THE VOLKSWAGEN EMISSIONS SCANDAL WILL BE ONE FOR THE BOOKS:
The Long Term Effect on Stakeholder Trust
A Devastating Series of Events
Consider the following facts and timeline:
- The US Environmental Protection Agency (EPA) reveals that Volkswagen has been using surreptitious emissions suppression software for 6 years for approximately 500,000 diesel cars and has refused to cooperate in investigation
- Six years of deception
- Volkswagen CEO finally admits to having “screwed up”
- 35% stock price plunge in 2 days
- The company’s market cap is half of what it was a year ago
- $7.3 billion set aside for reserves
- It started with 500,000 cars in the US, now it appears to be 11 million maybe more globally
- Multiple governments have begun investigations (including in the US, South Korea, Germany and France)
- Under the EPA’s fining system, the total violation fine for the 500,000 US cars alone without a settlement could amount to US$18 billion
- In the US alone, the US Department of Justice, the Environmental Protection Agency, the California Attorney General, the New York State Attorney General and other state attorneys general are looking at opening investigations
- The German Vice Chancellor warns against painting the German auto industry with the same brush as VW
- The CEO resigns
And all this in less than a week.
Long Term Stakeholder Trust Erosion
And the worst effect of all is not embedded in these figures: It will be the extensive and long-term stakeholder trust erosion:
- Customers – dealing with recall hassles, costs, and the embarrassment and anger of owning a less shiny brand
- Employees (existing and potential) – dealing with investigations and embarrassment
- Dealers – hassled with recalls and embarrassed to carry the brand, likely to loose substantial future sales
- Shareholders – already suffering devastating, probably unrecoverable equity losses, preparing for multiple types of law suits in multiple jurisdictions
- The Environment – the diesel toxic emissions are 40 times greater than permitted under US law
- Executives and Management – under the gun and under the microscope of public opinion for a long time to come
- The Board – under pressure to ramp up more proactive corporate governance
- Regulators – likely to ramp up the investigations and be engaged in long term investigations, prosecutions and/or settlements
- Lawyers and Consultants – the only ones benefitting from this reputational cataclysm
- Other Auto Manufacturers – watch out, you may be next! There is nothing like industry reputation risk contagion (financial crisis, Libor, etc.)
- The Media & Social Media – will continue to have a party discussing every possible angle of this scandal, fanning the fires with information that may be accurate, inaccurate or downright malicious
While VW scrambles to deal with the immediate crisis by deploying its crisis management, legal and public relations experts, there are a number of critical things that VW, its supervisory and its management must focus on like a laser beam immediately and into the medium and longer term future, including:
- Deep SWOT Analysis. One of the first things that must be tackled is a SWOT analysis of the who, what, when, why and how of this case. But VW management need to go a step farther and gather the lessons carefully, and apply them systematically on eradicating the root causes of this trust issue gone wrong.
- Corporate Governance and Culture Overhaul. While it begins with current leadership falling on its sword (even if belatedly), this whole issue goes to culture, incentives and performance management. It is incumbent on the board to review these elements
- Create an Effective Ethics & Compliance Program. No more facades, whatever is in place will need to be overhauled and amplified so that it becomes effective. This will happen probably only through government pressure and the imposition of a compliance monitor at some point in the future when investigations and/or prosecutions are complete (witness BP and GM).
- Understand Impact of Reputation Risk. VW and its management need to understand that when things go wrong and the underlying risks have not been properly managed in advance, reputation risk will attach itself and amplify the underlying risk. In this case, reputation risk is attaching itself and magnifying fraud and environmental risks gone wrong. As a consequence, the reverberations of the alleged fraud and environmental violations will be amplified and cost VW far more in both intangible and tangible ways if it is found that these risks were not properly managed and/or specifically ignored.
- Stakeholder Impact Analysis & Repair Plan. VW needs to repair its long term reputation and go back to the drawing board to understand and prioritize its stakeholders and their expectations: customers, employees, shareholders, suppliers, partners, government agencies and others. Only after a thorough stakeholder analysis, their expectations and a prioritization or re-prioritization of such stakeholders, will VW straighten out its broader mission and vision going forward. This will take years and will be a major effort but without it this analysis and repair plan, the stellar and leading reputation that VW has had (and rebuilt from another major scandal in 2005) it will not be able to compete successfully in the global marketplace.
(Re)Building Organizational Resilience and Long-Term Stakeholder Trust. VW must take advantage of this dark time to look at and repair the elements of organizational resilience that might be missing or are under-resourced or under-deployed that help to build long term resilience, trust and organizational strength: culture, risk management, ethics, compliance programs. Below is a graphic from my book The Reputation Risk Handbook that provides a birds-eye view of what VW needs to do to restore long-term resilience, integrity and trust.
For more on these topics take a look at:
- The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency
- Additional articles and resources downloadable and available here.
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