The CSR Commitment Pyramid - A Refresher for the Folks at VW

September 23, 2015

I drew up the CSR Commitment Pyramid a few years ago in trying to give order to the ideas expressed in a Harvard Business Review article by Michael Porter and Mark R. Kramer. The revelations around Volkswagen's emissions fiasco felt like a good impetus for a refresher.

Here's a quick overview of the model.

Level 1: License to Operate – This is table stakes. It's the answer to the question: "What are the bare minimum requirements necessary for a firm to not get run out-of-town on a rail by the local community?" Firms working at this level are attempting to stay one step ahead of issues which would force them to close their doors.

Level 2: Reputation – This takes the further step of working to protect the firm’s reputation. Making choices like using dolphin safe nets for tuna fishing may not make an operation sustainable, but a good reputation can help minimize the damage when issues crop up.

Level 3: Sustainability – This, along with related financial needs, is where those of us looking to transform business typically focus. We work to find ways to reduce our impacts and restore benefits, while at least maintaining (preferably improving) profitability through these programs.

Level 4: Moral Obligation - These are things that businesses aren't required to do, but which its leaders think it ought to be doing. Few companies choose to operate at this level, but those who do are highly respected and they are believed to command loyalty premiums due to their efforts. An example here would be a firm going beyond regulatory requirements, regardless of the direct financial impacts, to make sure that their environmental impacts are fully mitigated.

I'd love to write more stories about firms that are climbing the pyramid, but the examples of such are still too few. Instead, we keep learning about firms that are trying to move down to Level 0: No Longer a Going Concern. Volkswagen is the latest contestant in this game of reverse limbo. (Queue the Chubby Checker song...)

Prof Henry Mintzberg gets at the heart of matters, which is far broader than VW.

In Europe, the U.S., Japan, and most everywhere else, something is going on. There is a level of sheer corruption that transcends the automobile industry. How about banking in the U.S. and Europe? How about politics, most everywhere? Now Brazil is receiving a lot of attention, while the utter corruption of U.S. politics—private money in public elections, a level of lobbying out of control—carries merrily along.

But VW is the impetus for this post, so we'll set the broader issues aside for now. The initial response from VW's CEO on 9/20 included the following statement:

We do not and will not tolerate violations of any kind of our internal rules or of the law.

-Prof. Dr. Martin Winterkorn, CEO of Volkswagen AG

Then there was a generic statement that was released on 9/22:

Volkswagen is working at full speed to clarify irregularities concerning a particular software used in diesel engines.

At this point in the proceedings I was ready to write off the venerable auto maker. They'd been caught with their hands in the cookie jar and it appeared their response would be internal finger-pointing fingers and/or downplaying the problem.

When you're in this sort of situation, leadership needs to take responsibility. And they need to be open and honest to begin regaining credibility. Fortunately for VW, Dr. Winterkorn stepped up to that challenge today.

I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group.

As CEO I accept responsibility for the irregularities that have been found in diesel engines and have therefore requested the Supervisory Board to agree on terminating my function as CEO of the Volkswagen Group. I am doing this in the interests of the company even though I am not aware of any wrong doing on my part.

Volkswagen needs a fresh start – also in terms of personnel. I am clearing the way for this fresh start with my resignation.

By taking the fall, Dr, Winterkorn may have saved the firm. We'll see what's revealed over the coming weeks and months, but this move gives the firm a chance to stop the bleeding on the stock price.

But here's the thing, firms that align themselves around climbing the pyramid are a lot less likely to have to deal with these "life or death" situations. Tech created to circumvent regulations is unlikely to be deployed in a firm where fair play and higher aspirations came before profits. That may seem a tall order, but ask VW shareholders how they feel about the firm's near death experience and whether they'd like to see them aim a bit higher. (I know what I'd recommend.)