The Public Relations Strategist

In the C-Suite: Scandals at VW and Takata Highlight the Worst in Corporate Culture

December 17, 2015

There are certain moral principles that are also good business principles.

Here’s one piece of advice that I’ve given my clients over the past 30 years: “Never lie, deceive or mislead. It will catch up with you. And you will likely pay a dear price when it does.”

I’m a media coach and consultant, not a spiritual leader. But sound moral advice is generally good business advice.

Unfortunately, leaders at car manufacturer Volkswagen and airbag maker Takata apparently never received such counsel.

The lessons of their behavior should not be lost on anyone in the corporate world. Their corporate cultures valued expediency over integrity and short-term fixes over long-term prospects. And they are paying a dear price right now.

Let’s start with Volkswagen, who wanted to be the top car company in the world — so much that it resorted to cheating and breaking the law. In other words: lying, deceiving and misleading.

A key element of Volkswagen’s game plan was to sell a lot more diesel cars, especially in the United States. So VW’s ads sold a dream — a sporty diesel car that was top rated in fuel economy and performance, and was so green that the federal government offered buyers a $1,300 tax credit. But the dream was a lie. The cars were heavy polluters.

When VW’s engineers couldn’t meet the emission standards, the German manufacturer resorted to deception: installing illegal software that could detect when a test was taking place and give low, and false, pollution readings.

VW installed the software in 11 million diesel engines — software solely designed to beat government tests by disguising the output of nitrogen oxide, a pollutant harmful to the lungs. In reporting the fraud, the Environmental Protection Agency said that, in some cases, the cars emitted up to 40 times the amount of nitrogen oxide allowed by U.S. regulations.

While shocking in its magnitude, this was not the only deception. VW also underreported the levels of carbon dioxide produced by 800,000 of its diesel and gasoline vehicles in Europe. In addition, it exaggerated their fuel economy.

All of this represents corporate wrongdoing on a massive scale, with significant potential damage to the environment and to public health. It is difficult to believe that only a handful of people knew about or approved these practices.

The fallout from the discovery of VW’s test-cheating scheme, first reported in September, has been huge, including these results in the first couple of months alone:

  • Share price fell by nearly 30 percent.
  • VW lost $26 billion in total value.
  • Recall costs and fines are heading for the multibillion-dollar range.
  • VW posted its first quarterly loss in more than 15 years.
  • Toyota took back the industry’s No. 1 position.

Congressman Mark DeSaulnier, who represents California’s Contra Costa County in Washington, D.C., is introducing legislation that calls for strong criminal penalties for carmakers who game the system to the public’s detriment.

And here’s a second bit of advice that Volkswagen’s top management apparently never received: “When your company is at fault in a situation that causes death or great harm, your response must be quick and effective.”

A CEO needs to step forward and tell everything that he or she knows about how the situation occurred, where the fault lies and what immediate action the company is taking to get to the bottom of it.

There must be an apology that expresses regret, shows an appropriate level of contrition, and outlines a fair program to compensate victims. It needs to be in clear, unequivocal language that accepts blame where blame is due and doesn’t try to whitewash wrongdoing with innocuous terms like “issues.”

It must include a promise that steps will be taken to see that a similar incident does not happen again. And company leaders must not portray the wrongdoing as the acts of low-level employees who were hidden from top management unless that has been clearly established and the perpetrators held to account.

Volkswagen did not perform well on these counts:

  • In congressional hearings, Michael Horn, president and CEO of Volkswagen Group of America, was less than persuasive when he said that the cheating was not a corporate decision but the work of “a couple of rogue engineers.” That seems highly unlikely. •
  • VW issued a tepid apology in full-page newspaper ads on Nov. 15, referring to the “VW emissions issue.” It was far more than an “issue.”
  • The carmaker offered affected TDI owners a $500 prepaid credit card, plus another $500 card to be used only at VW dealerships and no-charge, 24-hour roadside assistance for three years. The offer was insulting. Owners were outraged, including some who said that their cars had lost as much as half of their value.
  • CEO Martin Winterkorn stepped down — not unusual in such situations — but his successor, Matthias Mueller, also comes with baggage. He was the head of the company’s Porsche unit, which has also been implicated in the cheating tests.
  • Volkswagen offered amnesty for employees who come forward to tell what happened. But the offer was good only until the end of November. Further, VW might have deliberately discouraged cooperation by pointing out that it could not protect employees from criminal prosecution in the matter.

The decision to cheat seems to have resulted from VW’s demanding culture. Some employees, speaking under an agreement of anonymity, pointed the finger at a culture of fear, telling journalists that engineers were afraid to tell Winterkorn that they couldn’t meet the standards. Fearful employees, under high pressure, are prone to cutting corners that can lead to disastrous results.

Temptation and transparency

Takata is another company whose future is in peril because of product failure and cover-up. Corporate culture appears to be the root cause here, too.

The National Highway Traffic Safety Administration has implicated Takata’s exploding airbags in eight deaths and hundreds of injuries in the United States alone. There is strong evidence that the company knew of the problems and initiated a cover-up.

Takata conducted tests on its airbags in 2004 after one ruptured and spewed metal debris at a driver in Alabama. But the tests were conducted in secret, and management ordered that all findings and evidence be destroyed after two of the bags cracked during testing.

The company subsequently lied in regulatory filings, saying that it had not tested its airbags until years later.

According to employees, the company also did not reveal or correct a pattern of careless handling of the airbags. Emails show workers raising concerns that airbag units that were wet or damaged in transportation were being delivered to automakers. And closed-circuit TV footage shows forklifts dropping stacks of the units. Inspections were lax, and the company ignored employee product safety recommendations, according to insiders.

In news accounts of the scandal, employees have said that quality problems resulted from the pressure to meet intense delivery schedules. Failure to do so would cost Takata thousands of dollars per minute through fines that car manufacturers would impose if they lost production due to late deliveries of airbags.

Since these revelations in the fall of 2014, Takata has lost a dozen key carmaker clients, faced a recall involving 19 million vehicles in the United States and seen its share price drop 25 percent.

How can companies avoid calamities like these?

  • A company must change its culture to one that doesn’t demand success at any price. There should not be a penalty for a person reporting problems to a superior.
  • There should be a whistle-blowing system to allow workers to report unsafe products or wrongdoing. There are firms around the world that offer a hotline system that protects the identity of the worker but brings serious problems to the attention of management.
  • Transparency is necessary within an organization.
  • Boards of directors must say no to letting culpable leaders retire or resign with big payouts.

When a company is struggling to meet unrealistic demands, the temptation to cheat is great. But so is the price of getting caught.

Virgil Scudder
Virgil Scudder is the author of “World Class Communication: How Great CEOs Win With the Public, Shareholders, Employees, and the Media,” which received an Award of Distinction as one of the best business books of 2012. Email: virgil@virgilscudder.com.

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