The Volkswagen Crisis: A Lesson in Trust
Japan Today, September 2015
The Volkswagen crisis, triggered by misleading emission measurements, has reinforced the idea that truthfulness and simplicity are pillars of international marketing and integral to a business’ public face. The (formerly) largest car manufacturer in terms of sales has been accused of fitting defeat devices into its diesel cars in the United States that can discern when the vehicle is undergoing emissions testing and turn on full emissions control for that duration. Once the testing is over, however, the emission controls are switched off and allow the cars to emit between 10 and 40 times the regulation standard of nitrogen oxide. Since this deception has come to light, Volkswagen’s stocks have crashed, with shares falling 38 percent in 2 days. This initial loss to investors and the brand alike showcases the importance of truthfulness in business operations.
Businesses are constrained by the nations and societies in which they operate. Their standards of conduct should ensure that their business activities are beneficial to the people and society. Companies that are seen to violate such expectations will see their trustworthiness diminished. Reduced trust not only results in tangible losses for the company in terms of fines and costs of recall, but also causes the public to censure the company via strongly diminished sales. In order to regain the trust of the consumers, Volkswagen must engage with both short- and long-term measures.
Already, Volkswagen takes important steps to punish those responsible (either directly or via neglect) for the violation of the emission standards and the disappointment of the public’s trust. Within 5 days, CEO Martin Winterkorn has resigned although he denies having any knowledge of the wrongdoing. The pressure of stakeholders, who lost trust in his leadership and were pushing him to leave was simply too high. What power does a CEO still hold, if the majority of shareholders are losing trust? Additional heads will roll with lay-offs signaling to the public that the company expects adherence to high standards of behavior, and is not lenient on those that break the social contract. Volkswagen has also set aside 6.5 billion euros ($7.3 billion) to cover the costs of recalling the cars with the defeat device, as well as any other damages. The U.S. Environmental Protection Agency (EPA) was given the power to fine a corporation up to $37,500 for each car that breaches standards—in Volkswagen’s case that will result in a maximum fine of about $18 billion. Although the American government holds the harshest measures of all public sector actors, the private legal actions by car owners and shareholders of Volkswagen are not even considered and their claim “cannot be estimated at the current time” as VW said.
Together with future direct and indirect costs, this step curtails the company’s profits for years to come. Yet it goes a long way in indicating that Volkswagen is ready to accept responsibility and do what it must in reparation of the betrayal of the trust which customers and governments had placed in the company. Public trust is an important determinant of a society’s willingness to allow international firms to do business in their nations. Volkswagen will have to rebuild this broken trust, and reinforce the values of truthfulness and simplicity in its workings. No longer will VW consumers allow the company’s real activities to be shrouded in complexity, or permit the lines of truthfulness to be blurred. For Volkswagen, standards will be scrutinized more and enforced more sharply. The European Commission already announced to revise the European standards and to introduce new testing technologies, which is more representative of on-road conditions.
Volkswagen ways of doing business must become more transparent and understandable by the public. For a company that is at the heart of Germany’s manufacturing and export economy, and thought to reflect the social responsibility and consciousness of its home country, this active misleading of regulations and claims is a shock for supporters, customers, fellow firms, and host cities. Volkswagen will have to prove itself anew as an honest partner, an uphill task considering the magnitude of the deception and the corresponding stain on the car manufacturer’s reputation which has “People’s Car” as its name.