In April 2017, Volkswagen Group was fined $2.8 billion for “rigging diesel-powered vehicles to cheat on government emissions tests.” In what became known as ‘Dieselgate,’ it was discovered that Volkswagen had deliberately programmed the emission controls of diesel engines to activate only during tests, to hide that in real-world driving, their cars actually emitted up to 40 times more nitrogen oxide (NOx). In its various forms, NOx contributes to smog, acid rain, ozone layer degradation, and global warming.
Five years earlier, in December 2012, HSBC was fined $1.9 billion for laundering $881 million worth of drug money for international cartels. The large multinational bank had failed to adequately monitor wire transfers and had ignored warning signs that Mexican drug cartels were using HSBC services to whitewash money — even though already in 2003 the bank had been ordered to “strengthen its anti-money laundering controls.”
Business as usual
What do these examples have in common? Both companies were able to shrug off these fines, small compared to their total revenue, and continue their ‘business as usual’.
The $2.8 billion fine didn’t keep Volkswagen from earning $11.6 billion in 2017. And even though by June 2020, the emissions scandal had cost Volkswagen Group $33.3 billion in fines, settlements, and buyback costs, the company still made a total net profit of $50.5 billion between 2015 and 2020. As late CEO Matthias Müller wrote in 2015, “I am firmly convinced that, with time, we will be able to say: no matter how grave the crisis was, it also opened doors for us.” He was right: lying about your destructive impact on the planet is clearly forgivable as long as shareholders are kept satisfied with solid financial results.
Similarly, HSBC Holdings earned a net profit of $15.3 billion in 2012 regardless of the $1.9 billion fine. Even worse, leaked documents from the US Treasury’s Financial Crimes Network (FinCEN) showed that HSBC simply continued its money laundering practices in the years after. This surprises nobody. As Linda A. Lacewell, the superintendent of the New York State Department of Financial Services, wrote: “Money laundering becomes a source of profits and bank fines become a cost of doing business; when the profits exceed the fines, the business choice is easily corrupted.”
This highlights a crucial weakness of punishing companies’ societal and environmental misconduct through financial consequences: if the unsustainable, harmful business practice is financially profitable enough, it can offset the risk and costs of fines. The size of the fine is irrelevant: the bigger the company, the greater the potential harm, the easier it is to shrug off fines and avoid taking real responsibility. Any harm to company reputation can then be easily smoothed over with PR, social marketing, and one-off social initiatives. (Case in point: the only reported annual loss of Volkswagen Group was in 2015 when the world learned about the company’s emission cheating, and its stock price fell by almost 40%. HSBC Holdings never made a loss.)
In Finance we Trust
Most companies practice what Simon Dresner calls weak sustainability. Yes, the company may consider financial capital (money) at the same time as human capital (knowledge, health, communities) and natural capital (land, air, animals, plants, resources). And yes, it may consider the value of all stakeholders. But, financial capital can still offset the other capitals. Any harm done to local communities or natural resources can be compensated financially as long as the overall ‘triple bottom line’ is money positive.
Indeed, a 2019 review showed that even though companies may use key performance indicators (KPIs) to measure their sustainability goals across three dimensions — environmental, social, financial — some indicators are more equal than others. Environmental and social KPIs need to be “measured by the economical dimension”: they need to be expressed in money to understand their impact on the company’s profits.
This makes total sense. After all, the only true existential threat to a company is bankruptcy. A firm ceases to exist only if it can no longer meet its financial obligations. As a result, every business activity needs to be assessed in terms of money.
But as long as every business activity needs to make sense financially, there’s no real incentive for companies to embrace corporate social responsibility (CSR) as something more than a ‘side-activity.’ The focus remains on maximising shareholder value — the core characteristic of capitalism — and minimising financial costs. As CSR activities (volunteering, charity, etc.) do not directly increase shareholder value, they are considered costs, which of course, motivates a company to take the minimum necessary responsibility to guarantee revenue growth. Doing otherwise is just bad business; it would risk the company’s continued existence.
The above is true even for B Corporations, social businesses, and purpose-driven start-ups. Even though social and environmental responsibility is a core part of these companies’ business models and operations, there will always be the temptation, the pressure, the necessity to value every activity financially. Because even with their genuine intentions, ultimately, the only thing that will keep responsible companies in business is to meet financial obligations.
What needs to happen to make companies consider strong sustainability, in which different capitals are considered separately and can’t be offset with money? What will drive companies to maximise environmental and social value?
The answer is surprisingly simple: companies need to have a non-financial existential threat. I refer to this concept as “worldruptcy”: if a firm fails to meet its social and/or environmental obligations (its responsibility to the world), it can be disbanded legally. Essentially, faced with the threat of worldruptcy, companies need to make absolutely sure they comply with humanitarian and environmental laws. Not because otherwise their cash will run out, but because otherwise, a court will order that shareholders and executives must be replaced or that the company must be disbanded completely.
The threat of worldruptcy would be a powerful incentive to pursue social and environmental value throughout the entire company hierarchy. The risk of replacement would unite shareholders to put pressure on the firm to reduce carbon emissions, remove pollution, or break with modern slavers. Investors would think thrice before investing in a non-responsible company, given the risk of losing their entire investment by court order.
The possibility of losing the business by neglecting responsibility would drive executives to set a genuine company purpose and integrate CSR in every business activity and sales offering. No business model would be viable unless it’s circular and considers the company’s role in society and the ecosystem. Directors would be forced to consider all capitals in their strategy and create truly long-term roadmaps in order to guarantee the company’s survival.
