The VW Scandal: Insular Senior Management and Ethical Breakdowns
The Volkswagen scandal will be studied for years. One of many themes from the Volkswagen scandal will rest on the complete absence of any commitment to corporate governance. Volkswagen’s weird corporate structure (it is owned in large part by a family) and labor and government interests resulted in a mish-mosh of influences that permitted the family to exercise almost unbridled control over corporate functions, leaving any semblance of governance structure in the dust.
Some will be sure to point out that this was a scandal waiting to happen. While the exact nature of it was not expected – circumvention of environmental regulations – the minimal collusion among a small number of corporate leaders needed to carry out such a criminal scheme created a culture and “environment” where misconduct would be unchecked.
We have been witnessing a continuation of C-Suite misconduct – criminal behavior committed by senior executives at United Airlines, Volkswagen, and even GM. When the C-Suite engages in misconduct, rest assured the company will suffer serious consequences. Almost by definition, C-Suite misconduct translates into serious government intervention and substantial damages to the company’s reputation, financial pocketbook, and possible criminal prosecution of individual senior executives.
Going back to Volkswagen for a minute, the company was ruled by an autocrat, Frederic Piech. He was ousted as Chairman of the Board when he tried to oust the CEO Martin Winterkorn, who resigned just last week. Piech and his family took over and controlled board management positions, despite serious concerns about their qualifications.
Volkswagen’s board was insular in that Piech family members dominated the seats, along with Porsche family members. In the end, the board heard very little from “outside” the insular ownership and board structure.
In the absence of any real board consideration of other views or opinions, the family members – Piech and Porsche – fought with each and engaged in corporate skullduggery, trying to out-influence each other. In the end, the board suffered from serious malfunctions and mismanagement that resulted in a climate where misconduct would fester.
The Volkswagen scandal demonstrates once again an age-old principle – corporate misconduct can usually be rooted back to corporate governance failures. We have seen such examples in the FCPA enforcement arena, and in major corporate prosecutions. At bottom, a company without adequate commitment to corporate governance, and lacking in board oversight and monitoring commitment, is likely to suffer systemic compliance breakdowns, leading to real and significant violations.
Turning these companies around, and implementing a new culture of ethics and compliance, can be a daunting task. Government intervention and cleansing of corporate leadership is a preliminary step in the process. After the initial stages of shock and response to an enforcement action, the real work begins in restoring or creating for the first time a culture of ethics and compliance.
Volkswagen’s journey is just beginning. It has a long way to go, especially where the supervisory structure is so out of touch with corporate management principles. Part of this reflects Volkswagen’s unique history where the company was built on an alliance of a family business, labor unions, and government interests. This relationship led eventually to any commitment to maximizing shareholder value and operating a business with a real commitment to sustainability.
Given the significant financial exposure created by the emissions scandal, Volkswagen’s ability to survive without government support or assistance is doubtful. The EPA, the Justice Department, and recalls of all the offending vehicles could be a burden that is too great for the largest auto company in the world to carry.