Lessons From Volkswagen (and Other) Scandals
From Huffington Post on Oct. 12, 2015
“Without a moral center, you will swim in chaos” — James Burke, Former Johnson & Johnson CEO
The Volkswagen scandal hit new lows this week when German-born Michael Horn, CEO of Volkswagen America, refused to acknowledge the people responsible for falsifying emissions tests on 11 million vehicles or to release essential documents. In front of the U.S. House Committee on Energy and Commerce, he chose instead to blame lower-level engineers.
Does anyone really believe a scandal of this magnitude and scope was actually masterminded by a few engineers? In my experience, it would be highly unlikely for first-level engineers to take the risks inherent in such an illegal scheme and even more improbable that their superiors knew nothing about it, especially in a hierarchical organization like Volkswagen.
Unfortunately, this kind of dissembling and cover-up has become all too common in corporate circles. It only serves to harm ethical companies as the public loses trust in all corporate leaders.
It’s been a bad year for organization ethics. In September United Airlines’ CEO Jeff Smisek was forced to resign for cutting unethical deals with the head of the Port Authority for New York and New Jersey. Toshiba’s top officials admitted to seven years of corrupt accounting. Even the soccer world was rocked when FIFA’s executive committee acknowledged that corruption had reached its highest levels, and suspended president Sepp Blatter, right-hand man Jerome Valcke, and European head Michel Platini.
What should organizations do when the organization is corrupt from the top down? In my new book, Discover Your True North, I address how essential it is for leaders at the top to set standards for the entire organization. Yet all too often, people on the lowest rungs of the ladder are fired or blamed for illegal activities, while the bosses protect themselves. Even when forced to resign, they walk away with large termination settlements. For example, United’s Smisek received nearly $20 million in termination pay after his corrupt dealings with public officials were exposed.
Every organization needs clear values that establish its principles and set firm ethical boundaries on its actions. Confronted by the 1980s Tylenol crisis, in which lethal poison was placed in Tylenol pills, former Johnson & Johnson CEO James Burke used his company’s famous Credo to guide his actions. He observed, “Without a moral center, you will swim in chaos.”
Employees encounter many gray areas in their work. They need clarity about where to draw the line between acceptable and unacceptable actions. That’s what IBM’s CEO Sam Palmisano established after becoming CEO. He shifted IBM’s entire 440,000 person organization – which operates in many countries where corruption is the norm — to “Leading by Values.”
Former Citigroup CFO Sallie Krawcheck took a heroic action when she insisted on refunding losses to clients misled by her firm during the 2008 financial crisis. She bluntly asserted Citi broke clients’ trust by pushing low-risk alternative investments that were actually high risk. When CEO Vikram Pandit vehemently disagreed, Krawcheck took her argument directly to Citi’s board of directors, which backed her actions. A miffed Pandit later fired her. Krawcheck knew she could always get a job, but she recognized she couldn’t recover her values.
But what can be done when organizations like FIFA and Volkswagen are corrupt at the top? The only solution is to clean house at the highest levels of the organization and weed out the poison in the system. Otherwise, the organization will ultimately revert to its unethical practices.
That’s what Germany’s Siemens did when audits revealed it paid out $1.8 billion in bribes. Board chair Heinrich von Pierer, who presided over the unethical dealings as CEO, was forced to resign. Board chair Gerhard Cromme and CEO Peter Loescher were brought in to clean up the mess. To their credit, they squarely faced the issues, terminating the company’s entire executive committee and firing 400 top executives. A new governance and compliance system was established, and all employees went through extensive compliance training. It cost the firm $2.7 billion in fines and legal fees, but now Siemens is operating ethically throughout the world and has been restored to full health.
FIFA and Volkswagen would be wise to follow Siemens’ approach of bringing in outsiders to address their scandals, with outsiders leading the board and executive management. Their actions should include hiring new law firms and accountants to conduct independent investigations, and terminate anyone who is directly or indirectly involved with corrupt dealings. In FIFA’s case, this may include current members of its governing board involved in the corruption.
Leaders should always put the institution first. Instead, all too often organizations protect individuals until they are “proven” guilty, as Blatter’s attorney is arguing FIFA should do. It is far better to separate them completely from the organization, and let the courts determine criminal culpability.
Finally, transparency is essential: the board should reveal all the findings of its legal and accounting reports and make them public immediately. It is far better for the board to reveal them rather than waiting for political bodies, the media, or the courts to extract this information. By vigorously investigating its own actions and transparently sharing the findings, the organization begins to rebuild the credibility necessary to return to business.
Only through aggressive, transparent actions can corrupt organizations be restored to fulfill their missions.