To execute the responsible strategy, managers would set sustainable objectives on every level of the company and motivate employees to reach their targets. Incentives for money laundering at HSBC would disappear. Environmental and social KPIs, freed from the need to be expressed financially, would be used to measure harmful effects that could lead to worldruptcy. Cheating on emissions would be too risky even for Volkswagen. Every non-monetary aspect of a company’s supply chain would be monitored with an accountant’s tenacity.
After all, doing otherwise is just bad business; it would risk the company’s continued existence.
Brave New System
Non-monetary punishment is, of course, nothing new. Breaking environmental law may lead to community service, having to publicly admit the offence, having to stop the offence reoccurring, and, in the most severe cases, imprisonment. We’ve all heard of misbehaved executives that are sent to jail for a couple of months.
However, systems thinking tells us that “a system generally goes on being itself, changing slowly if at all, even with complete substitutions of its elements — as long as its interconnections and purposes remain intact.” In other words, replacing or putting away a single executive at a time won’t change the direction of an organisation that’s incentivised to pursue profits, no matter the costs. And while the threat of imprisonment may be an effective deterrent for an individual, social and environmental impact (and fines) are rarely directly linked to individual actions. Clearly, we need a more systematic approach.
That’s where international law comes in. Courts across nations will need to create punishments for breaking humanitarian and environmental laws that result in companies’ disbanding or replacing shareholders. (If that sounds extreme, remember that we currently accept the same punishment for companies that run out of cash.) International collaboration is crucial: if a single country adopts worldruptcy laws, companies’ reflex response will be to move their headquarters, subsidiaries, or operations to other nations to avoid those laws (like they do now for tax reasons). The progressive country, in its desire to do good, would lose jobs and business. Yet if international bodies such as the European Union, Africa’s INECE, and Asia’s AECEN agreed on the general legislation and created an international body to enforce, oversee and implement worldruptcy, companies would find fewer spots to hide from their responsibilities. Individual nations would be able to implement worldruptcy without fear of economic penalties.
This kind of international agreement is not an idealist’s fantasy. For example, the European Union has adopted the so-called EU 2014–95 Directive, which requires large companies to report on certain non-financial measures. Another example is the ongoing work towards the legal definition and consequences of ecocide, the “devastation and destruction of the environment to the detriment of life.” Of course, regulations, customs, and values vary across the world, so naturally, the details of worldruptcy laws will differ per country. Some will be more lenient, some more strict. But the general principle should apply to all: non-monetary, ‘business fatal’ consequences for companies that commit crimes to society and the environment.
Would all of this result in a fragile economy, in which many companies need to declare worldruptcy? Unlikely. There would probably be a transition phase in which many harmful companies will go out of business, yet this creates room for B Corporations and social businesses to thrive and provide many new, meaningful job opportunities. And let’s not lose faith in the adaptability of business: a new existential threat would inspire entire organisations to readjust their objectives and processes. There’s no reason to expect HSBC would be any less ingenious in avoiding worldruptcy as they are now in avoiding bankruptcy. “Innovate or die” goes the worshipped mantra.
A new definition of success
Our humanist society values freedom and democracy, yet we readily accept the dominance of Finance. This contradiction is a modern example of what George Orwell named “doublethink” in 1984 — accepting two mutually contradictory beliefs as correct at the same time. Luckily, the age of Big Brother has not come to pass, which means we have the freedom to resist this contradiction. We don’t have to accept that large companies can financially offset their harmful practices.
As a citizen, you can influence the political debate in international bodies by voting the right people in. As a politician, you can use your power to set the right minimum standards for firms. As a law professional, you can extend existing environmental laws by introducing non-monetary punishments that put the fear of worldruptcy in companies. As an economist, you can become agnostic about growth and realise that the economy happens between a social foundation and an ecological ceiling — which are both not countable with money. As a manager, you can set non-monetary targets for each project, product, or service you’re involved in — and aim for profit sufficiency instead of profit maximisation. And as a business owner, you can make yourself publicly accountable for your company’s societal and environmental impact.
Ultimately, it all comes down to redefining what success means for business. The current definition says: a company is successful as long as it meets its obligations to the bank. Everything else — individuals, communities, environment, natural resources, fines — are just factors to consider in the quest to maintain and grow financial objectives. As economist Ernst Friedrich Schumacher already noted in 1973:
“The strength of the idea of the private enterprise lies in its terrifying simplicity. It suggests that the totality of life can be reduced to one aspect — profits. The businessman, as a private individual, may still be interested in other aspects of life — perhaps even in goodness, truth and beauty — but as a businessman he concerns himself only with profits … Everything becomes crystal clear after you have reduced reality to one — one only — of its thousand aspects. You know what to do — whatever produces profits; you know what to avoid — whatever reduces them or makes a loss.”
We have to break this harmful paradigm that’s so empty of creativity and beauty. A firm should only be considered a success if it meets its obligations to both the bank and the world — and one cannot compensate for the other. Under this definition, companies like Volkswagen and HSBC, although performing well financially, are not successful. To get that kind of firm pursuing a modern definition of success, fines won’t do the trick; we need to establish the threat of worldruptcy.
I would like to thank Alessandro di Mascio, Annegret Bönemann, Mark Lambert, Nico Benoist, and Thijs Weenk for providing their critical insights and making this article possible.