How unethical conduct turned VW business murky

Nicola Kleyn, dean at the Gordon Institute of Business Science shares her views on the Volkswagen scandal. (Picture supplied).
Nicola Kleyn, dean at the Gordon Institute of Business Science shares her views on the Volkswagen scandal. (Picture supplied).

Business, both globally and locally, has been rocked by two corruption scandals in recent weeks. At home we’ve seen Japanese conglomerate Hitachi agree to pay a R250m fine over ‘improper’ payments made to ANC investment arm, Chancellor House.

While the economic impact on South Africa, contributed to by Hitachi’s failure to deliver on tender obligations, is being felt in the form of ongoing electricity supply constraints and Eskom’s attempts to raise tariffs yet again, it was reported by Bloomberg that Chancellor House enjoyed a 5 000% return. 

As serious as the issue is, it pales in comparison to the Volkswagen (VW) scandal, which broke in September when the US government raised questions about the group’s diesel vehicle emissions.

The impact on stakeholders is staggering: some 11m vehicles are affected, 4 000 vehicles have been removed from UK dealerships alone and, in just days, €29bn was shaved off the market cap of the world’s largest automaker. 

As the scandal began to unfold a number of questions occurred to me, not least of which was to wonder how – given the sheer timescale and depth of the deception – the cover-up remained in place for so long.

The allegation that VW cheated by installing sophisticated ‘defeat devices’ is shocking, that it did so over seven years (2008 to 2015) is indicative of something very wrong at the core of the company.

The Wall Street Journal noted that the US Environmental Protection Agency was already investing discrepancies between VW’s lab results and on-road emissions as early as 2012. It seems VW was aware of these tests, but continued regardless. 

Although fingers could be pointed at the (now ex) CEO Martin Winterkorn, the unusual hybrid of family control, government ownership and labour influence has resulted in suggestions that the governance of VW provided a fertile breeding ground for the scandal.

Founded by the Nazis before World War II, VW’s ownership is dominated by the Porsche and Piëche families. Labour representatives hold three of the five seats on the executive committee and half the board seats are held by union officials and labour. The Lower Saxony government owns 20% of voting shares and appoints the remaining two seats. 

Given the often turbulent relationships between management and unions in SA, the closeness of owners and unions at VW might be seen as utopian, but accusations of a clannish board and a deep-rooted hostility to environmental regulations among engineers have resulted in corruption on a grand scale.

The effects of the scandal are hardly limited to employees, customers, dealers and shareholders.

Aside from the German government’s direct involvement with VW (many high-level politicians have sat on its board), the issue calls for Germany – which has been relentless in condemning Greek cheating on public accounts – to clean its own house.

German Chancellor Angela Merkel recently stressed to the BBC: “I think the reputation of German industry… is not so shaken that we are no longer considered a good place to do business.” 

This is an excerpt from an article that originally appeared in the 22 October 2015 edition of finweek. Buy and download the magazine here

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