September 23, 2015 5:42 pm
Volkswagen’s deception is a warning to every company
John GapperJohn Gapper
Suddenly, behaviour that was common practice is judged to be improper and possibly illegal
The most dangerous three-word phrase in business is: “Everyone does it.”
However conventional it is to bend the industry’s regulations, however great an advantage your rivals gain, however much pressure you face to do so too, there is a simple test for deciding whether to succumb to temptation. What would happen if the world found out? How great would the damage be?
Volkswagen’s installation of software to make its diesel cars emit more pollution on the road than in official tests is a disaster that has forced the resignation of Martin Winterkorn, chief executive. It could tarnish the entire European auto industry, which has invested heavily in diesel technology. But it is hardly the first time that a vehicle manufacturer has behaved sneakily.
It has become so common to game European fuel efficiency tests with tricks such as taping up doors and overinflating tyres to curb drag that most diesel cars are less fuel-efficient and environmentally friendly than claimed. In the US, Ford was found to have fitted an illegal “defeat device” — the charge facing VW — to vans in 1997, and Hyundai and Kia were fined $100m last year for fixing their tests.
The car industry is not alone in such behaviour. The same thing happens in many industries, from banking to pharmaceuticals. A few companies decide gently to bend the rules and stretch regulations and others soon follow. They know it is a little dodgy but it becomes normal practice and regulators turn a blind eye. Then, one day, someone goes too far and scandal erupts.
“Although I was operating within a system . . . in which it was commonplace, I was someone who was a serial offender,” Tom Hayes, the former UBS banker jailed for 14 years last month for rigging Libor benchmark rates, told the UK Serious Fraud Office. Mr Hayes was talented at it and at enlisting other traders to co-operate. An official investigation eventually ensued.
When the backlash comes, it comes with a vengeance. Suddenly, behaviour that was common practice, passed over with a nod and a wink, or secretly condoned to keep up with rivals, is judged to be improper and perhaps illegal. “Everyone did it” is no defence. Once it has been exposed to public gaze, and regulators have been shamed for failing to stop it, there is no forgiveness.
Amid an angry search for who was responsible within a company, senior executives are hastily drilled to face official inquiries and media briefings and answer the question: “Why did you do it?” There is no good response to it, although Michael Horn, VW’s US chief executive, had an accurate one: “We have totally screwed up.”
The key to getting away with bending rules is that it needs to be done subtly and discreetly. Abuse may be common but it cannot become too blatant, or it will alert regulators that tolerate some grey areas. The car industry is a prime example: it was public knowledge that the gap between the official fuel economy data and actual performance was wide but VW stupidly took the deception to a higher level.
Frauds often start in laboratories, where the outcome is bound to be artificial. A certificate attesting that a product works a certain way in a company’s laboratory — even if no one has cheated — cannot guarantee the same of its real-world performance. Inevitably, companies tend to focus on hitting the laboratory targets they are set, just as students cram for examinations.
The gap between a well-designed test and reality need not be huge. But bright minds will soon work out how to arbitrage the two, just as banks calculated how to meet regulatory capital standards with the minimum amount of equity capital in the run-up to the 2008 crisis. Hyundai and Kia cherry-picked the best mileage tests, achieved with a following wind and special tyres.
Crowd psychology rapidly takes hold. Company X knows what Company Y is doing to game its results without being punished by the regulator, and realises it cannot compete if it does not do the same. The tests are officially sanctioned, after all, and customers are not likely to question them. Any executive or engineer who tries to resist is overruled as naive or difficult.
Rivalry creates evermore ambitious attempts to gain an advantage, and greater reputational risk. VW contrived to fit its rule-breaking gadget to 11m cars under the noses of regulators before it was discovered. Even researchers at the International Council on Clean Transportation, which identified the deception in Europe, did not believe that it would be so blatant.
Sooner or later, one company goes too far. There is bound to be a Libor super-rigger, a VW, or a GlaxoSmithKline in China, which flouts the law to such an extent that it cannot be concealed. Many companies had paid bribes to doctors and hospitals in China, but its government was bound one day to make an example of a western company doing it so systematically.
The head of a Wall Street bank once told me the lesson he had learned from financial scandals was that ethics are absolute, not comparative. “We don’t behave as badly as our rivals” was a tempting but dangerous attitude. Many companies imperil themselves by clinging to this mantra.
