Integrity key to driving VW forward again
Jeremy Stewart is head of wealth management and private banking at Danske Bank
It is impossible to put an exact price on the value of integrity in business. Over the last few years, a number of events, particularly in pharmaceutical, investment banking, financial services and now car manufacturing companies, have demonstrated that investors need to have strategies in place to deal with such occurrences.
In valuing a business, investors need to be able to rely on a firm being honest, open and transparent. Volkswagen is turning into another salutary lesson of what can happen when it is shown that trust has been misplaced.
Diversification was a topic I covered last week in relation to market segments and geographies.
It is also a key way to mitigate a risk that the Volkswagen saga has highlighted. In the jargon of the investment world, this sort of risk is described as 'specific' risk.
An industry may be particularly attractive and within that industry, one company may stand out. However, where possible, it is usually best to spread the risk, even within a sector, so that the impact of unforeseen events, ranging from oil spills to manufacturing defects, or indeed outright deceit, does not have a disproportionate impact on a portfolio of investments.
The Volkswagen story still has some way to run, but what is emerging makes for some very uncomfortable reading for shareholders. It seems that a very narrow focus on maximising profits resulted in returns that were anything but maximised. There was more evidence of short term fear and greed than of long term balance and moderation leading to sustainable profit.
There were early warning signs. MSCI, a leading research-based provider of indices and analytics, had said that the VW corporate governance score placed it at the lower end of global company rankings. What is also surprising, is that in 2013, the European Commission had already highlighted that technology existed that could potentially be used to circumvent emissions testing.
Malice aforethought is perhaps more often associated with other crimes, but is probably a fair description of the degree of calculated premeditation involved in deploying the emission defeat devices. While it may not be possible to put an exact price on the value of integrity, some of the potential costs of a lack of it are emerging. In one week the value of VW dropped by more than £14bn. The Environmental Protection Agency may not fine VW the maximum of around £12bn, but any fine is likely to be significant - Volkswagen itself has set aside close to £5bn to cover the costs. This does not take account of further legal and regulatory action.
Integrity, at one level, is about personal values.
At a collective level in business, it is also about good corporate governance. More investors are beginning to demand evidence companies take corporate governance very seriously.
This is now set to increase further and is really good news for those firms that work hard to maintain a strong ethical culture.
That culture will be seen as adding significant shareholder value, in addition to providing benefits to all stakeholders in society.