The VW Debacle: How Large Successful Organizations and Institutions Can Become “Bad Barrels” And What To Do About It

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The outlines of Volkswagen’s comprehensive program to defeat national auto emissions laws are becoming clearer. According to the New York Times the company began installing software designed to cheat on emissions test in 2008, when they realized that their new E89 diesel engine could not meet the pollution standards in the US. Three (now four) top managers who were involved in the development of that engine have been suspended. The NYT article goes onto mention that that it was also in 2008 that the CEO of VW, Martin Winterkorn, had vowed to triple the company’s sales in the US within ten years. When he became CEO in 2007 he had a reputation for being a detail-oriented manager who hated getting bad news and dealt harshly with subordinates who failed to meet their targets. All this in a company known generally for its high-pressure management methods…

The debacle at VW is just another instance of the alarming propensity for large, apparently successful organizations to spawn unethical and even criminal activity for long periods of time and then to cover it up. When they are eventually revealed, these activities can result in existential threats to the organizations involved. The recent General Motors cover-up of its faulty ignition locks is an obvious parallel but Johnson & Johnson (J&J) is another example of a corporation that has encountered more and more ethical issues in recent times. Only a few weeks ago NYT columnist Nicholas Kristof reported on J&J’s aggressive attempts to promote off-label uses of its mega-hit drug Risperdal. The company eventually pleaded guilty to misbranding the drug and was fined over $2.2 Billion. No individual executives were charged with any wrongdoing. As Kristof points out, Alex Gorsky, the executive responsible for the marketing of the drug in these ways has now been elevated to the job of CEO! This suggests that the internal reward systems for pursuing results at all costs can be very real. This incident occurred shortly after J&J’s tardy recall of faulty hip joints as well as the discovery of multiple quality problems in J&J’s factories. J&J used to be known as the “Credo Company” that always put its patients first. How it has drifted!

The standard explanation of these events, at least in America, is that there are “bad apples”, unethical individuals in organizations, and that they must be punished. One outside comment on Kristof’s Risperdal article in the NYT read in part: “Let us be realistic. Corporations do no wrong. The people who run the corporations are the wrong doers. In fact, the people who run the corporations award themselves huge bonuses when their corporations take in big bucks. Want to put a stop to this corporate irresponsibility? Punish the people behind the corporations…” This is a little reminiscent of the National Rifle Association’s disingenuous argument that “Guns don’t kill people, people kill people.” Yes, it is people who kill people but only in Aristotle’s sense of an efficient cause. Guns are the material cause and with fewer guns fewer people would kill people.

Just as the US needs a more systemic approach to gun control so do we need a more systemic approach to corporate wrongdoing. Obviously there may be people within companies who are unethical – “bad apples”. They must be discouraged from acting badly. But the phenomenon is so pervasive that it’s time to look at how large successful organizations can become “bad barrels” – coercive contexts – that produce “bad apples”. We need to understand how good people can do bad things in bad situations and how those situations are created. This is where an ecological/systems view becomes helpful. From this perspective enterprises are conceived in passion, born in communities of trust, grow through the application of reason and mature in power. Here they tend to get stuck: their founders’ sense of high purpose has been steadily diluted as people were hired for their technical abilities and rewarded for results, rather than their dedication to any worthy cause. The focus is all on short-term what and how and not on long run who and why.

An ecological/systems perspective points out problems at several other systems levels. One is the management practice of setting stretch performance goals top-down, using a one-way communication process, with the organization’s budgeting process linked directly to performance management. This is a corruption of the Management by Objectives (MBO) approach that is associated with Peter Drucker. Drucker’s intention was for MBO to be a vehicle for self-control. Unfortunately it has been used more often as an instrument of domination. When objectives are set top-down and metrics become targets the stage is set for trouble. Managers will do whatever it takes to manipulate and game the system. Add a power culture and a climate of fear and intimidation and the result is self-sealing hall of mirrors. Executives in such companies dwell in an echo-chamber, the walls of which are papered with organizational “selfies”. When everything falls apart they can deny they knew anything about it. That may be true, but they created or maintained the culture that enabled that “deniability”.

A systems perspective points to an even higher systems level that encourages the use of managerial techniques, including the dysfunctional application of MBO, as tools of power. This is the shareholder value movement, which has been ascendant in North America since the 1980s. If the only purpose of the firm is to “maximize shareholder value”, this precludes discussion of the larger roles of corporations in society. It also encourages a pervasive short-termism on the part of management. It creates a so-called success trap that works in the same way that an addiction ensnares an individual – the short-term rewards of the activity are positive, which sustains the behaviour, even though the long run consequences are disastrous. Of course if the long run consequences of any given behaviour are uncertain, then the trap is likely to be even more powerful.

The bottom line is that we need to deal with corporate malfeasance systemically, looking at every level of the systems to understand both the behaviour and the technical, managerial and governance factors that contributed to it. The result is multiple levels of causation:

1. The basic technology. Some technologies e.g. diesel in the case of VW, pose inherent problems in meeting emission standards. Does the technology currently exist for diesel to be as clean under all circumstances as VW claimed it to be? Who decided that it was and committed the company to it?
2. The technical people in the system and the incentive schemes that guide their behaviour. Why did they do what they did? To what extent were their professional engineering standards compromised by the corporate reward system and culture?
3. The management group, their worldviews, the culture they create and maintain, the goals that are set and the social technology (management practices) they use. Did they create a self-sealing system that rejected bad news of any kind?
4. The corporate system of governance and the power structure that sustains it. In VW’s case this structure seems to have been particularly dysfunctional.
5. The overall economic system – capitalism and what it has become e.g. the emergence of shareholder value theory (unlikely to be a factor in VW, but one never knows). If capitalism is like an ecosystem then it may be subject to the same succession dynamics as any other system and it is likely that it is in urgent need of renewal. What would an ecological renewal look like?

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One Response to The VW Debacle: How Large Successful Organizations and Institutions Can Become “Bad Barrels” And What To Do About It

  1. warren says:

    Welcome back David ~!

    As usual, excellent dissertation 🙂

    Volkswagen may want to change its motto from “Das Auto” to
    “Das might be a little fishy” 😉

    However, it will be interesting to see how many other auto companies are
    doing the much the same as VW did here. Also, regarding testing of emission standards…while it is apparent that VW admitted wrongdoing, and is responsible, I am wondering a few things:

    1) If VW is sued and compensates owners/governments worldwide, where does the bulk of the money go if awarded and given out? Does devastated car owner get 300 bucks, a recall and a pat on the back, and the rest go to the various countries government coffers? What about the lawyers?

    2) If one can sue VW, cannot one or many sue the EPA for not catching the fraud?

    3) Do people even care. If it is found the diesel engines in VW and in other car companies are not meeting emission standards, and have to be fine tuned, to meet them, ‘gas’ mileage will drop severely. Who wants a full proof emissions standard car that was getting 30 mph, and now only gets 20 mph?

    Wow, what a mess!

    Warren 🙂

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