Search This Blog

Showing posts with label Volkswagen. Show all posts
Showing posts with label Volkswagen. Show all posts

Sunday 27 September 2015

The Observer view on corporate cheats

“If only everything in life was as reliable as a Volkswagen” ran the slogan of one of VW’s most iconic ad campaigns. Last week’s revelations that VW deliberately and illegally cheated emissions tests will rightly do irreparable damage to a global brand that has traded off its reputation for quality and reliability.

The way this has played out on both sides of the Atlantic raises two critical and related questions about corporate accountability. First, VW is only the latest in a series of global corporates to be caught breaking the law, a sure sign that, even where regulations exist, they are often not fit for purpose. Second, VW’s law-breaking has highlighted the extent to which powerful industry lobbying has watered down European testing to the extent it can be manipulated without illegal action, and at terrible cost. Air pollution accounts for some 50,000 premature deaths a year in the UK – three times as many as liver disease. But in the face of corporate lobbying, EU and government efforts to address it have been utterly inadequate.

“It was not an accident… a lot of work has gone into this,” was the verdict of John German of the International Council on Clean Transportation, the NGO that uncovered VW’s use of sophisticated software to flout US emissions tests. It’s a textbook case of predatory capitalism: a global business deliberately flouting regulations to harm the environment and cause unnecessary deaths in the name of profit.

The business community reacted with outrage when former Labour leader Ed Miliband condemned predatory businesses, accusing him of unfairly tarring the whole private sector with this brush. But each new corporate scandal makes this response more untenable. Scandals in banking, energy and food show that a serious misdemeanour at one global firm is often indicative of poor practice across a whole industry. Other car firms have already been found guilty of illegally manipulating tests, albeit not on the scale of VW.

The common lesson from these scandals is that capitalism is neither inherently good nor inherently evil. But unless they are rooted out, poor cultures that permit bad individual behaviour can and will develop in businesses. Companies such as VW employ the equivalent of a small city’s worth of people: in a company that size, there may well be employees with criminal tendencies. What’s critical is whether company cultures root out these bad apples, or whether they allow them to set in train a corporate race to the bottom. This is not an insight limited to business: the MP expenses scandal and widespread doping in athletics show what happens when people feel able to police themselves.

The financial crisis should have served as a warning of how imperfect our regulatory systems are at rooting out criminal practices within business. But the debate about reforms to corporate accountability has not been commensurate with the scale of the challenge. This is partly because there are no easy solutions. There is a consensus that regulators need to focus more on firm cultures, but little understanding about what an effective approach might look like. Greater personal liability undoubtedly has a role to play, but is no magic fix, as poor organisational cultures can encourage people to take risks regardless of the consequences.

The German system of corporate governance – often held up as an exemplar for its employee representation – has failed to prevent scandals afflicting big German companies such as Siemens, Deutsche Bank and Deutsche Telecom: a system designed to work for modestly sized, community-rooted businesses has not worked in holding global giants to account. But corporate governance is an imperfect lever through which to try to change corporate culture.

The VW case shows how a relatively small NGO running independent tests was eventually able to get US – if not European – regulators to take action. It demonstrates how independent civil society organisations can play an important role in holding corporates to account: but to do so, they need to be properly resourced.

This is particularly true given the way in which global companies have wielded their huge power to get regulations watered down, perhaps the most shocking aspect of how this has played out in Europe.

Air quality is a serious killer. But addressing it is easier than other public health challenges because it relies more heavily on changing corporate than individual behaviour. It is much more localised than climate change policy: unlike with carbon emissions, action to improve air quality in the UK overwhelmingly benefits the UK. Yet the immense lobbying power of the German car industry has knocked air quality down the agenda both in Brussels and Westminster. As a result, EU emissions tests are far laxer than in the US. There are even legal loopholes that allow car manufacturers to use the type of software that VW was found to be using in the US.

