Too big to fail

Monday, Sep 28, 2015, 11:09 PM | Source: Pursuit

By Ben Neville, Caron Beaton-Wells

Too big to fail


Volkswagens were once the solid, reliable and ethical face of German business. But after the automotive company admitted rigging emissions tests on its diesel cars, its worldwide reputation lies in tatters.

The scandal erupted after researchers from West Virginia University did their own tests on VW vehicles, and found discrepancies with the results promoted by the company.

Now Volkswagen's CEO has stepped down, and its share price has plummeted. VW owners around the globe are set to launch what many lawyers are saying could be the biggest class action in history.

West Virginia University, where researchers discovered the fraud. Picture: Woodburn hall wvu by Swimmerguy269 via Wikimedia Commons

But will this mean the end of the iconic brand, which employs more than half a million people around the world? No, says business ethics expert Dr Ben Neville of the University of Melbourne's Faculty of Business and Economics.

"VW is too big to fail," he says. "I don't think that the German government wants to hang them out to dry, because they are scared of what is going to happen to the Made in Germany brand.

"There are just too many vested interests – too many employees that will get sacked that need their jobs, too many German shareholders.

There are too many people that have VW cars that don't want to be driving around a car that was sold to them by a company that no longer exists.

Apart from anything else, says Dr Neville, if VW folds now, it will be impossible to compensate all those affected by the scandal.

He draws parallels with the case of building supplies manufacturer James Hardie, who continued to sell asbestos products for many years, despite knowing that they cause fatal diseases such as asbestosis and mesothelioma. They then lied about how much money was in a fund set up to help victims.

Asbestos is known to be deadly. Picture: Asbestos bagged twice by NAVFAC. Flickr via Creative Commons

"Not only had they knowingly manufactured and sold this stuff for a good two or three decades, then, while their victims were dying a horrible, painful death, they kicked them in the guts," says Dr Neville.

"An agreement was reached that 40 per cent of James Hardie's after-tax profits would go into properly compensating the victims.

"The victims are dependent on the future success of this company that has done so much damage."

But the desire to see someone punished for Volkswagen's unethical behaviour is strong.

Professor Caron Beaton-Wells of Melbourne Law School says it is essential that enforcement agencies take action to hold accountable both the company and the individual executives.

The VW Beetle is one of the world's most loved car designs. Picture: Pixabay

"Individual accountability is a foundation of social control in democratic societies, and also serves important instrumental functions such as general deterrence," she says.

"It is also vital to maintaining the legitimacy of enforcement systems, which itself is crucial to ensuring ongoing popular and political support."

She says class action is inevitable in the US, where the scandal broke, and cannot be ruled out in other jurisdictions, including Australia.

"Australia has an effective class action regime under the Federal Court of Australia Act and there has been a striking upward trend in class actions in the last five to ten years," she says.

"Given the scale and consequences of its reported conduct, one could expect settlements by VW in respect of this case to dwarf the pay out figures we have seen from class actions to date."

Whether individuals at Volkswagen will be held liable for the fraud is another matter.

Professor Beaton-Wells says that government agencies have been vocal about the need to hold individuals accountable for corporate wrongdoings.

The legal case against VW could be huge. Picture: Pixabay

"In the US, in particular, the emphasis in policy statements and enforcement official speeches has been on applying criminal sanctions, jail time especially, to individuals," she says.

"A similar rhetoric has been heard from other enforcers, including the Australian Competition and Consumer Commission."

But as yet, this has yielded patchy results, at best.

"In the US, despite massive corporate fines for the substantial harms caused by companies caught up in financial, housing and environmental scandals in recent years, few actions have been taken against executives," says Professor Beaton-Wells.

"Indeed, in a very recent case involving similar conduct to the Volkswagen scandal, the US DOJ imposed a $900m fine on America's largest car manufacturer, General Motors, for failing to recall cars with an ignition switch defect – a defect that killed 125 people and injured 275 – yet no charges were laid against GM executives.

"The US Department of Justice recently released revised policy guidelines to all federal prosecutors emphasising the need to get tougher on individuals, including directives that would see companies compelled to turn over evidence that incriminates their employees.

The VW case will be the first major test of this new policy.

As the legal case unfolds, VW is doing its best to salvage what is left of its reputation. And that won't be an easy task, says Dr Neville.

"The brand is about reliability, which is about trust. They have cheated the Environmental Protection Agency, but also us," he says.

The only way forward for VW now, says Dr Neville, is for them to fall to their knees and beg for mercy.

"They will have to be ethically bulletproof for a long, long time, until they can potentially recapture the goodwill."

Dr Neville says what appears to be grossly unethical behaviour by VW could in fact be considered as poor risk management.

He says the system whereby individuals are rarely held accountable for bad behaviour means corporations often push the boundaries of what is acceptable from an ethical standpoint.

"If the only entity that can be punished is the company, how do you punish it? You can't put it in jail," he says.

"The BP Deepwater Horizon oil spill, which caused the deaths of 11 people and untold environmental damage, cost BP $54 billion, but they have been able to absorb that cost. It hasn't stopped them."

The Deepwater Horizon disaster cost BP billions of dollars. Picture: Deepwater Horizon offshore drilling unit on fire 2010 by US Coast Guard via Wikimedia Commons

The silver lining to this case, says Dr Neville, is that it will show the impact of regulation and enforcement of environmental regulations. And, of course, steps can be taken to correct the problem.

In time, VW will recover its reputation, he says. But the case should be a warning to other corporations.

"Even within some of the really good corporations, they are not always the same across everything they do," he says.

"Corporations have to dot every I and cross every T because something like this creates a stigma for the entire organisation."