Fixing Volkswagen Requires Manufacturing Candid Conversations

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As the Volkswagen emissions scandal was breaking, Stewart Parnell — the former owner of a peanut company in Georgia – was sentenced to 28 years in prison for knowingly shipping salmonella-tainted peanuts to customers. His actions resulted in an outbreak that killed nine people and injured hundreds, not to mention one of the largest food recalls in U.S. history and the liquidation of Peanut Corporation of America.

But you wouldn’t know that from the apology he issued.

Parnell claims he never imagined that creating fake certificates to indicate that contaminated peanuts were uncontaminated would harm anyone. Prior to being sentenced, he said, “It’s just been a seven-year nightmare for me and my family. All I can do is come before you and ask for forgiveness from you and the people back here. I’m truly sorry for what’s happened.”

Back in Germany, former Volkswagen head Martin Winterkorn initially tried to ride out his leadership crisis, claiming he was unaware of the company’s use of pollution-hiding software. Authorities are investigating, but there is currently no public evidence that directly links senior management to the rigging of diesel engines marketed as green technology.

Nevertheless, Winterkorn eventually agreed to resign to give Volkswagen a chance at a fresh start. And that might have been worthy of some applause, but then he issued a statement as insulting as Parnell’s self-absorbed apology. “I am doing this in the interests of the company even though I am not aware of any wrongdoing on my part,” Winterkorn said.

Nothing wrong, sir? What about failing to lead in a way that ensured the decisions made under your watch were ethical?

As The New York Times notes, there is a tradition of scandal and skullduggery in the auto industry, “but few schemes appear as premeditated as Volkswagen’s brazen scam.” The fallout goes well beyond lost reputation, trust and shareholder value. The company has already put aside US$7 billion to cover costs, but few industry watchers think that will be enough. Fixing the millions of vehicles sold with software designed to trick regulators will cost several billion dollars alone. Meanwhile, the U.S. Environmental Protection Agency can fine the automaker up to US$37,000 for the almost 500,000 offending vehicles that ended up on American roads. That’s another possible US$18 billion out the door. And then, of course, there are the potential class-action lawsuits from dealers and customers.

VW-dishonesty-chart

The auto sector is under huge pressure to cut both costs and emissions while also improving vehicle quality and safety. As a result, as everyone worth a CEO title knows, the temptation to cheat is enormous. And that’s why nobody should shed a tear for Winterkorn. As The New Yorker put it, “given that this was not, as in most auto-industry scandals, a case of a defective part but rather a deliberate corporate effort to deceive consumers and regulators, it was impossible for him to stay on, particularly given his reputation as a hands-on, technically adept micromanager: he either did know or should have known, and, in either case, he has to bear the blame.”

When corruption under his successor destroyed SNC-Lavalin’s reputation, former CEO Jacques Lamarre — who built the company into an international powerhouse — felt betrayed. And yet, he was responsible for putting in place a decentralized management structure that encouraged bad behaviour. As an Ivey Business Journal editorial noted, according to a company history written prior to the SNC scandal, Lamarre “put his trust” in his people and was rewarded with “a more profitable and integrated company.” Unfortunately, that history now needs a rewrite because the long leashes Lamarre put in place at SNC eventually strangled the company.

Simply put, Lamarre liked giving executives lots of freedom to act how they pleased because he grew up that way. “I was a good student, so I was completely free as a kid,” Lamarre told IBJ Editor Thomas Watson in 2003. “By the time I was 16, I was living on my own in Quebec City with nobody expecting any reports except for good grades.”

Parenting may be different, but as a leader it clearly never pays to focus on rewarding results while ignoring how they are achieved, especially when conducting business in environments that are highly competitive, not to mention in nations prone to corruption. In other words, trust is only a good thing when you have a culture that supports the right behaviour.

As Executive Director of Ivey’s Ian O. Ihnatowycz Institute for Leadership, one of my interests since the Global Financial Crisis involves helping organizational boards actively seek leaders with the character dimensions that Ivey research shows are required to live up to the responsibilities of leadership. But it is not enough for leaders to have sound judgment and understand where to draw the line when it comes to decision making. They must also ensure that other decision makers care about responsible leadership and ethics. That means enhancing their understanding of the breadth and depth of character at all levels of leadership within the organization through character measurement and accountability systems. It also requires developing a culture that fosters candid conversations and constructive dissent.

As was clearly articulated in Ivey research on the Global Financial Crisis, the essence of good risk management is asking appropriate questions and getting truthful answers. Leaders also need to listen to the whispers in the organization. Few people will come storming into the leader’s office saying, “There is a hell of a problem here.” And so, if CEOs don’t make it clear that they expect unethical behaviour to be outed by managers asking tough questions, then it probably won’t be outed. This clearly didn’t happen at Volkswagen, where the company culture has been compared to that of North Korea (minus the labour camps).

As a result, few, if any, Volkswagen employees had the courage to openly talk about emission problems that jeopardized the ambitious goals formulated by senior management. In fact, it is easy to envision any person who did ask a difficult yet legitimate question being marginalized at Volkswagen, or even thrown out of the organization, as we saw happen at some financial institutions during the run-up to the Global Financial Crisis.

In accordance with German law, Volkswagen’s board includes employee representatives. It also includes directors delegated by the state of Lower Saxony. As a result, employees’ and other stakeholders’ interests were supposedly aligned with those of management. But as a Bloomberg commentary on German governance traditions points out, this strong esprit de corps “isn’t necessarily conducive to a clean, values-based culture.”

True enough. Developing cultures with values requires CEOs who are open-minded, considerate, reflective, curious, respectful, composed, principled, future-oriented and socially responsible, among other character elements.

The Volkswagen saga is yet another example that all three Cs of leadership — competencies, character and commitment — are essential for good leadership. Competencies count. Character matters. And commitment to the role of leadership is critical to individual and organizational success.

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