The European Commission and the government have both been warned about the implications: some diesel cars that have passed European laboratory tests have been found to be producing seven times the legal limit of nitrogen oxide emissions. But as reported by this paper today, the government has been seeking to block EU legislation to toughen up emissions tests. And it has ignored European legal limits for nitrogen dioxide levels altogether. It has taken a legal case by the NGO Client Earth to force Defra even to consult on proposals to reduce air pollution, proposals that experts believe fall far short of what’s needed. The scale of government inaction in the face of heavy industry lobbying is staggering even in relation to other public health challenges such as obesity and smoking.

As well as tougher European vehicle testing and a properly resourced plan from government to improve air quality, there needs to be a more holistic approach to environmental policy. Diesel has been promoted as a greener alternative to petrol as a result of its lower carbon emissions, but it performs much worse on air quality. There are similar issues with biomass. Yet climate change policy sits with the department of energy and climate change, while air quality is the responsibility of Defra.

VW’s behaviour has had terrible consequences for global human health. It is only the latest warning that business regulation remains unfit for purpose, and a powerful reminder that corporate lobbying has too often stopped governments taking action to prevent avoidable human suffering. It must not take another corporate scandal on this scale to get governments to act.

VW is further evidence that global business has become a law unto itself

Will Hutton in The Guardian

A well-functioning capitalism has, and will always need, multiple and powerfully embedded checks and balances – not just on its conduct but on how it defines its purpose. Sometimes those checks are strong, uncompromised unions; sometimes tough regulation; sometimes rigorous external shareholders; sometimes independent non-executive directors and sometimes demanding, empowered consumers. Or a combination of all of the above.

CEOs, company boards and their cheerleaders in a culture which so uncritically wants to be pro-business do not welcome any of this: checks and balances get in the way of “wealth generation”. They are dismissed as the work of liberal interferers and apostles of the nanny state.

Germany’s economy has been a good example of how checks and balances work well. But the existential crisis at Volkswagen following its systematic cheating of US regulators over dangerous diesel exhaust emissions shows that any society or company forgets the truth at its peril.

Volkswagen abused the system of which it was part. It became an autocratic fiefdom in which environmental sustainability took second place to production – an approach apparently backed by the majority family shareholder, with no independent scrutiny by other shareholders, regulators, directors or consumers. Even its unions became co-opted to the cause. Worse, the insiders at the top paid themselves, ever more disproportionately, in bonuses linked to metrics that advanced the fiefdom’s interests. But they never had to answer tough questions about whether the fiefdom was on the right track. The capacity to ignore views other than your own, no external sanction and the temptation for boundless self-enrichment can emerge in any capitalism – and when they do the result is toxic. VW, facing astounding fines and costs, may pay with its very existence.

So why did a company with a great brand, passionate belief in engineering excellence and commitment to building great cars knowingly game the American regulatory system, to suppress measured emissions of nitrogen dioxide to a phenomenal degree? Plainly, there were commercial and production benefits. It could thus sell the diesel engines it manufactured for Europe in the much tougher regulatory environment – at least for diesel – of the US and challenge Toyota as the world’s largest car manufacturer. Directors, with their bonuses geared to growth, employment and profits, could become very rich indeed.
Nor did the risks seem so outlandish. It was an open secret that car emission tests are artificial constructs, with special tyres, lubricants and measures to reduce car weight and air drag all allowed with the connivance of the regulators. To create a special piece of software that closed down nitrogen dioxide emissions during a test must have seemed to the executives involved only an extension of this artificiality. In any case, regulations are for busybodies, especially in areas as controversial as climate change and air quality. The software ruse was merely taking the game of cat and mouse between regulator and car maker to another level.

Former CEO Martin Winterkorn, who resigned last week over the scandal, claims he knew nothing of what was going on, blaming a few unnamed executives for making a catastrophic error of judgment. Winterkorn was the consummate German engineer, knowing every dimension of engine performance; if he did not know how the dirty diesel engines of some popular VW brands were successfully passing US emission tests it was only because he chose not to ask. He did not need to. He had the backing of the Porsche family, who own just over 50% per cent of VW’s shares and who agree to vote as a block; the support too of the state of Saxony with a further 20% per cent –and of union members on the supervisory board. Winterkorn could run a company of 600,000, as Süddeutsche Zeitungremarked, as if it were North Korea.

