To say Volkswagen had a bad week would be the understatement of the year. Earlier this week VW was forced to admit it had engaged in fraudulent conduct, affecting millions of cars worldwide. Driver safety is not at risk, but its reputation is in tatters, after revelations it built software into its diesel-powered cars, designed to cheat emission tests by delivering much better test results than the car is capable of delivering under normal driving conditions. The cars’ real emission levels are up to 40 times above what’s permitted by US emission standards.
VW has set aside €6.5 billion to help cover the costs of the scandal, although given the scale of the problem that amount is unlikely to be sufficient. The US Environmental Protection Agency (EPA) noted VW could face regulatory penalties of up to $US18 billion in the US alone. Of course the EPA is unlikely to impose the maximum fine, but it is still a good indicator of the scale of the problem VW is facing.
In the meantime VW’s share price plummeted 30% on the back of the scandal. It’s only a question of time before shareholders start looking at legal options to hold it to account. Customers are also likely to band together to seek redress for having been misled. Dealerships affected will be looking to be compensated as well. These anticipated legal actions would make a significant addition to the costs VW is facing.
CEO, Martin Winterkorn promptly acknowledged the company’s serious misdeed, took full responsibility for the fraud, and abruptly resigned on Wednesday.
A criminal investigation is already pending in the US, while back home investigations into the company are also underway in most European countries. Regulators in Australia and Asia are also asking questions, and it is highly likely that a lot of revelations are yet to come.
This raises the question: is Volkswagen a dead brand walking? Did VW just flush away close to a century of goodwill and brand reputation?
Close, but perhaps not. Everything will depend on how the company handles this crisis over the coming weeks and months.
Crisis management is serious business and it’s not for the faint of heart:
- first, you must act fast, and I mean f.a.s.t. – the first 48 hours will frame the public perception of your management of the crisis;
- second, you must take full responsibility – your insurers and internal stakeholders may have a heart attack over this aspect, but in a major scandal, owning it, and taking control of it, is critical; and
- third, move on – yes, move on, by promptly developing a sensible and publicly acceptable response that addresses the issue, implementing it with urgency, engaging with the public frankly and openly, and starting to rebuild the brand, even if there are players who will continue to tear it down for a while.
This scandal will be a difficult one to manage, because it involves a breach of trust that was calculated, deliberate and fraudulent.
The effects of VW’s actions also go to the heart of one of the biggest issues confronting humanity, climate change. We don’t know how many of its customers brought their cars thinking it was an environmentally sound choice, and how those customers may react to these revelations.
This is not the Tylenol crisis of 1982, which became a textbook example of crisis management. In that case Tylenol itself was a victim of what would no doubt be considered terrorism today. VW on the other hand is the guilty party here – a fraudster.
To its credit, VW acted fast and its CEO took full responsibility, within 48 hours of the news breaking.
Will that, together with the resignation of the CEO, be enough? I doubt it. It’s hard to imagine that fraud on such a scale could have been perpetrated without widespread collusion by staff and management.
Consequently, step 3 of the standard crisis management process will require further self-examination, tangible action and eating a lot of humble pie on the part of VW, if it is to survive this scandal, which colloquially would be referred to in marketing and public relations circles as a ‘s**tstorm.’
The design, implementation and ability to keep hidden such a sophisticated algorithm implies a well-planned and executed ‘conspiracy.’ VW will have to lay bare the facts of the matter, and those responsible will have to be punished for the good of the brand, and quite possibly for its survival.
Although Martin Winterkorn acknowledged serious wrongdoing and took full responsibility, VW will have to continue to be seen genuinely contrite.
Words of apology and regret alone are unlikely to be sufficient in the circumstances. It will have to be seen doing the ‘right thing,’ and it should communicate to the public the steps it is taking to remedy the problem.
Openness and frankness
Again, VW had a good start in this aspect, by acknowledging the wrongdoing fast and being honest about the true extent of the problem by admitting up to 11 million cars may be affected by the issue.
It will have to continue to keep an open line of communication with customers, and the public, so trust can be rebuilt.
It will also have to cooperate with regulators in the most open manner possible, including coming clean about the extent of the collusion within the company to perpetrate this fraud, and ensuring those responsible are held accountable transparently, and as swiftly as possible.
Growing from the error
First, VW would be well advised to examine its corporate culture, which allowed this emission scandal to occur. It is clear there is a lot of work to be done on that front, and cultural change takes time.
Second, it should explore ways to mitigate the damage caused by its cars to the environment, and the climate. Public health may also have suffered as the result of the excess pollution emitted. VW should look at financing public health, environmental and climate initiatives … but quietly, because at the moment it will want to let the brand rest and recuperate, and anything too public in this area would likely appear disingenuous for a while.
When the time comes for the brand to reemerge, no doubt there will be those who will enjoy reminding VW of this incident – having done solid work in the background to remedy the damage that may have been caused by its excess pollution, will be a good basis for responding to, and shutting down, such critical commentary.