Volkswagen wins the dubious honour of being the worst-behaved company in its industry, but it was a contest.
john.gapper@ft.com
Volkswagen’s deception is a warning to every company
John GapperJohn Gapper
Suddenly, behaviour that was common practice is judged to be improper and possibly illegal
The most dangerous three-word phrase in business is: “Everyone does it.”
However conventional it is to bend the industry’s regulations, however great an advantage your rivals gain, however much pressure you face to do so too, there is a simple test for deciding whether to succumb to temptation. What would happen if the world found out? How great would the damage be?
Volkswagen’s installation of software to make its diesel cars emit more pollution on the road than in official tests is a disaster that has forced the resignation of Martin Winterkorn, chief executive. It could tarnish the entire European auto industry, which has invested heavily in diesel technology. But it is hardly the first time that a vehicle manufacturer has behaved sneakily.
It has become so common to game European fuel efficiency tests with tricks such as taping up doors and overinflating tyres to curb drag that most diesel cars are less fuel-efficient and environmentally friendly than claimed. In the US, Ford was found to have fitted an illegal “defeat device” — the charge facing VW — to vans in 1997, and Hyundai and Kia were fined $100m last year for fixing their tests.
The car industry is not alone in such behaviour. The same thing happens in many industries, from banking to pharmaceuticals. A few companies decide gently to bend the rules and stretch regulations and others soon follow. They know it is a little dodgy but it becomes normal practice and regulators turn a blind eye. Then, one day, someone goes too far and scandal erupts.
“Although I was operating within a system . . . in which it was commonplace, I was someone who was a serial offender,” Tom Hayes, the former UBS banker jailed for 14 years last month for rigging Libor benchmark rates, told the UK Serious Fraud Office. Mr Hayes was talented at it and at enlisting other traders to co-operate. An official investigation eventually ensued.
When the backlash comes, it comes with a vengeance. Suddenly, behaviour that was common practice, passed over with a nod and a wink, or secretly condoned to keep up with rivals, is judged to be improper and perhaps illegal. “Everyone did it” is no defence. Once it has been exposed to public gaze, and regulators have been shamed for failing to stop it, there is no forgiveness.
Amid an angry search for who was responsible within a company, senior executives are hastily drilled to face official inquiries and media briefings and answer the question: “Why did you do it?” There is no good response to it, although Michael Horn, VW’s US chief executive, had an accurate one: “We have totally screwed up.”
The key to getting away with bending rules is that it needs to be done subtly and discreetly. Abuse may be common but it cannot become too blatant, or it will alert regulators that tolerate some grey areas. The car industry is a prime example: it was public knowledge that the gap between the official fuel economy data and actual performance was wide but VW stupidly took the deception to a higher level.
Frauds often start in laboratories, where the outcome is bound to be artificial. A certificate attesting that a product works a certain way in a company’s laboratory — even if no one has cheated — cannot guarantee the same of its real-world performance. Inevitably, companies tend to focus on hitting the laboratory targets they are set, just as students cram for examinations.
The gap between a well-designed test and reality need not be huge. But bright minds will soon work out how to arbitrage the two, just as banks calculated how to meet regulatory capital standards with the minimum amount of equity capital in the run-up to the 2008 crisis. Hyundai and Kia cherry-picked the best mileage tests, achieved with a following wind and special tyres.
Crowd psychology rapidly takes hold. Company X knows what Company Y is doing to game its results without being punished by the regulator, and realises it cannot compete if it does not do the same. The tests are officially sanctioned, after all, and customers are not likely to question them. Any executive or engineer who tries to resist is overruled as naive or difficult.
Rivalry creates evermore ambitious attempts to gain an advantage, and greater reputational risk. VW contrived to fit its rule-breaking gadget to 11m cars under the noses of regulators before it was discovered. Even researchers at the International Council on Clean Transportation, which identified the deception in Europe, did not believe that it would be so blatant.
Sooner or later, one company goes too far. There is bound to be a Libor super-rigger, a VW, or a GlaxoSmithKline in China, which flouts the law to such an extent that it cannot be concealed. Many companies had paid bribes to doctors and hospitals in China, but its government was bound one day to make an example of a western company doing it so systematically.
The head of a Wall Street bank once told me the lesson he had learned from financial scandals was that ethics are absolute, not comparative. “We don’t behave as badly as our rivals” was a tempting but dangerous attitude. Many companies imperil themselves by clinging to this mantra.
Volkswagen wins the dubious honour of being the worst-behaved company in its industry, but it was a contest.
john.gapper@ft.com
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