The VW Trust Sinkhole: It’s Worse Than You Think

copyright Nate Osborne 2013A. The Volkswagen Emissions Scandal.

Q. What do you get when you assign German engineering the task of developing a high-performance trust-and-ethics violation?

If you don’t know the basics of the VW emissions scandal, read up on it here. The basics: on the diesel engine models it sent to the EPA for US emissions testing, VW installed software to automatically  reduce emissions, then move back to high performance and high emissions after it was done being tested.

There are lots of issues this scandal raises; for example, the depressing fact that the majority of letters-to-the-editor in the Wall Street Journal regarding the its (excellent) coverage are complaints about the ineptitude of the EPA, rather than the venality of VW.

There are certainly interesting issues about the relative harm caused by this scandal vs. others.  Will more creatures be harmed by 40x stated emissions from 11 million cars than were harmed by the BP spill in the Gulf? Will VW’s 35% hit in the stock market be more expensive than damages caused by the systematic rigging of LIBOR rates? Will the hit to German engineering and branding exceed that to the oil industry of the Exxon Valdez?

Yeah yeah, maybe. But what I want to focus on is the scope and nature of the trust violation that Volkswagen engineered here – and to argue that it’s much worse most other violations, including the LIBOR scandal. Its only close competitor in venality is Enron.

The Scale of the Violation

In in industry that has a history of thumbing its nose at regulation and buying off (aka lobbying) regulatory efforts, this stands out. Software has long been available to tweak performance; but to have a company that aspired to being number one in the world to make it automated enough to install across millions of vehicles, designed specifically to intuit a regulatory testing environment, requires a level of coordination and group effort that goes way beyond an individual.

This was not a case of individual malfeasance with a few willing bad actors, like LIBOR or Bernie Madoff. This was not a case of a series of close calls that went wrong, a la BP or Barings. This, like Enron, was a coordinated case of several people in roles of leadership who clearly knew they were doing something illegal, and were doing it on a large scale.

Winterkorn himself can’t plead technical ignorance, a la Carly Fiorina; unlike her, he was not a marketing guy. In fact, before becoming CEO in 2007, he was the top executive in charge of “technical development,” encompassing engineering and innovation. Clean diesel was a strategic imperative, and something he knew a lot about. Ignorance won’t be easy for him to claim.

The Depth of the Venality

VW management had been denying there was a problem for going on three years. In 2014, VW insisted the disparities were due to technical issues, and renewed the claims as recently as early last month (August).

And that’s not all. Even after coming clean, VW pleaded with regulators to get its 2016 models certified, “claiming it had swelling inventories that it needed to get to showrooms.” Way to show contrition.

That’s not all either. Now-former-CEO Winterkorn finally did the right thing today, September 23, by resigning; why he did not do so immediately on September 18, can only be explained by a view that this scandal is only a PR problem, to be ‘managed’ like any other business issue. Way to show a commitment to ethical behavior.

And that’s not all. VW’s cheating directly contradicted its stated advertising, that “those old diesel realities [stinky, smoky, sluggish] no longer apply.” Way to shoot your strategic message in the foot.

In short: this involved a lot of people, doing a lot of complicated malfeasance, over an extended period of time, denying flatly what were doing, claiming that they were in favor of what they were actually harming, and demonstrating a callous disregard for national governments, their legal regulators, and their used-to-be-brand-loyal customers.

It’s like their famous ad of a few years ago, The Force: except how we find out that we were the kid, and VW management was controlling the engine all along.

 

This seems to me the leading candidate for Worst Trust Fiasco of the Century (so far). Any other nominations?

3 replies
  1. Charles H. Green
    Charles H. Green says:

    [This comment from Rich Sternhell]

    You made the point well. It is not “merely” a difference in scale….but it is a logical extension of the kind of moral thinking that takes place. The regulator is our enemy, therefore what we do to evade his rules is justified. If seen just as another competitor, all is fair. Really no different than deflating the ball or stealing the plays.

    The problem became the tests rather than the emissions the test was measuring. Thus a rational response was how do we beat the test. This is the kind of thing people should face stiff jail sentences for. Perhaps even countries should face punitive tariffs. Fining the shareholders and firing the CEO just isn’t enough.

    Reply
  2. Charles H. Green
    Charles H. Green says:

    [This comment from Jim Peterson]

    Very nice.

    The Enron comparison is right on, and the ethics and governance faculties will go to town on this one for years.

    Partly because the fall-out will run deeply into the brand value — think how long it took Audi to recover from the “sticky accelerator” problem, which as I recall was not in fact ever actually traced to deliberate fault on their part.

    Interesting wrinkle — VW still has a real four-wheeled product, however degrading the reputational effect will be. Andersen had nothing to sell but its trust, and evaporated like the mist.

    There’s a theme lurking here — the recent “early CEO resignations” — with a number of good instances to compare and contrast. I’m thinking of Toshiba in Japan, Blatter holding on at FIFA, the recent hasty departure by Jeff Smisek at United, last year’s house-cleaning at Tesco in the UK. Outcomes vary greatly, depending on how long the chief tries to hold on (think of Joe Berardino at Andersen, who stayed far too long on the ship’s burning deck).

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