VW is about production and jobs which trumps concerns about environmental sustainability – a culture than unites unions as much as the Porsche family. And Winterkorn was its standardbearer, leading the charge against the tightening of EU emission regulations – urging weaker targets and a longer timetable. Despite a vast R and D budget, VW is far from a leader in the electrical car or hybrid market. Mr Winterkorn’s bonuses were based on his capacity to deliver production, jobs and profits: environmental sustainability or engaging with wider stakeholders did not get a look-in.

Make your god the share price, as so many British and US companies do, and you create one basket of problems – under-investment, excess deal-making and cutting corners. Abuse the stakeholder system, as did VW, and make your god production on any terms, damning the concerns of outsiders as irrelevant, and your end can be equally grisly. Capitalism, in short, may have boundless creative and innovative energy – but it also has boundless ways to go wrong. Intriguingly, recent work by a group of researchers at Harvard and the London Business School compared 90 American companies that took sustainability seriously with 90 who did not. Over 18 years the 90 committed to sustainability delivered annual financial returns 4.8% higher than the other 90.

In order to deliver sustainability they had to organise themselves around a core purpose, and then embed checks and balances to keep themselves honest. They shaped the way they were governed to open up to outside stakeholders with whom they checked their strategy. Their reporting measures embraced many metrics beyond share price and they rewarded directors for meeting them. Sustainability was a route to more open governance and rounded strategy – and it delivered.

VW did not believe in this any more than the British government does, now steadily rolling back “green crap” and efforts to promote sustainability as “anti-enterprise”. Transport secretary Patrick McLoughlin, under fire for doing nothing when he was sent the same damning report as the Americans 11 months ago, will have known that in Tory terms there would be no rewards for being cast as a bleeding-heart green. Enterprise is about getting regulators off car-makers’ backs and disempowering meddling stakeholders, especially trade unions.

Yet nor is it right in Corbynesque style to damn capitalism with a reflex call for stronger unions and public ownership. The government of Saxony and union members of VW’s supervisory board proved ineffective whistleblowers. They were not sufficiently interested in human betterment or the fatal consequences of excess nitrogen dioxide emissions. They just wanted jobs at any cost. Checks and balances alone don’t work: they have to be animated by an honest acceptance of mutual responsibility between firms and society – a moral ethic that must inform unions, regulators, shareholders and systems of corporate governance alike. VW lost the plot. But so, in a more profound way, have both the apologists and critics of western capitalism.

Thursday 24 September 2015

The Volkswagen scandal reveals the corruption of the Left's regulation dreamworld

Liberal, competitive capitalism is the opposite of the law of the jungle because it depends on rules. Those who transgress must be swiftly punished.


Allister Heath in The Telegraph


If I were Jeremy Corbyn, I would be thanking my lucky stars for the scandal that threatens to engulf parts of the car industry. Nothing is more guaranteed to galvanise the Left-wing cause than a corporate conspiracy – and the VW diesel affair, which reads like the script of a Hollywood movie, ticks all of the boxes. Lies, secret computer technology programmed to fool the authorities, a deliberate breach of environmental regulations by a rapacious corporation: it’s all there, and crying out for the full George Clooney treatment.

Fortunately, this latest blow to the reputation of big business won’t be enough to rescue the doomed Labour leader. But those of us who support capitalism must lead condemnations of VW’s egregious behaviour, and explain clearly that a functioning free market implies a scrupulous adherence to the rule of law.

