Recently, Yonhap News of Korean announced that South Korea will conduct fuel efficiency tests on Volkswagen models that have been imported into Korea after the news that Volkswagen admitted to falsifying fuel emission tests results. It did this by using software that activates emission controls only when the car is being tested. How serious is this? It’s a PR nightmare!
In fact, the fuel emission scandal is so serious that the CEO of Volkswagen stepped down though he claims he was not aware of any wrongdoing. The US EPA has announced that pollution level of the diesel engine used in Volkswagen models could be 40 times higher than previously thought. Shortly after the scandal broke, Volkswagen’s shares tumbled by more than 30 percent. South Korea will now initiate an investigation into the fuel emission issue on Volkswagen and Audi models as is other countries such as the US, China and the UK. There are reports of class action lawsuits as well as criminal investigations by the DOJ and other regulators including those from Germany. All told, Volkswagen could face legal fines in the US of up to $18 Billion US besides fines in Germany and elsehwere.
What happened? How could this of happened if strong compliance controls and risk management processes and procedures were in place to prevent such a catastrophe? The answer is that in Volkswagen there was a lack of strong compliance controls and risk management processes. Though in this age and time, it is incredible that a company the size of Volkswagen could let a scandal like this happen is amazing. The fact that the software was put in place meant more than one engineer was involved. Volkswagen now admits that at least 11 million cars were equipped with the software devices that cheated on fuel emissions. Something this massive can only result when there is a complete breakdown of ethics and corporate social responsibility in all levels of management. It is most likely that Volkswagen Upper Management knew about the software devices and probably someone at the Board level was aware of it too. Therefore, the compliance culture at VW broke down over the years.
When President Ronald Regan ran for the US Presidency, he often talked on how the US was “the shining city upon the hill.” This was when the cold war was still rampant and that the West viewed the US as the last bastion of hope. Today, with the cold war allegedly behind us, much of the world is engaged in blaming companies for all of the evils that have befallen the world. In response, most Western companies as well as companies in Asia and elsewhere have enacted compliance processes, corporate social responsibility programs and corporate ethical codes of conduct in an attempt to show how responsible they are as good corporate citizens. Most agree they must foster a culture of compliance within the organization if anything meaningful is to happen.
Today’s compliance tools and risk management processes are quite sophisticated. Regulators are aggressively punishing those that violate laws and of course corporate compliance mandates. The FCPA and other anti-bribery laws are being enforced around the world. The US Department of Justice has aggressively expanded its reach around the world. Why? Companies are held to a much high standard of conduct by society than before. In a sense, the rules of business has changed. It’s no longer just about profit and satisfying shareholders but it is also about responsibility to society. In essence it is about becoming that “shining city on the hill” or as I would like to put it, as reflected by the picture to the right of Gwangali Beach, Busan, becoming “that shining city by the sea”!
What does the latest corporate scandal from Germany (remember Siemens?) remind us of? It reminds us that compliance is not a minor issue to be handled at the lower levels of management. It reminds us that risk management processes and tools such as compliance, ethics training and management buy in are necessary and should be implemented on a daily basis. Though the vast majority of companies follow the law and abide by the corporate codes of conduct they have implemented, some companies clearly have not. It also teaches us that one can never be too diligent when dealing with an ethical culture- that compliance and ethics must be taught and reinforced everyday.
This is a wake up call on the part of companies throughout the world. Disregard compliance at your peril. Treat compliance as the shining city by the sea. Something to strive and hope for.