Volkswagen scandal shows that corporate culture matters

Why Volkswagen to stray so badly from the road? How did the world’s largest automaker end up costing itself around $ 17 billion in fines and regulations so far in a reckless attempt to beat emissions tests?

The facts of the case are slowly coming to the surface. A full account, however, needs to cover more than nitrous oxide, competitive pressure, and corporate ratings – it needs to consider culture as well. That’s a lesson we should have learned from responding to the 2008 financial crisis, when we decided to tackle bank balance sheets rather than bad individual players – leaving banks weaker and taxpayers dissatisfied.

The difficult question is not who did what, but why they did it. If a group of people in a company as strong as VW felt their best option was to go to the dark side, something needs to be said about what’s going on in their heads or, if you prefer, their hearts.

The standard answer to this question is simple. It is that someone has become greedy – that corporate scams are an economic phenomenon, explained by the way the average person reacts to constraints and opportunities.

An economic account of what has been dubbed the “dieselgate” scandal would go something like this. About ten years ago, VW was thirsty for growth. he was struggling Toyota and General Motors for the number one position in the global automotive market. The obvious place for its growth was the huge US market, where it had little presence.

As it turns out, VW – due to tax incentives in Europe – has special expertise in making small diesel engines. In addition, these engines produce less carbon dioxide than gasoline engines, so their sale makes it easier to comply with greenhouse gas rules. Given its commercial footprint, technical strengths and regulatory climate, the economically optimal strategy for VW was to push small diesels into the United States.

There was a small problem. US rules on nitrogen oxide emissions – where diesel is a worse offender than gasoline – are stricter than EU rules. The technology that enables cars to respond to them is expensive, making it virtually impossible to produce a mid-priced car that passes the milestone.

So much is established. What exactly happened next is not clear, however. But something like the following is plausible: An engineer, or maybe a group of them, set out to design a diesel engine that meets performance and price targets while emitting only a certain amount. amount of nitrogen oxide. Reaching the goal would mean money and promotion, but the engineers couldn’t handle it. So, perhaps spurred on by an ambitious framework, they did what engineers do: they designed something, namely software designed to beat emissions testing.

If something like this is correct, why weren’t the engineers discouraged by the risk of being caught? Why did no one stop them? Here, economic history turns to the governance of VW. A family business with a cranky and fuzzy board of directors, it was accountable to no one except maybe its unions. Under these lax conditions, VW’s progression from targeting to the US dieselgate market was as natural and easy as water flowing downhill.

This narrative leads directly to specific conclusions about the remedies: inflicting heavy fines on the company, sending a message about the cost of cheating; tighten regulations so that automakers assume there is a good chance of getting caught; and reforming corporate governance so that companies focus on sustainable growth strategies, not quick, harmful and risky solutions.

It is tidy but incomplete. The implication is that VW’s disbelievers believed that the subversion of the law was in their best interest. And this conclusion certainly matches the regime of rewards and punishments under which they operated.

But the world is full of flawed incentive regimes, yet systematic cheating on the scale and severity of dieselgate is relatively rare. Yes, Fiat Chrysler is facing charges in the United States that echo those against VW. But across industries, regulators are hopelessly outnumbered and underfunded compared to corporations. Poor and irresponsible corporate governance – and short-term incentives for leaders – are unfortunately pervasive. And there is always money to be made by bending the rules. But if corporate madness, from Enron to Valeant, is a regular feature of the market, it remains the exception.

Here’s a guess as to why this is so: Most people and most businesses behave honorably not because of the consequences of breaking the rules, but because they are honorable. If this is true then we have to assume that something has gone wrong with the VW culture such that immoral behavior has become acceptable.

However, moral failure requires a moral response. Perhaps the focus should be on shaming individuals, running away from them and putting them in jail. Fines may have their place, especially if the product is used to repair damage done by a business, but they somehow seem to miss the point.

It will be an uncomfortable conclusion for the kind of people – like me – who spend a lot of time analyzing companies. Education and professional experience equip me with a sophisticated apparatus for drawing economic conclusions. But I admit that I understand little about how corporate cultures work or how to improve them. What I have read on the subject has not left me wiser. I spent a few years studying moral philosophy but have no idea how I would apply it to VW.

It is still important not to be the man with the hammer who sees a world made of nails. I think I understand money pretty well; culture intrigues me. But the culture is there and it matters. And if we ignore it, there will be more dieselgates in the future.

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Letters in response to this article:

‘Dieselgate’ shows moral failure must be challenged from within / By Jo Iwasaki

It’s about finding the right balance between pioneers and farmers / By David Boorer

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