What is most damning about this scandal is that an almost identical deception had already been uncovered. In October 1998 the US Department of Justice and Environmental Protection Agency fined seven heavy-duty diesel engine makers for equipping their engines with an older version of “defeat devices” – just like in the VW scandal, software designed to detect and trick the official tests. The automotive industry must be forced to change its ways. It must become truly transparent, and there needs to be a crackdown on abuse.

It is vital that free-marketers explain again and again that proper liberal, competitive capitalism is the exact opposite of the law of the jungle or of a Hobbesian free for all: it is a remarkably disciplined system. Individuals are encouraged to pursue their self-interest; but unlike in a kleptocracy, they can’t force anybody to trade with them and must respect the sanctity of private property rights, contracts and the legal system.

It doesn’t matter how big your company is or how rich you are: a pledge must be met; a product must deliver what it says on the tin; lies are never acceptable. Breaking the law must lead to pitiless prosecution; and selling customers a pup must result in litigation and thorough compensation.

Free markets are at once realistic about human nature – unlike naive Leftyism, they don’t assume that people are altruistic or self-policing – and civilising, in that they force people to adhere to strict norms of behaviour. As Milton Friedman put it in his famous libertarian theory of business ethics: “There is one and only one social responsibility of business ... to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

There will always be dishonesty, in all walks of life, in every industry and profession, in the public and private sector and in all economic and social systems. Yet humanity’s inherent fallibility, and the need for eternal vigilance, doesn’t invalidate the fact that free markets are the best possible system to create wealth and prosperity for all.

But while corporate scandals always force the political right onto the defensive, this particular story is just as bad, if not worse, for the Left-wing world-view. It shreds many of its favourite assumptions, highlights endless government and political failures and mercilessly exposes the flaws at the heart of the ridiculous virtue-signalling that has passed for environmental policy in recent years.

Take the nonsensical claim that the City of London is a cesspool of iniquity, home to a uniquely amoral tribe of adrenalin-junkies willing to lie and cheat whenever bending the rules is deemed to be a gamble worth taking. The truth is that no industry can claim moral superiority, and all are blighted by a tiny minority of rogues: even old-fashioned manufacturers in the supposedly gentler, law abiding industrial capitals of Old Europe can and do commit fraud, taking insane risks to pull the wool over regulators’ eyes. The anti-London euro-enthusiasts were wrong, once again.

Or consider another Left-wing shibboleth: the idea that Wall Street’s lobbying and influence means that it effectively controls the US political system. Yet the VW scandal reminds us that heavily unionised car manufacturers have traditionally been far better at getting their way, collecting handouts and bailouts and directing legislation. They have convinced politicians, especially in Germany, France and Brussels, to turn a blind eye to indefensible testing practices that would never be tolerated in any other industry.

What must be most galling to the Left is that VW is structured exactly in the way they would love every company to be. It is partly owned by a German state; the remainder of its ownership structure means that it is protected from a hostile takeover; and it has the sort of two-tier board structure beloved of the dafter corporate governance activists, complete with plenty of trade union representation. Yet it didn’t make a blind bit of difference. In the fraud stakes, the Anglo-American model of financial capitalism and the Germanic and Japanese models are one and the same. Once again, the euro-enthusiast belief that everything is always better in Europe has been spectacularly refuted.

Last but not least, the scandal has highlighted the gross hypocrisy of politically correct companies, as well as how the environmental agenda can backfire spectacularly. Industrial firms should be honest: if they don’t like green rules, or believe that meeting them would impose price hikes on their customers, they should say so, not loudly sign up and bask in the moral high ground while surreptitiously ignoring the rules.

As to the embrace of diesel as a supposedly cleaner alternative to petrol, it has been a disaster caused entirely by official error. Desperate to meet Kyoto Treaty carbon dioxide targets, the European Union decided in the late 1990s to bet the bank on diesel. This reduced CO2 but increased emissions of nitrogen dioxide and particulates, an own goal if ever there were one.

The idiocy of the policy, backed by German carmakers, but for which the Eurocrats must bear responsibility, is only now becoming apparent. Nobody emerges from this sorry saga with any credit.