t care how you make your number, as long as you make it” should never be a sales mantra.
  2. Stop rewarding executives, marketing professionals, and sales staff exclusively for revenue achievement. Instead, compensate on value delivered. That’s more difficult, but it’s safer.
  3. Stop obsessing over maximizing shareholder value. One reason that many strategic decisions ultimately cause harm. According to Professor Bobby Parmer of the University of Virginia’s Darden Graduate School of Business, “Shareholders don’t own the corporation. Public companies own themselves. Shareholders own a contract called a share. There is no legal reason to put shareholder interests above anyone else. It’s a choice, but not mandated. There is no legal duty to maximize profit. As long as executives aren’t violating the law, the courts won’t interfere with their decision making . . . Across hundreds of studies, there is no evidence that companies that maximize shareholder value are more profitable.”

Would these changes eliminate all harm that corporations create? That’s unlikely. But we need to stop our fawning rhetoric about revenue. We need to redirect our infatuation, and instead honor and reward outcomes that provide more equitable and sustainable outcomes. We will always have good revenue and bad revenue. It’s important that we stop turning a blind eye to the difference.

 

Big Governance Will Thwart the Next Corporate Ethics Disaster

Imagine you are at an airport bar waiting for a long-delayed connecting flight. A villain sidles up to you and offers to buy your next drink. How would you react?

I don’t mean a fictional villain like Norman Bates, Hannibal Lecter, or Nurse Ratched. I mean a real-life corporate scoundrel, dressed for success, jetting his way to Somewhere Important. A Shigehisa Takada, Martin Winterkorn, Ray DeGiorgio, or Michael Pearson.

If identifying white collar villains sends you reaching for the nearest facial recognition app, that’s the point. Unlike popular villains from movies and literature, corporate villains are pretty ordinary. No weird tics, quirks, or evil laughs. Mainly, they’re paunchy and middle-aged. Quintessential bureaucrats, who blend discretely with the polished wood and carpet at the United Club. I can visualize any of these men standing at a conference room lectern, droning about revenue projections, while confidently twirling a laser pointer in a haphazard circle around some inscrutable pie chart. “Questions? No? Well, then – let’s call it a wrap. I’m late for my next meeting.”

Ordinariness partly explains how companies lose their ethical way. Business-as-usual provides a vital smokescreen for unethical shenanigans. The many VW functionaries whose efforts unleashed 11 million CO2-belching vehicles onto the planet’s roadways unwittingly performed this travesty while enduring countless dull operations meetings, prosaic management requests, and bland internal emails. In essence, crafted code words and Euphemisms kept the devious sales machinery humming. Someone should compile a dictionary for 2016. I’ll supply the first entry: “defeat device.”

Still, I’m an optimist. I believe commercial enterprises generally begin life without corruption baked into the strategic plan. So how does corporate deceit begin and become systemic? What makes some organizations fecund for scandals, while others consistently maintain the ethical high road? There are three conditions, but they are not always apparent: High motivation to attain a financial reward, opportunities to cheat, and an individual’s ability rationalize his or her deceit. Elements that Donald Cressey labeled The Fraud Triangle (see Other People’s Money: a Study in the Social Psychology of Embezzlement.)

The first two conditions are near-ubiquitous in the workplace, and I don’t know any human over the age of two incapable of rationalizing a lie. Yet, most employees don’t deliberately drag their companies into scandals. What else? I thought hard about this conundrum, and realized the need to conjure additional reasons. It didn’t take long to find two suspects: unicorns and lack of governance.

Unicorns. In a December, 2015 article, The Creed of Speed, The Economist describes the pressures that Unicorns – startups on steroids – create. “Unicorns can win billion-dollar valuations within a year or two of coming into being. In a few years, they can erode the profits of industries that took many decades to build. Like dorks in awe of the cool kids, the rest of America’s business establishment chastises itself for being too slow.” Yikes! The revenue rug ripped out from under your feet not over years or months, but over crazy-short time frames. As we have learned, “Get creative about driving revenue!” now carries sinister meaning. Around the world right now, Takada automotive airbags, sold with known defects, continue to explode, killing and maiming vehicle occupants.

“If you ask the boss of any big American company what is changing his business, odds are he’ll say speed. Firms are born and die faster, it is widely claimed. Ideas move around the world more quickly. Supply chains bristle to the instant commands of big-data feeds. Customers’ grumbles on Facebook are met with real-time tweaks to products. Some firms are so fast that they can travel into the future: Amazon plans to do ‘anticipatory’ shipping before orders are placed,” according to The Economist. “We are putting a premium on speed,” GE CEO Jeff Immelt wrote in his letter to shareholders. IBM CEO Ginny Rometty, echoed his sentiment. “People ask, ‘Is there a silver bullet?’ The silver bullet, you might say is speed, this idea of speed.”

Revenue flows to the nimble and quick. Slow movers are losers. No doubt that deposed VW CEO Martin Winterkorn would adamantly agree – if anyone sought his opinion. Facing rapid upheaval in the automotive market, Winterkorn and his management team discovered an opportunity to juice sales that was too fantastic to ignore. Instead of investing hundreds of millions of Euros in diesel engine development over a long lead time, they could spend a pittance to modify some closeted software, and sell today’s production sehr schnell. Duh! The ROI numbers in Wolfsburg must have soared off the charts faster than a departing Lufthansa jetliner. At the time, the multi-billion dollar costs of government penalties, class-action lawsuits, and widespread customer backlash didn’t make it onto spreadsheets. Oops. “Cheating? No. It’s Event-Induced-Sensor-Reconfiguration. That’s longish, so for marketing purposes, we’re calling it Clean Diesel.”

