Volkswagen scandal a failure of leadership not management

Posted on October 1, 2015


The VW scandal is a failure of leadership not a failure of management. Such failure spreads beyond any single company and suggests that something is rotten in the state of business.

This article first appeared in the Huffington Post, in the Times of Malta and in Het Financieele Dagblad (Dutch)

The Volkswagen scandal of widespread deception of regulators and of its customers has sent shock waves through the business world – in Germany and elsewhere. But are we really surprised?

In an editorial the Financial Times rightly points out that many corporations follow the letter but not the spirit of regulation. However, it also suggests that VW’s deception was “exceptional.” This is not the case. From embedded tax avoidance to regular scandals ranging from the horse meat scandal to Libor, to mis-selling of financial products, to abuse of personal information by digital platforms, to GlaxoSmithKline’s’s misbehaviour in China, to many others too numerous to mention, such behaviour is anything but exceptional. It is deeply embedded in the culture of big business. Why?

Business and right leaning governments have all drunk the Kool Aid that paints regulation as unequivocally bad for business. Regulation has become nothing more than “red tape” that makes business “uncompetitive.” Governments and regulators the world over have also become captured by this narrative. In the UK, the Conservative government proudly declares a war on red tape. The German government tried to block any regulation that was perceived to be damaging to its automobile industry. Even when they know about it, regulators routinely seem to turn a blind eye to infringement. It seems that the use of deception devices such as those used by VW were known to everyone in the business as far back as 1994 and, in 1998, the US Environment Protection Agency reached a settlement of $1 billion with diesel engine manufacturers on precisely this identical issue. When Olaf Lies, Lower Saxony’s economy minister and a VW Board Member, says that the Board only found out about the scandal just before it was announced to the press, this tells us nothing other than of a Board that is utterly blind to what is seemingly common knowledge in its own industry.

Yet both politically and in boardrooms, the war against regulation goes on. Eurosceptics use “excessive regulation” as their rhetorical weapon of choice. In response, Jonathan Hill, EU Commissioner for financial stability, financial services and capital markets union has just announced a new deregulation binge for the financial services industry. Companies spend billions lobbying against regulation and hand out millions in political donations to any political party that promises to de-regulate. This  makes efforts to stop or delay regulation probably the single biggest source of political corruption in the Western world.

The anti-regulation mentality is deeply embedded. In such a business and political culture it is hardly surprising that skirting regulation has become normal behaviour at all levels of many big businesses. When Chief Executives and Board Members attempt to shift the blame for such scandals to individuals at lower levels of the organisation, it betrays a breathtaking blindness to their own failings.

Yet regulation is a public good, raises standards and is an essential component of a functioning society. Over two years ago I wrote that regulation can serve to enhance business competitiveness rather than destroy it. Those countries that have the toughest regulations spawn the most advanced companies with world-beating products that others find hard to compete with. It is only if we define competitiveness as a race to the bottom rather than a race to the top that regulation becomes problematic. Yet in advanced economies, there is no mileage in engaging in a race to the bottom.

True enough, just like any management and government activity, no regulation is perfect. We are only human. We should work to improve regulation not abolish it or have our regulators be complicit in skirting it. After all, how many of us believe that the de-regulation frenzy of the 80s and 90s gave our societies a better banking system?

When Mr Winterkorn, VWs outgoing Chief Executive, states that he has done nothing wrong, it simply shows how deep the rot has established itself in the minds of business leaders. This rot is a failure of leadership not a failure of management. Until senior business and political leaders accept both taxation and regulation as both legitimate and desirable, no amount of tightened governance can spare the public from abuse and shareholders from repeated destruction of shareholder value.