VW’s Toxic Culture Went All the Way to the Top, New Lawsuits Allege

VW’s Toxic Culture Went All the Way to the Top, New Lawsuits Allege

Three state attorneys general are suing Volkswagen over last year’s emissions cheating scandal, the New York Times reports, alleging that top managers at the auto manufacturer were in on the fraud:

The accusations, leveled in lawsuits by New York, Maryland and Massachusetts, contradict Volkswagen’s portrayal of the deception, representing a new threat to the carmaker’s finances, reputation and management. For the first time, the suits connected Volkswagen’s chief executive, Matthias Müller, to the scandal, saying he was aware of a 2006 decision to not outfit Audi vehicles with equipment needed to meet American clean-air standards.

Volkswagen, which admitted late last year to equipping 11 million vehicles worldwide with software to cheat emissions tests, has maintained that the deception was limited to a small group of people. The company has said top management was not aware of the cheating software, known as a defeat device. But the New York civil complaint, drawing on internal Volkswagen documents, emails and witness statements, depicts a corporate culture that allowed a “willful and systematic scheme of cheating.” The evidence paints the most detailed picture yet about how the deception unfolded and who was responsible. … The suits stopped short of accusing Mr. Müller of having specific knowledge of the devices.

The suit does name other names, however, accusing several major figures in Volkswagen’s leadership of wrongdoing and also taking aim at the company’s board:

The New York complaint claims that more than two dozen Volkswagen engineers and managers were involved in the deception, including Wolfgang Hatz, the former head of engine and transmission development at Volkswagen and Audi; Ulrich Hackenberg, former head of development for Audi; and Heinz-Jakob Neusser, former head of development for the Volkswagen brand. While several executives have been identified by the media, German prosecutors, because of the country’s strict privacy laws, have named only one suspect, [former CEO Martin] Winterkorn.

The suit also points to how Müller and others on the management board received about $70 million in salary and bonuses from the company’s supervisory board last year.

In addition to costing Volkswagen billions and damaging its reputation, the scandal has led to several rounds of management shakeups, including the resignation of its head of US operations, in an effort to detoxify the organization’s culture. Nor is Volkswagen the only automotive industry player to face this sort of problem recently: A similar scandal over fuel economy testing took down the president of Mitsubishi in May, while the Japanese auto parts manufacturer Takata was forced to recall over 28 million unsafe airbag inflators after they caused 10 deaths and more than 100 injuries. In both cases, major culture problems were found to be at the root of the crisis.

The importance of culture in corporate governance is becoming increasingly hard to ignore. In fact, it’s the subject of a new report from the UK’s Financial Reporting Council, in which the regulatory body urges corporate leaders, and especially directors, to be mindful of culture problems before they snowball into full-blown crises, Dina Medland reports at Forbes:

The report is the culmination of the FRC’s Culture Coalition, a collaboration with a number of leading organizations that have produced their own findings, as well as interviews with more than 250 chairmen, CEOs and leading industry experts, from the U.K.’s largest companies. Long-term value is its guide, and the focus is the importance of company culture to that goal. The FRC report looks at how corporate cultures are being defined, embedded and monitored.

“A healthy corporate culture leads to long-term success by both protecting and generating value in the U.K. economy. It is therefore important to have a consistent and constant focus on culture, rather than wait for a crisis. A strong culture will endure in times of stress and change. Through our research, it has become clear that establishing the company’s overall purpose is crucial in supporting and embedding the correct values, attitudes and behaviors” said Sir Winfried Bischoff, Chairman of the FRC. …

In this report, the FRC is unequivocal: “It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.”