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The Steep Drop in Volkswagen's Shares Show the Importance of Ethical Business

25/09/2015 11:17 BST | Updated 24/09/2016 10:12 BST

Imagine that two years ago, an international organisation, respected worldwide for the quality and reliability of their product was tipped to "rule the world" by Forbes magazine and become the most "profitable, fascinating and sustainable " in the industry.

Imagine that, just two years later, that very same company should see their share price suddenly nosedive by 19% on a Monday and a further 20% on a Tuesday. Imagine that on the Wednesday their reputation is in tatters and they have set off worldwide industry panic, government investigations and are at the heart of arguably one of the biggest scandals in the industry's history. It becomes clear that something must have gone terribly wrong.

But that is exactly what has happened to German carmaker Volkswagen this week after it emerged that they had fitted 11 million cars with software that duped regulators in to believing that levels of dangerous emissions were lower than they were. The gas emitted, nitrogen oxide, is known to cause an array of environmental and medical issues including smog, respiratory problems and lung disease. In fact, it is thought to cause the premature death of up to 50,000 people in the UK in one year.

As I write, Volkswagen have already announced they will be putting €6.5bn aside to attempt to restore trust with the public and regulators alike. And while recently-resigned US chief executive Michael Horn has admitted they "totally screwed up", it appears there will be a long way to go before they, and the automotive industry, can restore their battered reputation.

The reaction to this scandal only serves to emphasize the vital importance of ethical business practices to the long-term success of an organisation. In our interconnected world of unprecedented levels of data, extended supply chains and increased scrutiny, it is more important than ever for a business to have rigorous ethical standards and processes. In fact, according to our recent report, 93% of the largest companies today have a code of ethics. This begs the question: did Volkswagen have such a code?

Probably, yes, but as can be seen, how that code is put in to practice is a different story. Although there is a general consensus that acting ethically is imperative to business success, more respondents to our research report feeling under pressure to compromise their firm's ethical standards than three years ago. Added on to that is the fact that only 36% of companies collect ethical information that could inform their business strategies. And given the complexity and relative recent interest in the issue, 90% admit to struggling to get any valuable insight from this data.

This is a problem because acting in an unethical manner (whether through a disregard for human rights, inordinately high executive pay, or activities that harm the environment) is damaging to the relationship business has with the society in which it operates.

Corrupt practices deplete national wealth, hinder the development of fair market structures and distort competition. It is a sobering fact that according to the Edelman Trust barometer 2015 , trust with business is at an all-time low. In an era when responsible business means more than just getting a product to market, and customers increasingly engage with organisations they feel act ethically, it is vital that we regain this trust. An organisation that is trusted will succeed in the long-term.

Long-term thinking is vital to this. Those companies that understand that putting short-term commercial interests before issues such as climate change, child labour and misuse of data will suffer huge reputational risks, as well as affect the bottom line.

It is fundamental that organisations create an operating environment that promotes and instills good practice through a combination of processes and behaviours - something which falls firmly on the laps of the leadership team and the board. They must ensure that acting ethically is at the heart of their business strategies and activities, as well as those in their wider value chain, by setting an ethical tone from the top. Having clarity on what is business critical will also help decision makers to prioritise where to direct their attention.

Businesses that use and analyse ethical data by incorporating it in to their strategic planning processes will be able to preempt risks and even enable innovation. The adoption of integrated reporting, the process through which all drivers of value are reported on and analysed, will also help to add transparency to an organisation.

Management accountants, with their role as business partners, are ideally equipped to navigate this arena, providing the relevant insight to manage the risks as well as innovations that come with ethical scenarios.

And while the Volkswagen story unfolds before our eyes, seemingly with no end in sight, it serves as a timely reminder: ignore acting ethically at your own peril.