The Cost of Culture (at VW)
In September 2015, the Environmental Protection Agency sent a letter to Volkswagen (VW) accusing VW of installing a “defeat device” in its 2.0-liter diesel engines. The device was programmed to control engine software that reduced engine emissions to legal limits when it detected only two wheels were rolling (as in during an emissions test) and to be deactivated so that the engine and the car would return to normal performance when all four wheels were rolling, at which time pollution increase as much as 40-fold.
This scam was created by pressure to perform “at any cost/no matter what.” When VW engineers could not create a legitimate solution to ensure vehicles with the 2.0-liter diesel engines were both quick and efficient, and meet stringent emissions standards, they created the “defeat device.” VW later acknowledged that 11 million vehicles were affected globally; about 580,000 in the United States.
What is the cost of this “at any cost/no matter what” culture?
Last week a federal judge agreed to the largest criminal penalty assigned to an automaker. VW and the U.S. Department of justice agreed to a $2.8 billion dollar penalty for the “defeat device” scandal. This is in addition to the $14.7 billion previously reached with the EPA, other federal agencies, and authorities in the state of California. Part of this original agreement required VW to offer a “buyback” alternative for anyone who purchased a VW with a 2.0-liter diesel engine. This repurchase program is expected to cost VW more than $10 billion. Do the math. The total sum is approaching $30 billion – that’s a big number, but that’s not all.
In recent history, we have seen companies be held accountable for their fraudulent behavior. Here is where it gets really different:
During the final settlement hearing, general counsel Manfred Doess told the court, “Volkswagen deeply regrets the behavior that gave rise to this case. Plain and simple, it was wrong,” A company taking full responsibility – different. In a separate statement, VW stated that it has, “taken significant steps to strengthen accountability, increase transparency and transform our corporate culture.” A company seeing this type of behavior as tied to culture – different.
The one remaining obstacle for VW to put this scandal behind them is criminal litigation covering investor claims who say their holdings lost significant value due to the scandal. This has yet to play out.
However, criminal charges remain in place for six current and former company employees. A seventh employee pled guilty in the U.S. District Court last year. One of the six is currently being held in a federal prison located in Michigan. The other five are in Germany.
But several state German prosecutors are continuing their own criminal investigations. In recent months, they have raided offices of both VW and its sibling Audi brand in search of evidence. Among those considered targets is former Volkswagen AG CEO Martin Winterkorn, who may have assisted in a cover-up once senior management learned of the diesel engine rigging.
The tide may be turning – at least with VW as one example. It may no longer be good enough for a company to pay penalties for malfeasance – even large penalties may not be sufficient. This may be the first case in which executives go to jail for creating a culture that supports and/or drives the behaviors that created the fraud.
Executives, take note. The cost of your culture may have just gotten higher. It could cost you your freedom.
We all benefit from creating a culture that takes into account all of our stakeholders. When we create a culture that pits one stakeholder against another, bad things follow.
Let’s cultivate our culture – together!