Volkswagen – The Cost of Deception

“We screwed up.”  Michael Horn, head of VW’s U.S. operations, offered a stark apology and admission of cheating on diesel emissions.  “Our company was dishonest with the EPA, and the California Air Resources Board and with all of you,” was the confession offered by Mr. Horn during a press conference to discuss the now explosive findings of devices added to their cars to fake the appearance of passing emissions tests.  The scandal, like most acts of deception, will widen into a predictable pattern of lost public trust, stock price declines, calls for the resignation of senior management and regulatory fines and legal action that may exceed 20 percent of the value of the firm, in some estimates.

Is deception worth the risk?  The answer may surprise you!  While it may be easy to condemn Volkswagen, as many will in judging the firm’s actions, should we rush to judgment so quickly?  Jonah Lehrer, author of “How We Decide,” discusses the “Uses of Reason” and how rational people placed in specific circumstances can lose perspective and make irrational decisions.  The shortened version of the story: In 1949, in the grassy highlands of Montana, firefighters had been called in to fight what was described as a minor brush fire.  The location, Mann Gulch, was wedged between the pine trees of the Rocky Mountains and the grasslands of the Great Plain.

The fire, which began in the Rockies, had grown out of control by the time the firefighters reached the gulch.  The small crew of smoke-jumpers were inexperienced and had no map of the terrain, but they had moved down toward the Missouri River in case things got out of hand. Suddenly, the winds changed course and began pushing the fire toward the men.  As they rapidly retreated down the gulch, it became obvious the fire was moving faster than the men could run.  However, a remarkable thing happened: the leader of the firefighters ordered the men to stop running from the fire and set fires where they stood. Unfortunately, the other firefighters either didn’t hear the command or decided the thought of facing sure immolation was too much and kept running.  The captain of the firefighters survived while his men died in the rushing firestorm.

Caught up in the sheer panic of moment, the firefighters experienced what is known as “perceptual narrowing.”  The problem with panic is that it narrows one’s thoughts.  Panic reduces awareness to the most essential facts, the most basic instincts, with survival being the strongest of these instincts.

What does fighting fires have to do with Volkswagen?

Decision making under pressure in the face of uncertainty is one of the biggest risks faced by all organizations.  Decision failures such as the one experienced by Volkswagen are the most costly of all the risks organizations experience.  If you add up all of the internal control failures, audit failures and operational risk failures, none exceed the loss of credibility, stock value or public trust as does the act of deception.  The very survival of Volkswagen is now being questioned by some in the media.  What could have led to Volkswagen’s perceptual narrowing event?

Volkswagen had built an assembly plant in Chattanooga, Tennessee and had plans to invest $7 billion to revamp its family of Passat diesel model cars.  Volkswagen’s Passat was losing market share to Toyota and couldn’t keep up with model revamps of its competitors. Volkswagen had set a goal of overtaking Toyota by 2018, but instead lost 10 percent share in 2014 and was down 16 percent year-to-date in August of this year.  In other words, panic had set in.

There is no justifiable excuse for deception, but the rush to judgment should be muted with a sense of humility.  Small deceptions happen at many firms with the same level of acceptance that appears to have been pervasive at Volkswagen.  Price deception, new product launches with known defects and financial products with hidden fees are just a few examples of deceptive practice that are passed as justifiable business decisions to achieve higher sales goals or justify stock options and bonuses, with the reasoning being, “others are doing it; why can’t we?”

Much will be made of Volkswagen’s deceit, and many were complicit with devising, installing, inspecting, auditing and accounting for the deceptive devices and executing such a massive fraud.   However, instead of pointing fingers, Volkswagen should be viewed as an opportunity for discussion in Board rooms, executive suites, risk management and auditing departments, and on the shop floor.  Deception, no matter its size, sends a signal to the entire organization what you really value.