The emerging allegations that Volkswagen installed “defeat devices” on its cars to evade emissions requirements highlights the importance of good corporate governance during periods of industry disruption. Such periods challenge companies to respond to emerging market trends without losing focus on longstanding and well-established social concerns and expectations. It seems clear that VW failed to do so.
We consider the automotive industry poised for disruption for the following reasons:
- The industry has been subject to long-running, growing and often conflicting social and environmental pressures;
- The boards and management teams, especially in the United States, have not always successfully navigated these challenges, as evidenced by recent bankruptcies and safety failures; and
- Emerging technologies offer potential solutions to many transportation challenges, offering new entrants opportunities to compete with or complement industry incumbents.
The markets have unfortunately become accustomed to shocks to the auto industry, but the emerging revelations about Volkswagen are different. Safety issues at Toyota (decelerators), GM (ignition switches and airbags), and Honda/Takata (airbags) were sins of omission—primarily, these were failures of safety and quality oversight from the board level down. Volkswagen’s was a sin of commission—a deliberate decision to program each car sold to lie on emissions tests. The “defeat device” is not just a violation of the Clean Air Act; it is a deception of customers, dealers, employees and the public about the nature of the product being sold.
No one outside the company yet knows who made this decision or why. A key question will be whether top management or board members actively approved or even directed the deception, or if they merely failed to prevent it. Moreover, because the company firmly denied the allegations for months after they surfaced, shareholders will want to know at what point board members or management became aware of the deception. As of this writing, rumors linking management to the decision are being reported by European news agencies, but no definitive evidence has yet emerged.
Even if top management had no specific knowledge of the decision, the incident suggests a culture and set of incentives within the company that enabled or encouraged cheating. Either way, the incident raises significant governance concerns.
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John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. John has over 16 years of experience in socially responsible investing and corporate governance. Previously, he was Director of Corporate Governance for TIAA-CREF, where he oversaw the voting of proxies at CREF’s 8,000 portfolio companies and engaged in dialogue with corporate boards and management to promote sustainability and good corporate governance. An Adjunct Assistant Professor at Columbia Business School, John is also a member of the Advisory Council to the Sustainability Accounting Standards Board. He writes and presents widely about the relevance of social responsibility to investment performance.