Showing posts with label environmental responsibility. Show all posts
Showing posts with label environmental responsibility. Show all posts

Wednesday, September 30, 2015

What Tom Brady and Volkswagen have in common

We note that last week automaker Volkswagen admitted that “’defeat devices’ used to cheat emissions testing were installed in 11 million vehicles worldwide.” The admission resulted in the swift “resignation and prompt replacement of CEO Martin Winterkorn, and a 30-percent drop in the company’s stock..” Volkswagen will be removed from the Dow Jones Sustainability Indices (DJSI) as of October 6 (showing, once again, just how unreliable these index measures are).  
Env and Stock
Some time ago (2011), we quantified the impact environmental factors have on stock prices using several statistical techniques. Our analysis showed that investors and publicly traded companies must recognize the impact environmental incidents and issues have on a given firm's ability to use company assets and therefore generate revenue and profits.
As we stated on February 5, 2015 in testimony to the Norwegian Ministry of Finance and on April 22, 2015 in testimony to the Government of the United Kingdom: 
“the market value of environmental, social and governance factors continues to grow, companies and investment managers will engage in fraudulent practices related to these factors. These practices will range from simple falsification of environmental, social and governance records to more sophisticated, but no less fraudulent methods related to environmental, social and governance ratings. We note that unethical practices have flourished in capital market institutions, propelling ethical standards of behavior downward.”
A few things about the VW scandal stand out:
1. Firstly, it worked for a good, long time (long defined relative to the hyper short term attention span of the current marketplace).
2. It establishes the model we expect others will continue to use: a very technical type of fraud. 
3. The opacity of the scandal is stunning: only highly skilled technicians were able to see what was really occurring on the inside (of both the company and the engines…)
4. It matches what we saw in the mortgage fraud crisis. At a far more trivial level, it also matched the “deflated football scandal” in the NFL. Both cheats require astonishing levels of arrogance and skill: not only do you really have to be on the inside, but you REALLY have to want to win to even attempt such a thing. 
5. It strikes at the very core of trust.
For now, any short term gains have been completely swamped by losses. That 30% decline in stock price translates into $30 billion, and that represents 30% of the company’s market value. Over the long term, this value will probably return, just as it did to companies in the financial sector, and as it did, for that matter, to the football deflating Patriots. Their starting quarterback, Tom Brady, didn’t miss a single snap (and stands in stark contrast to the suspensions and punishments meted out to Black players, BTW).
This is the core of the ethical issue facing both the marketplace AND organized sports.