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Shoot that messenger, please

2 October 2015 By Edward Hadas

The scandal at Volkswagen might look like the sort of stupid mistake that could easily have been avoided. Not so. The carmaker’s installation of unauthorised and illegal software capable of falsifying emissions test results in 11.5 million vehicles is the sort of problem that highly successful companies find very difficult to avoid.

Start with an obvious point: fiddling emissions was clearly not a good idea. Such defeat devices were explicitly banned in the European Union in 2007 and had not been tolerated by U.S. regulators for decades. VW itself had a run-in with the Environmental Protection Agency on a switch that limited emissions back in 1973, the Wall Street Journal reported. Then there was a 2007 letter from parts supplier Bosch warning of possible foul play, as reported in the German newspaper Bild am Sonntag. In 2011, VW’s supervisory board received warnings of manipulation, the Frankfurter Allgemeine Sonntagszeitung reported.

So how was it allowed it happen? Look to the corporate culture. The feuding cousins at the top of Volkswagen and Porsche promoted people with the same basic management style. In that kind of environment, three things tend to occur. Talented and arrogant executives do well. Bosses fail to delegate important decisions. Subordinates are expected to succeed, not to moan about problems which they cannot solve.

The hard style naturally travelled from top to bottom. So it is easy to imagine the pressure on the engineers who had been ordered to find a low-price way to keep diesel emissions down on a new engine model. The company’s reputation for technical excellence was on the line. So was the strategy in the crucial North American market, where VW was struggling. Failure was not an option.

The investigation now taking place at Volkswagen will reveal more details. But it is easy to imagine the reluctance of superiors, all the way up the line, to listen too closely to any hints of foul play. Asking probing questions could cost them their jobs long before any warnings saved the company from a great deal of trouble.

For anyone who has studied the numerous trading scandals at investment banks, the pressure to perform and the reward for closed eyes will sound familiar. At the banks, the desire for higher profits was much greater than the interest in a pure culture. Besides, in an environment where people were regularly fired for no obvious reason, asking hard questions promised more pain than gain. So few hard questions were asked.

In any company, a narrow focus and a lack of strong internal controls are an invitation for trouble. However, single-mindedness is not all bad. On the contrary, it is hard to think that Volkswagen would have grown into the world’s largest car company by revenue with the sort of cautious and open culture in which emissions cheating would be neither tempting not tolerated. More sensitive bosses probably would not have pushed as hard for technological pre-eminence or made the big bets on acquisitions and investments which pushed VW far ahead of its European peers.

Supreme self-confidence is especially important when companies challenge accepted ways of doing business. Uber would still be a small car service in San Francisco if Travis Kalanick spent much time wondering whether he was doing the right thing. But the strong hand of the now-global company’s founder comes with all sorts of risks, including a regulatory crackdown.

A few enterprises have managed to maintain cultures which combine aggression and ambition with unflinching rectitude and constant self-examination, at least for a while. General Electric is a definite contender for the global all-round prize. Fans of VW’s more luxurious German rival BMW might put it forward, but corporate life is generally easier for producers of luxury products with high profit margins than for mass-market players. Toyota was once the exception to this principle, but rapid expansion eventually compromised the Japanese company’s commitment to excellence.

Volkswagen has vowed to change its ways. In resigning as chief executive, Martin Winterkorn said the company needed a “fresh start”. Toyota promised much the same after getting into trouble over hiding problems with unwanted acceleration. Even Uber’s Kalanick sounds a bit less pushy these days. For most big companies, a single-minded focus on growth or profitability brings unacceptably large risks to shareholders, customers and the community. From the perspective of society, such firms cannot really afford to be reckless.

Cautious cultures can be installed by empowering bureaucracies to limit all sorts of risky behaviour. When these are present, companies are safe and dull. Rather than reshape industries, they generally keep doing what they always have been. Executives may emit a lot of rhetoric about change and excitement, but in practice stability usually rules. That is basically where banks are now, and where carmakers are probably heading.

The corporate tedium is basically a good thing in the complex and already-rich economies of the developed world. The risks from malfunction outweigh the gains from too much radical action. As Volkswagen has learned, determination is a strength – but overplayed, it becomes a great weakness.


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