Corporate crises are part of modern life. From the BP oil spill to the Fukushima nuclear plant’s failure, the world is familiar with industrial accidents and their aftermath. In the auto industry alone, Toyota’s unintended acceleration problems and GM’s ignition failures have cost billions and led victims’ families to ask, “Why can’t this industry build a safe automobile?”
Now, Volkswagen is in crisis with a massive story of public deception. Starting in 2009, as many as 11 million diesel vehicles, including 500,000 in the United States, were sold to unsuspecting customers with “defeat software,” which is manipulated software, that falsified emissions data. Actual emissions may have been as much as 40 times worse than VW reported. Recall and repair costs could exceed $7 billion in the United States alone. No reliable estimate exists for the upper limit of looming fines and legal expenses.
How did this happen? And what must VW do to reclaim its reputation and regain the public trust? To understand this case is to look through a giant prism with innumerable facets and complexity. The following lenses provide a map of what to watch for in the months ahead.??
This begins with VW top management’s obsession with replacing Toyota as the world’s largest automaker, a goal achieved in the first half of 2015. To do so, they appear to have stretched VW’s technical capabilities beyond the breaking point and pressured a large segment of their staff to evade environmental standards.
This commitment to deception appears to run deep, involving top and mid-level VW managers, software designers, and engineers. The organization knew what defeat software was intended to do. Engineers flew from Germany to the United States to “help” with the US tests. This conspiracy seems certain to be a central theme for prosecutors to pursue. As prosecutors know, it may be necessary to prosecute prominent executives to get the message across.
To extract VW from this disaster of its own making, top management will have to recognize that acceptable practice in one country may be forbidden in another. European regulators have been more flexible than US authorities in dealing with diesel standards, and VW has a close, deep relationship with German government officials. Differences between countries regarding business rules may be misconstrued as indicating that the rules in one jurisdiction will apply elsewhere.
VW and its industry peers have long been hostile to clean air regulation. Throughout the industry, there is a long-standing attitude of “we know best” and “regulators are stupid,” epitomized by the former auto executive legend Robert Lutz (Hon.’85), who said, “Government regulation is like fighting obesity by telling garment manufacturers to make smaller sizes.” The expression is clever; the sentiment is wrong, and builds a corporate-wide disdain for necessary clean air standards.
VW contracted with Daimler-Benz for its diesel technology in 2007. In 2008, VW decided to use its own technology for its small cars and reported favorable emission results. Sales of small VW diesels grew in the United States and Europe; the dollars and deutschmarks rolled in. VW’s deception began to unravel in 2013 when researchers at West Virginia University (WVU) tested three diesel cars: two small VWs and a larger BMW SUV. When the WVU team could not replicate VW’s results, they consulted a state government lab in California. VW rejected their findings. Top management seems to have left little room for questions or opposition to “sanctioned” corporate actions.
In a crisis, the speed and quality of a company’s response affect the crisis’ ultimate cost and harm. Effectively responding requires clear priorities and recognized limits of authority and a well-communicated and credible plan of action. It appears VW has been slow to grasp these fundamentals. The VW attitude, stated?by a spokesman in the New York Times last month, is, “Thoroughness comes before speed. We will provide information as soon as we have the facts.”
Since no one knows how long a crisis will take to resolve, it is important to reevaluate priorities and make adjustments over time. Avoiding missteps that effectively shoot the company in the foot is another imperative.
One of the truths we have drawn from the study of other companies in crisis is that the recognized risks can be managed. In this context, despite the many risks VW faces in its markets, perhaps one of the largest is legal rulings that will drive financial costs, or, as in a bankruptcy proceeding, cap them. The comprehensive legal-political strategy that VW needs is still unclear.
Risk management is a learned art, not science. Top management needs to learn from the experience of other recent crises—BP, Toyota, GM, and the world’s largest banks. One lesson is to recognize that full facts will not be available for some time, but the public and customers alike need information in real time. Credibility rests on outreach as well as accuracy.
A large number of government agencies and nongovernmental organizations have connected their agendas to VW events. Politics is not reserved for governments; bureaucrats and nongovernmental organizations (NGOs) play, too. Advocates of strict regulation enforcement have defined the VW problem as a lack of enforcement; corporate governance reformers see the VW management structure as the weakness that permitted the cancer to grow; environmental advocates make a strong case for toughening all environmental reporting and monitoring. Competitors such as Tesla CEO Elon Musk are out in front with their cars. The darker the emerging picture, the more evident it is that this industry’s self-regulation is a toothless lion.
VW has yet to launch a full-blown campaign to restore trust and credibility. But it is coming. This we know for sure: the lenses we have defined in this article can help the public understand VW. There is truly a public interest to be served that goes beyond regulatory enforcement. What VW did was unethical, probably illegal, and unhealthy—it affects the air we breathe.
The stakes are high for all of us. Hopefully, VW will affirm one of its recent slogans, “Truth in engineering.”
James Post, a Questrom School of Business professor emeritus and the John F. Smith, Jr., Professor in Management Emeritus, can be reached at firstname.lastname@example.org. Kenneth Hatten, a Questrom School of Business professor of markets, public policy, and law, can be reached at email@example.com.
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