What VW fiasco says about company culture

Volkswagen’s stunning admission this week that it used special software in its emissions devices to deceive US regulators about its diesel-powered vehicle emissions for the past six years has called up a host of questions about organizational culture and the strength of compliance programs at companies throughout the auto industry. The cost of such a compliance failure is likely to be of a magnitude seen more often in the financial than the automotive industry, observers are saying.  But the total cost goes far beyond the $18 billion in fines and penalties that some believe could be imposed on VW after various government investigations have been concluded.

Identifying where the locus of responsibility – and liability – for the cheating software lies is sure to be a key focus of these investigations. But whether it turns out to have been orchestrated from the top levels of management or from further down in the ranks, it will reflect badly on senior management and the board. As an engineer himself, the odds are slim that chairman and CEO Martin Winterkorn, who resigned on September 23, could have been completely unaware that the company was cheating on its emissions tests for six years. And if junior employees were in on the deception, it’s unlikely a whistleblower would not have come forward in those six years. So, if one or more did, what does the failure of the hotline call or complaint to a supervisor to rise up through the appropriate channels to the board say about the effectiveness of VW’s compliance program?   

‘So many of these scandals and headlines come down to organizational culture. Is there room for employees to speak up? Do they have the right systems and processes in place to respond?’ says Carrie Penman, chief compliance officer and senior vice president of advisory services of NAVEX Global. ‘At Toshiba, the issue was a chain of command culture that could stifle internal reporting.’

NAVEX has noticed through its compliance and ethics survey results that senior executives’ participation in their firms’ compliance training is dropping. Among the critical messages that need to be discussed with senior leaders about how to develop and maintain a culture that allows people to speak up is the need to balance performance pressures with ethical business conduct, Penman says. ‘They should recognize situations where employees might feel they have no choice but to compromise company standards.'

One of the most important roles the board of directors can play in providing an ethical culture is in their serious and thoughtful conversations about financial targets they’re setting with and for the organization. ‘Financial pressure drives a lot of culture issues. I don’t think boards recognize that that probably is one of the most important roles they can play,’ she says. ‘Yes, we want to have stretch objectives. Yes, we want to grow the organization. But we don’t want to put people in the situation where they feel like the only choice they have is to break the rules in order to meet the objectives.’

For investors, the VW fiasco will likely increase awareness ‘that ESG blowups – whether they’re governance or environmental or social or whatever they are – are something you really need to try to take into account,’ says Matt Orsagh, director of capital markets policy for CFA Institute. ‘You can see it happening with other car companies now. Analysts and fund managers want to know [if their] tests are on the up and up,‘ wondering if there will be further surprises from other companies.

The impact of this scandal is dispiriting not only to investors who, by the close of trading on September 22, had already lost an estimated $25 billion in market cap, but to VW employees, many of whom were no doubt making sincere efforts to produce vehicles that would be better for the environment.

‘It’s devastating to employee morale. If you talk to employees at other companies that have been through very public scandals, the litmus test is ‘Would you wear the company’s shirt to the supermarket?’ says Penman. ‘Their neighbors say You work where? And they find themselves responding and defending the organization for something they didn’t have any involvement in.’

That’s how companies lose good people because employees lose trust in leadership for not catching such misconduct, she adds.

‘We go back into companies where they have had these issues and we ask the question, Are you wearing the shirt yet? The test to see if you’ve earned trust back is are they wearing the shirt?'