Very Worrying: VW, Leadership and Ethical Culture

Guest post from Dennis Gentilin of the National Australia Bank and author of the forthcoming book, “The Origins of Ethical Failures


As we all know, last week the car manufacturer Volkswagen admitted to installing software in over 11 million of their diesel engine cars that was designed to cheat emission tests. Put simply, the software (colloquially referred to as “defeat devices”) is able to detect when a vehicle is being tested, and, when they are, reduce the amount of nitrogen oxide being emitted.

At worst, some commentators have suggested that Volkswagen are responsible for the premature death of people with respiratory conditions. At best, it is extraordinarily deceitful and unethical conduct.

It is highly unlikely that a scandal of this magnitude is the work of a handful of rogues. Rather it points to a systemic disrespect for principled conduct at numerous levels of the organization. No doubt the pending investigation will uncover failures in governance and compliance. However, as with all corporate scandals of this nature, my hypothesis is that at least one (or some) of the following five factors would have been at play:

Firstly, an environment would have emerged within Volkswagen that normalized and institutionalized unethical conduct. Behavior that to those outside the organization would seem to be totally inappropriate, would have been viewed as both an acceptable and legitimate way to conduct business by insiders. So powerful were these behavioral norms that they shaped the character of the people working within the organization.

Secondly, the most senior leaders, through their actions, choices and decisions, would have shaped and sustained this environment. This could have been done explicitly or implicitly, most likely the latter. It is not sufficient for senior leaders to claim they are innocent on the basis they were not personally involved or had direct knowledge of the conduct. Rather, the question they need to ask of themselves is, ‘Should I have known?’ For an incident of this magnitude, the answer is an unequivocal ‘yes’. Hence it was proper that CEO Martin Winterkorn resigned.

Thirdly, there was more than likely an obsessive, maniacal focus on goals and targets, to the detriment of other priorities. Commitment to reaching these targets created an environment where the ends justify the means, even when the means required people to engage in immoral conduct. In the famous words of Warren Buffet, “Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.”

Fourthly, flawed incentives would have played a role in encouraging the conduct. It may have been the case that those directly involved were handsomely rewarded (hopefully not). But even if this wasn’t the case, incentives would have played a role in the failure of leadership. Where opportunities presented themselves for leaders to act (as they inevitably do in these types of scandals), they were incentivized to turn a blind eye and refrain from asking any difficult questions.

Finally, there quite possibly was an environment where there was excessive power, and that power was in the hands of the factions involved in or condoning the conduct. This dynamic would have made it incredibly difficult for those questioning the conduct to give voice to their values. Some, under incredibly challenging and risky circumstances, may have attempted to do so. With this dynamic at play, they would have been sadly rebuked, and either forced to leave the organization, suffer in silence, or possibly embrace the prevailing norms.

The response from the regulators will be fascinating to observe, especially if other manufacturers are found to be engaging in similar conduct. It is worth noting that this is not the first time a manufacturer has been found to be using “defeat devices.” We can expect that the authorities in the U.S. will seek to prosecute individuals within Volkswagen. The Department of Justice made it clear in its recently released Yates Memo that it wants to hold individual actors accountable for corporate wrongdoing. Beyond this, we can also expect that regulators will respond by imposing a more onerous and strict regulatory framework. Coming from the banking industry, this is a response I am familiar with.

However, the experience from the banking industry should also provide some caution. The regulatory impasse has not only resulted in excessive bureaucracy, but more concerning it risks creating an approach to ethics that is rooted in compliance. This “compliance culture” does not build the capacity for good decision making. Rather, it becomes a crutch that practitioners and leaders use to ensure they are doing the “right” thing. Ethical reasoning is delegated to the rule book, and keeping the regulators happy is prioritized over reflection and thought, the hallmarks of ethical practice.

Regulators have come to the realization that legislation alone cannot create ethical cultures. As Reserve Bank Governor Glenn Stevens recently stated, “you can’t legislate for culture or character.” This is the work of boards and executives. They need to display an allocentric orientation, recognizing that their primary obligations are not to themselves and their organizations, but to the communities and public they serve. They need to display humility, and not only pursue profit responsibly, but also embrace failure – there are times when they will under perform and this can be done honorably. Finally, they need to display a commitment to ethical practice, and through their actions, choices and decisions, role model conduct that is aligned to their organization's values and exemplifies what it means to be truly socially responsible.

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