Lack of governance. When inmates run the asylum, [stuff] happens. Shortly after news of the scandal broke in 2015, Volkswagen CFO Hans Dieter Poetsch told reporters “We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the line.” Interim Chief Executive Matthias Mueller gave a different spin, saying the investigation had revealed that “information was not shared, it stayed within a small circle of people who were engineers.” Those damn engineers. What do they know about designing systems with integrity? But I like Poetsch’s version, which I’ll rephrase: “No one in authority said, ‘That’s wrong. We will not do that. Period.’” The absence of anyone at VW to stand tough and pull the plug on cheating cost billions of dollars, thousands of jobs, and continues sicken and kill people suffering from respiratory disease. That’s a price no society can afford to pay. And Poetsch’s statement applies not just to VW, but to every high-profile ethics debacle.

Enter, Big Governance. Ethics cases demonstrate that rogue employee behavior presents significant risks for companies. Conduct risk, “the risk that arises as a result of how businesses and employees conduct themselves, particularly in relation to their clients and competitors,” now ranks #2 of the Top 10 largest fears for operational risk practitioners at financial services firms, according to Risk.net, an industry website. That’s ahead of terrorism (#9), IT failure (#8), and regulation (#3). Wow.

When scandals surface, people often ask, “why didn’t anyone speak up?” That’s part of the issue. In many cases, people did speak up. Loudly. But their concerns were crushed. The better question to ask is “why didn’t the company have mechanisms to expose and prevent the problem?” That matter deeply concerns corporate boards across many industries. Governance provides the mechanisms to mitigate ethical risk, by specifying management responsibilities, auditing and oversight, reporting, decision rights and accountability.

Governance doesn’t have to be big, but its rewards almost always are. The purpose of governance is to encourage ethical behavior. Some say that smacks of weak parenting. In today’s get-it-done business environment, encourage seems tepid. But here, it’s the right word. Ensure and guarantee don’t belong. We’re talking about people, not algorithms.

“In most instances, reputational damage is triggered by some other business or operational risks, including risks relating to the quality or safety of the company’s products or services, or illegal, unethical or questionable corporate conduct of which the public was not aware. How boards respond to these risks is critical, particularly with the increased scrutiny being placed on boards by regulators, shareholders and the media,” according to the website of Akin Gump, a law firm.

With governance, boards are the right place to start, but they face knotty challenges. Effective governance must harmonize opposing business demands: ethics, enterprise strategy, business performance goals, regulatory compliance, and the governance mechanisms themselves. That takes time, thick skin, and compromise. Things that are uncommon in the C-Suite – in combination or individually. Governance inevitably requires trade-offs.

Governance oversees decisions consequential to revenue. Decisions that affect a company’s customers, brand or market integrity, competitors, and legal situation. Effective governance requires understanding which objectives oppose one another – e.g. time-to-market versus regulatory compliance, profit margin versus product or service quality, short-term revenue versus long-term customer loyalty – and then to determine how to resolve them. These issues won’t be reconciled overnight. But absent governance, reconciliation gets shoved aside, and the risk of making catastrophic choices skyrockets. Without governance, deviant choices enter the decision space, and roam freely. Except they’re not called deviant, just choices. And sometimes, not even that.

World’s Most Ethical Companies® (WMEC’s). The Ethisphere Institute has developed a rating system to identify and honor companies that excel in: “(1) promoting ethical business standards and practices internally, (2) enabling managers and employees to make good choices, and (3) shaping future industry standards by introducing tomorrow’s best practices today . . . The information collected is not intended to cover all aspects of corporate governance, risk, sustainability, social responsibility, compliance or ethics, but rather it is a comprehensive sampling of definitive criteria of core competencies,” the Ethisphere Institute website states.

Ethisphere’s scoring system considers five factors, and assigns a weight:

Ethics and compliance program 35%
Corporate Citizenship and Responsibility 20%
Culture of Ethics 20%
Governance 15%
Leadership, Innovation, and Reputation 10%

Recently, Ethisphere discovered striking similarities in the ethics practices of the WMEC’s. High percentages of honorees used the following resources:

Code of conduct 95%
Compliance and Ethics Policies 95%
Misconduct reporting system 92%
Communication program 90%
Training curriculum or program 88%
Investigation process 88%
Organizational culture of ethics 82%
Risk assessment process 82%

Most telling, 61% of the WMEC honorees conduct annual reviews of these practices, versus 27% of non-honorees.

Clearly, not every company finds it worthwhile to invest in governance. Objections include:

1. Governance sounds too much like Government.
Rebuttal: none. This is a fair point.

2. Revenue killjoys remind them of the bratty kid who constantly tattled in elementary school.
Rebuttal: For sure. But every tattletale has, at least once, kept a prank from spinning hellishly out of control.

3. Governance can’t be achieved as a one-and-done – it’s ongoing.
Rebuttal: If you adhere to a management-by-magazine approach, this won’t be your thing.

4. There’s no “value add” for customers.
Rebuttal: Ask a VW owner if he or she agrees. “Without that expected fuel efficiency, VW owners of “clean diesel” vehicles will incur lost resale value as high as $5,000 per vehicle. Adding up all the cars affected, that puts the potential loss in the neighborhood of $55 billion.”

Dave Cote, Chairman and CEO of Honeywell, a 2013 WMEC Honoree, said there are three questions he never wants any Honeywell employee to have to face when discussing Honeywell with their family and friends: “Is it true?,” “Did you know?,” and “Have you ever done that?”

Those questions might be the ideal conversational opening for the average-looking person who offered to buy you a drink at the United Club. “Well . . . it’s a long story. But I’ve got time. My flight doesn’t leave for another nine hours . . .”

© Contrary Domino 2013-2016.
Website development by Crisp Point.