Volkswagen’s Emission Scandal is Expensive and Tragic

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The growing Volkswagen emissions scandal has received widespread coverage in the financial press.  Normally, I don’t rely on Wikipedia, but this source has jumped over the recent Volkswagen emissions scandal, noting:

On 18 September 2015 the United States Environmental Protection Agency (EPA) issued a Notice of Violation of the Clean Air Act to German automaker Volkswagen Group. The company had programmed their model year 2009 through 2015 turbocharged direct injection (TDI) diesel engine so that US standards nitrogen oxides (NOx) emissions were met only during laboratory emissions testing. NOx emissions during driving were up to 35 times higher. The EPA classified this programming as a defeat device, prohibited by the Clean Air Act. An estimated eleven million cars worldwide, and 500,000 in the United States, included such programming.  It has been variously estimated that the practice killed between 12 and 106 persons by diseases such as asthma and heart disease in the United States. [footnotes omitted]

The moral compass at Volkswagen was evidently not set to true north.

What we know is that Martin Winterkom,  the CEO of Volkswagen has resigned.  He will likely leave with a payday considerably greater than $32 million, but that’s another story.  We also know that the company and its shareholders are reeling in the aftermath of the EPA’s announcement on September 18th.

Scandal is Disastrous for Volkswagen and its Shareholders

Any way you cut it, this scandal is disastrous both for Volkswagen and its shareholders.

  • The shareholders.  The price of Volkswagen shares the day before the EPA announcement was $167.80 per share.  The price on Friday, according to the same source was $92.36 per share. Volkswagen’s market capitalization has dropped $75.44 per share since the day before the EPA announcement, for a total market value loss of $35.9 billion (this includes both preference and ordinary shares).
  • The company.  Recalls, government fines, litigation and more will cost the company (and the shareholders) many billions more.  The survival of the company is in question according to some.

I can’t address the technical aspects of Volkswagen’s cheating on environmental regulations, nor can I address how and in what form Volkswagen might eventually survive.  What I can address is the fact that there appears to have been an enormous leadership vacuum or leadership issues that could enable this pervasive cheating conspiracy to occur.

Leadership Vacuum? Looking the Other Way?

Think about the following:

  • The scandal involves “only” some 500 thousand diesel vehicles in the United States, but some 11 million vehicles worldwide.
  • It has been going on since before 2009, because that year was the first model year in which the “software solution” was programmed into vehicles.
  • Someone or ones had to conceive of this “solution” as an alternative for actually solving the emissions issues.
  • Someone or ones had to develop the “solution.”
  • And someone or ones had to insure that the “solution” was programmed into about 11 million vehicles.

Who in Volkswagen management knew about the decision to implement a programming “solution” to an engineering problem?  Who on the managing board knew of this decision and its massive implementation over seven years or so?

And who of the three dominant holders of voting control knew?  Volkswagen’s Preference Shares account for 38% of the total of 475.7 million shares (including Ordinary Shares) outstanding.  Per Volkswagen.com, the Preference Share owners are:

Current voting rights distribution (as at December 31, 2014)

50.73%
20.00%
17.00%
12.30%
Porsche Automobil Holding SE, Stuttgart
State of Lower Saxony, Hanover
Qatar Holding
Others

At today’s lower price, their Preference Shares are collectively worth about $15 billion.  That’s an amount worth watching.

Who was watching?

Two writers for CNBC wrote:

Volkswagen’s decision to nominate a long-serving executive as chairman has once more highlighted the carmaker’s corporate governance and culture, which some experts argue were a root cause of the diesel-emissions scandal.

Something was rotten, for sure.

Thoughts from Memphis

The famous line from Shakespeare’s Merchant of Venice comes to mind:

Truth will out.

I’m sure that the engineering science necessary to meet emissions requirements were not simple, nor were they likely inexpensive.  Someone or ones decided to take the wrong alternative and should have known something I’ve said for many years:

There is never time to do things right, but there is always time to do them over when the consequences of not doing them right the first time become known.

Volkswagen will take the time and money to try to get things right.  Let’s hope for some 600,000 employees, thousands of shareholders, and millions of Volkswagen vehicle owners, that they do.

When we make the decision to take shortcuts, we often forget an almost inevitable truth:

While it can seem expensive to do things right the first time, it is always more expensive to do them over if you didn’t do them right the first time.

In many respects, the issues at Volkswagen boil down to the lack of a culture where key managers and employees knew what they could/should do and what they couldn’t/shouldn’t do.  This type of culture is bred, fed and nourished from the top – or not.  This reminds me of something else I’ve said over the years:

It is important for every company to have a culture that enlightens what its people will do.  It is equally important to have a culture that informs what they won’t do.

Rules don’t help much when trying to determine what one should do or shouldn’t do.  I’m talking an a broad sense here, and not about safety and other rules that must be followed.  Principles of integrity do help.  Integrity is defined in one dictionary as:

  1. the quality of being honest and having strong moral principles; moral uprightness.

  2. the state of being whole and undivided.

Where were the “strong moral principles” and “moral uprightness” when the defeat device was being devised and implemented?  Where was the “state of being whole and undivided”?  These things seem to have been missing at Volkswagen for quite a few years.

That reminds me of one other thought.

If you have to lie to yourself or others to justify an action, it almost certainly falls into the category of things that you should not do.

Where does Volkswagen go from here?  I don’t know.  But the road will not be an easy one.

Lessons for All

Recently deceased Yogi Berra said, “If you come to a fork in the road, take it.”  We do have to make decisions when we reach forks in the road.  Volkswagen management came to one of those forks in the mid-2000s, and in retrospect, took the wrong road.

However, they knew which road was the right one to take.  They had to have known.  Especially when that decision, or series of decisions, when brought to the light of day, were clearly wrong.  That is more than second-guessing in hindsight.

The easy way or the cheapest solution in the short run may well be the most difficult way and the most expensive in the long run.

Every company and every leader has a moral compass.  Are yours and your company’s set to true north?

Let the example at Volkswagen be a call for all of us to reexamine our moral compasses, both as individuals and as those compasses get translated within our companies.  Some of the best decisions are made when we simply say no to the easy road.

Until next time,

Chris

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