The crisis now unfolding at Volkswagen over its emissions cheating underscores yet again that “compliance” means a lot more than just making sure some underling fills out the right paperwork.
The risks of inadequate safeguards can be huge. A single episode can lead to a chain reaction of liability.
The global financial services firm JPMorgan Chase & Co. has racked up tens of billions of dollars in settlements and other costs since 2008, much of it to close the books on deals made during and after the financial crisis. Outside of the finance industry, in the past decade costly scandals have touched such elite global companies as Wal-Mart Stores and Siemens.
These companies have compliance officers. They have codified rules about how to treat everybody from employees to vendors. Volkswagen has these things, too. The code of conduct guide I found online from Volkswagen is a slick, 24-page publication with a cover that simply said “Rules. Know. Follow.”
“This was Volkswagen,” said Paul Vaaler, a professor at the University of Minnesota, in both the law school and business school. “I’m sure the paperwork [on emissions] was all in order. It was just wrong.”
What’s happened at VW, of course, wasn’t a simple case of some incorrect forms or a sales manager failing to keep some salespeople in line.
The German-based auto giant has admitted to writing software to detect when a diesel-powered car is undergoing testing for emissions controls, in a pretty straightforward effort to game the system. The software is installed on roughly 11 million vehicles worldwide.
That doesn’t sound like a run-of-the-mill failure of compliance, and of course the scope of the problem means it isn’t. But this is a compliance case executives ought to study closely, for compliance means having a management organization effective enough to keep bad behavior from happening.
And as this Volkswagen episode teaches, once again, this responsibility starts at the top of an organization.
Vaaler said that in talking with his colleagues and in the business community, he suspects that observers here in the United States have so far completely failed to grasp just how deep this problem is for Volkswagen. The clean diesel technology was a central part of the company’s strategy in North America.
One achievement that enabled the president of Audi of America to get that top job was helping “steer the introduction of Audi TDI clean diesel technology to the U.S. market by positioning it as a social cause rather than a mere engine variant,” as the Audi announcement three years ago put it.
That’s one reason why the liability for the admitted cheating can’t be easily walled off. The company in the first days after the news announced that it had set aside reserves equal to $7.3 billion, an awfully big number that to Vaaler doesn’t seem nearly big enough.
Just off the top of his head, Vaaler managed to put together quite a long list of all the groups in the United States that could have a financial claim against Volkswagen.
For starters there are the federal regulators, as about 482,000 vehicles in America have been acknowledged by Volkswagen to have had Volkswagen’s “cheat device” for “TDI” small diesel engines, making the cars noncompliant with U.S. emissions regulations. State regulators will have their own cases to make, too.
Another group that obviously has a legitimate beef with Volkswagen is made up of consumers who bought these diesel vehicles. VW and Audi had a very appealing pitch, having built an engine that burned lean, and thus efficiently, and also managed to take out much of the air pollution that had characterized the performance of diesel engines a generation ago.
The result was a fun-to-drive car that was very fuel-efficient and perceived as environmentally clean.
Unsophisticated consumers weren’t the only people who fell for this clean diesel pitch. The big rental car agency Hertz proudly announced in 2012 that it was placing the Volkswagen Jetta TDI in its “Green Traveler Collection.” Hertz may decide it has a claim.
VW and Audi dealers could have a big claim against Volkswagen, too. They stand to get a lot of repair work revenue paid by the company on the diesel cars, when an effective solution is engineered and released by VW, but meanwhile they own diesel cars on their lots that they can’t sell.
The damage this scandal has caused to the Volkswagen and Audi brands has also spilled over to affect the value of their own brands in their markets.
Then there are the lenders, who hold security interests on cars that are worth less, and maybe a lot less, than they were before the news of this emissions cheating broke in mid-September.
Automobile finance is also one of those segments of the finance industry that’s been securitized into bond issues, meaning there could be a bunch of TDI diesel-secured loans backing securities held by institutional investors.
The trustees for these bond deals have to be looking at how much the bond issues have been damaged and what claims they should be making on behalf of their bondholders.
There’s more on Vaaler’s list of potential claims, but you get the idea.
Then there is the potential for what may be found on the criminal probe now underway, first reported by Bloomberg.
It’s not exactly unheard of for U.S. authorities to charge a company with a crime. It was a guilty verdict on a single count of impeding a federal investigation in 2002 that effectively sunk the accounting firm Arthur Andersen, taking roughly 85,000 jobs down with it.
It’s far too soon to speculate on what outcome awaits the people at the top of the Volkswagen organization here in the United States. At a minimum they should have figured out by now that compliance was part of what they needed to work on every day, even if it wasn’t on their job descriptions.
They’ve learned this lesson way too late. The rest of us should be able to learn at least something from their experience.