Volkswagen and Toyota were both launched in the 1930s to produce affordable automobiles for the people of Germany and Japan, respectively. Volkswagen even labeled itself as “the people’s car” — a slogan that became linked with its purpose.
Both companies were enormously successful after World War II, growing to become real global businesses. Toyota became the world’s largest auto manufacturer in 2006. The next year, Volkswagen set the same goal for itself within ten years.
The Board must approve any such goal, and such was the case with VW. The company achieved its goal by 2015, three years ahead of schedule. It did so by promising vehicles with dramatically reduced emissions, which appealed to environmentally-concerned consumers.
That proved to be a lie, however. After reaching its goal, VW came under scrutiny for irregularities in its engines and admitted that it programmed the system to produce better emissions numbers under inspection than regular operations.
The scandal cost the company billions. The CEO and Chairman of the Board, Martin Winterkorn, came under criminal indictment and resigned. He claimed no knowledge of the rigging of VW engines.
Purpose and Innovation
Let’s give Mr. Winterkorn the benefit of the doubt while holding him accountable for something else — allowing his company to pursue growth while losing sight of its purpose.
In my purpose-innovation chart, VW and Toyota compete in quadrant 3, where they fight in an established market with innovations that improve processes. Many companies mistakenly view this as a dogfight in which the ends justify the means. The best companies, however, rely on purpose to drive their innovations and achieve success. That purpose is always associated with improving the world in some aspects.
Toyota’s purpose is to “lead the future mobility society, enriching lives around the world with the safest and most responsible ways of moving people. Through our commitment to quality, ceaseless innovation, and respect for the planet, we strive to exceed expectations and be rewarded with a smile.”
Toyota captures that in a visual:
It makes that purpose real through a variety of strategies. To create a future mobility society, Toyota is investing in new forms of transportation and connecting technologies. It believes it’s enriching lives through jobs and a sense of shared purpose. It has a focus on safety for customers and employees. It is also well-known for quality and constant innovation. And it claims to have respect for environmentalism by promoting eco-friendly products and processes.
If “purpose” is the essence or soul of a company, then “impact” measures its actions. In this sense, purpose is the theory, and impact is reality.
Traditionally, companies assess performance by measuring against Key Performance Indicators (KPIs) like market share, revenue, operating income, return on assets, and others.
Economists are increasingly looking at “impact-weighted accounting” to assess a company’s performance by examining the trail or trace that the company leaves in the world. Such practice includes the upstream path, i.e., the sourcing of raw materials and production of essential parts; and also the downstream trail, such as the primary production, employee welfare, diversity and inclusion, distribution, and use of the product, and even what happens to the product post usage (waste, consumer satisfaction, and the like)
For example, a car requires raw materials and parts like circuit boards and tires upstream. It must be manufactured and distributed for sale downstream. And the ultimate impact can also be measured by how that car is used and disposed of.
Impact considerations can lead to a very challenging audit and valuation of a company and raise serious questions. For example, when the environmental impact of Lufthansa and American Airlines are factored in, it can be reckoned that both companies’ real or net outlook and profits would be doubted.
Serafeim and Trihn from HBS suggest in their fascinating paper “A Framework for Product Impact-Weighted Accounts” a framework for assessing a holistic product impact view.
Following those principles, the total performance of VW and Toyota can look like this:
Such an audit can help assess whether a company is truly living up to its purpose or whether it is fooling itself.
Is that examination easy? No. It requires transparency, data, standardization, global frameworks, and governing bodies. Beyond all else, however, it requires will.
The Role of the Board
A company cannot follow a purpose-driven approach to the business unless that commitment starts at the top with the CEO and the Board.
Working with the C-Team, the Board must first discover and articulate a company’s purpose that ties impact on the world with growth and innovation. It then establishes clear and consistent measurement criteria for assessing performance based on that purpose. Such measures will include:
- methodologies that enable the assessment,
- targets that must be reached,
- periodic reviews to determine whether the company is on track, and
- accountability for executives, division heads, etc. for meeting those goals.
While this is more complex and multi-faceted work than Boards have done in the past, it also reflects a new reality. Companies are no longer in business to generate profit and shareholder value only. Increasingly, the purpose-driven impact is the measure by which customers and stakeholders evaluate success and worth.
Many companies learn this the hard way. For example, VW quite recently changed its purpose to become environmentally friendly. It is now in business to develop vehicles that achieve zero emissions by 2050.
Will it live up to this purpose? The Board once claimed it was not aware of how the company was achieving its goals. It can no longer turn a blind eye. It must develop a rigorous approach to assessing that progress or risk another potential cataclysm.
The Boards at other companies should heed such cautionary tales and equip their companies to pursue purpose — the source of real and lasting impact and growth.