Lessons From VW’s Deceptive Culture

Lessons From VW’s Deceptive Culture

Volkswagen’s board and management are focused on the wrong aim.

According to Volkswagen’s new chief executive, the recent discovery of VW’s use of sophisticated cheating software in its diesel cars to circumvent U.S. emissions standards was the work of a small group of rogue managers and engineers. He claimed the former CEO, all other executives and the board of directors had no knowledge of the scheme.

Well, I say, “Pferdemist!” (German for horse manure). It is the CEO’s and board’s duty to be fully informed about what is happening in their organization. They can’t claim ignorance—unless, of course, they are ignorant! The result of my research for this article convinced me that the cheating software is just a pimple on VW’s corporate butt. But what will turn this scandal into a major tragedy is if business leaders don’t learn that having unspoken and unwritten aims that differ from our values and behavior will destroy our companies— and ultimately result in an uncivilized society. There are lessons for all companies in VW’s deceptive culture.

Volkswagen (literally, “the people’s car”) was founded in 1937 by the Nazis to fulfill Adolf Hitler’s dictum to build affordable cars for German workers, thus the production of the VW Beetle, which in 1972 passed the Ford Model T as the top-selling car in history. For most of VW’s recent history, it was led by Ferdinand Piëch, a dictatorial leader who dominated an insular governing board made up of executives from within the ranks or with ties to the Porsche family. This dysfunctional corporate culture was just reaffirmed, even after discovery of the emissions cheating scandal, as both the newly appointed chairman and CEO are executives from the controlling family.

VW admitted that the cheating software had been installed on about 11 million vehicles, so now it faces a potential $18 billion in U.S. fines (but has set aside only $7.3 billion). As of this writing, Volkswagen’s market value has declined about $30 billion in a few weeks. Some industry experts are predicting the financial impact will be so punitive that Volkswagen will have to file for bankruptcy and the German government will be forced to bail it out.

Many people are wondering how this could happen at Volkswagen—after all, VW has an excellent reputation for German engineering. But details of the company’s history, corporate culture, governance standards and executive actions—as illuminated in many articles after the crisis, including one by James B. Stewart, international business reporter for the New York Times—demonstrate that growth and industry dominance were higher corporate values than protecting the environment and society through compliance with U.S. and international emissions laws.

Volkswagen’s well-being is often viewed as an essential cog in the health of the German economy. A former Volkswagen executive (on the condition of anonymity) was recently quoted by Steward in the Times as saying, “Volkswagen is seen as having a national mission to provide employment to the German people.”

In September, the U.S. Environmental Protection Agency announced that VW was using sophisticated cheating software to pass emissions tests on its diesel cars. Volkswagen’s then-CEO Martin Winterkorn claimed he was unaware of the scheme but apologized, then resigned a few days later. German newspapers revealed a few weeks later that the software was a “fix” after VW managers realized in 2008 that a new diesel engine developed at great expense would not meet U.S. and international pollution standards. Rather than stop production of the engine and scrap years of investment, managers created the software.

The summary only scratches the surface; the real story goes much deeper. VW’s scandal is a case study of a board of directors and management operating with a laser-beam focus on an unspoken, yet clearly understood, purpose of industry dominance that is buried in its corporate culture of insularity.

Volkswagen is governed by an amalgam of the Porsche family, the German government, Qatar’s sovereign wealth fund and management that includes leaders of local labor unions. Since 1993 leadership has been dominated by Ferdinand Piëch, grandson of the Beetle inventor, who set the goal for VW to become the world’s largest automaker. During the past 20 years, Piëch fed VW’s growth by acquiring other automakers. Today VW is made up of 12 brands, including Audi, Bentley, Porsche, Bugatti and Lamborghini.

Despite his success, in April, Piëch was given das boot in a boardroom coup. A German newspaper, Süddeutsche Zeitung, said that VW’s “autocratic leadership style has long been out of date.” After the emissions scandal, VW named insiders to replace the chairman and CEO, notwithstanding corporate governance experts urging it to look outside.

VW has an eloquent and glitzy 24-page “Volkswagen Group Code of Conduct” brochure with this preamble: “Our common goal is to be number one among the world’s automobile manufacturers and to make individualized, sustainable and safe mobility based on superior quality possible for people throughout the world. To achieve our goal, we act responsibly, for the benefit of our customers, shareholder, and employees; we consider compliance with international conventions, laws and internal rules to be the basis for sustainable and successful economic activities; we act in accordance with our declarations; and we accept responsibility for our actions.”

Really? Even more Pferdemist! True colors show in actions, not words. There sure isn’t much room in VW’s system for independent thinking, constructive criticism or external influence for change. VW’s code of conduct is merely obfuscation for its unspoken real aim to be the largest automaker in the world. Not much hope for whistle-blowers to bring to light the ugly fact about a failed R & D project. And this culture is why: As reported by the New York Times, a former senior Volkswagen executive said the company has “a deep-rooted hostility to environmental regulations among its engineers.”

The Volkswagen scandal is unfortunate for many innocent stakeholders, including dealerships and customers. Even more unfortunate is that the situation could have been avoided if Volkswagen executives had followed their own code of conduct. VW’s cheating software was the smoking gun pointing to a much bigger problem of broken corporate governance. To learn lessons from this culture of deceit, ask yourself if your actions are speaking so loudly that your people can hardly hear what you have to say.

Mark W. Sheffert (mark@manchester companies.com) is founder, chairman and CEO of Manchester Companies, Inc., a Minneapolis-based board and management advisory firm specializing in business recovery, transformation, performance improvement, board governance and litigation support.

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