A week ago Friday, news broke that Volkswagen admitted to cheating on American air pollution tests. They did it by installing sophisticated software that was able to reduce vehicle emissions while the vehicle was being tested by emission control.
This allowed their vehicles to pass emission tests yet emit up to 40 times the legal amount of certain pollutants while the car was driven under normal conditions.
Volkswagen is the world’s largest automaker by vehicle sales, overtaking Toyota earlier this year. Volkswagen also owns the Audi and Porsche brands.
Within three days of the announcement the company lost a third of its market cap and could face fines of up to 18 billion in the United States alone.
Volkswagen has since admitted that the problem was worldwide, affecting more than 11 million vehicles. The CEO resigned and company has set aside $7.3 billion to cover the cost of recalls and other efforts to limit the damage. I doubt that it will be enough.
The scandal is disturbing for a number of reasons:
- Volkswagen went to great lengths to intentionally deceive consumers and governments about the pollutants that its cars were emitting.
- Many people that purchase “clean” cars pay a premium to do so because they care deeply about the environment. Yet instead of helping the environment, they were making it worse and paying to do so.
- The auto industry accounts for about 20% of German exports and directly employees 775,00 people. Germany is proud of its automobile-manufacturing tradition and is known for making high quality cars.
A company cheating a government entity for financial gain is one thing; a company cheating its customers by selling them something they believe in, something meaningful to them, and then delivering the very thing that they were opposed to is a much greater problem.
Loss of Trust = Loss of Brand Equity
Volkswagen has spent the better part of 60 years carefully building its brand equity with its loyal customer base. The company’s lack of values has now wiped out shareholder value and will cause billions of dollars in fines.
How will its customers react to this betrayal? Is this the only betrayal?
My view is that they will never recover the lost dollars or more importantly the lost reputation. When I read about this, my first thought was one I’ve had several times over the past 10 years as I’ve read about the collapse of many giants of the marketplace (Enron, World Com, Stanford Financial, etc.). That thought is this:
“The difficulty with values is that they don’t show up on a balance sheet.”
Mahatma Gandhi perhaps said it best with these words:
“Your beliefs become your thoughts, your thoughts become your words, your words become your actions, your actions become your habits, your habits become your values, your values determine your destination!”
The drive for success – whether corporate or personal – has always been riddled with land mines and potholes waiting to halt you, yet often it is the simple reliance on a strongly held set of values that guides you through safely. I know what you are thinking, “Well what about all those failures by companies that had written values and still failed?”
Simply writing them down does not ensure they are woven deeply into the fabric of the organization! While there are never guarantees a company will maintain their values, it’s important that you consider if they have them published, and if they are consistent with what you believe they should be. I suggest you look at their values before you look at their dividend history.
Volkswagen never actually bothered to even go through the exercise of writing down some values. They have brand values and stated goals, but as one of my clients said to me, “It’s not a German thing to focus on this.” What?
Values Cross Regional and Cultural Barriers
Values and ethics are not regional or cultural – they give the market a starting point on how to evaluate your actions and decisions regardless of where you are or who you are.
Volkswagen’s action is a monumental failure of epic proportions. My fear is that most CEOs or business owners will look at the current situation in disbelief, but within a few short months it will be long gone in their minds.
I encourage you, while this is still fresh in your mind, to take a serious look at the actual values that guide your organization; do all the people believe and follow them, do your customers know and trust them, and do you have evidence of how they guide your daily actions and beliefs? Don’t think that what happened at Volkswagen cannot happen to you. Your values have to be engrained into every part of and into every person in the organization.
Apparently at Volkswagen someone forgot to mention this to the design and testing group. Mahatma Gandhi, you were right after all.