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#VWGate – why investors need better due diligence

By 22nd October 2015 Blog No Comments
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#VWGate provides the perfect illustration of why investors need an improved approach to due diligence.  

 

Volkswagen, for years portrayed as a paragon of ethical business, and a CSR and sustainability exemplar to the world, is now battling to salvage its reputation after US officials discovered its cars were cheating emissions tests.

The company has admitted that it deliberately fitted its cars with software that would produce lower emissions under test conditions.

Since the news emerged, VW’s chief executive has gone and it could be facing fines in the US of around $18bn.

Of most concern to investors will be the fact that VW lost over a third of its stock market value in just under two weeks after news of the cheat device emerged, with many potentially now nursing big losses.

It’s not the first time a well-respected company, known for being a ‘good corporate citizen’, has seen its share price fall off a cliff taking investors and pension savers with it.  Take Enron, for instance.  Before it collapsed into bankruptcy in 2001, its giving to good causes was legendary: it had paid for a new baseball park in Houston where it was headquartered, donated generously to local art galleries, and made annual donations of $10m to the United Way charities.

A new way?

The Financial Times carried a piece recently entitled ‘VW Investors Ignored Corporate Governance Warning’ which quoted Jeroen Bos, head of equity research at a Dutch fund house, as saying that the emissions scandal provides a “clear example of the importance of integrating ESG (environmental, social and governance) factors in the investment process.”

He is also reported to have said that the episode demonstrates that ESG factors can have a material impact not only on a company’s share price and near-term financials, but also on its longer-term reputation and business success.

So, is a new way of evaluating stocks for investment needed in order to better protect investors and their funds?  Do companies engaging in M&A activity also need to add to their due diligence toolkit?  Could Private Equity companies benefit from a way to further reduce their exposure to risk?  And, if so, what might it look like?

Whatever it is, it’s going to need to take a deeper look at company culture, particularly by probing employees at all levels in the organisation to check that sustainability / CSR / ESG is genuinely embedded and not some sort of artificial construct designed to appeal to customers, investors and the media.

Our unique maturity model, that assesses sustainability and resilience performance across 30 separate measures (including reputation management), rating performance in each area as either Beginning, Improving, Succeeding or Leading, could prove invaluable.  Part of the evaluation process involves interviewing staff at various organisational levels in order to understand how culturally embedded that performance is.

Those making investment decisions need to deploy something like this in order to avoid catching a cold with investments that tank after an otherwise environmentally and socially responsible-looking business follows the VW path.

Repeat, repeat, repeat

The problem is that companies – and, to some extent their cultures – can change over time, especially with new management at the helm.  A new political landscape can also trigger change.

Which means that it’s important to check up periodically, and to ensure that all those CSR awards and charitable giving plaudits aren’t masking a shift in behaviour that could one day cause the company to implode with its reputation in tatters and its value slashed.

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