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Wednesday, September 30, 2015

Strategic CSR - VW

I am sure you have all been following the unfolding drama at VW. Rather than focus on the firm alone, however, the article in the url below highlights the track-record of the whole industry in terms of regulatory compliance. By any measure that most of us care about, that record is not good:
"Long before Volkswagen admitted to cheating on emissions tests for millions of cars worldwide, the automobile industry, Volkswagen included, had a well-known record of sidestepping regulation and even duping regulators."
The duplicitous behavior remains prevalent in Europe, for example:
"For decades, car companies found ways to rig mileage and emissions testing data. In Europe, some automakers have taped up test cars' doors and grilles to bolster their aerodynamics. Others have used 'superlubricants' to reduce friction in the car's engine to a degree that would be impossible in real-world driving conditions. Automakers have even been known to make test vehicles lighter by removing the back seats."
In the U.S., it has been present as long as the Environmental Protection Agency (which regulates car emissions) has existed:
"Cheating in the United States started as soon as governments began regulating automotive emissions in the early 1970s. In 1972, certification of Ford Motor's new cars was held up after the Environmental Protection Agency found that the company had violated rules by performing constant maintenance of its test cars, which reduced emissions but did not reflect driving conditions in the real world."
It seems that evading rules and regulations is standard operating practice in the industry, with any fines that result from being caught seen as an affordable cost of doing business. After the EPA found Ford guilty in 1972, for example:
"Ford walked away with a $7 million fine. The next year, the agency fined Volkswagen $120,000 after finding that the company had installed devices intended specifically to shut down a vehicle's pollution control systems. In 1974, Chrysler had to recall more than 800,000 cars because similar devices were found in the radiators of its cars."
And so on, and so on. The article, of course, makes no mention of any car company that was put out of business as a result of its fraudulent behavior, even when people died as a result:
"No matter the offense, penalties have often been fleeting. Executives are not jailed; fines are manageable."
If you can believe it:
"In the United States, automakers' lobbying has ensured that the statute giving powers to the National Highway Traffic Safety Administration 'has no specific criminal penalty for selling defective or noncompliant vehicles,' says Joan Claybrook, a former administrator of the agency and a longtime advocate of auto safety."
Of course, the Ford Pinto stands as the poster child for "cost-benefit analysis," and nothing much has changed since. GM's recent fine of $900m for its ignition switch fiasco that resulted in the confirmed deaths of 124 people is just the latest in a long line of pathetic settlements that let everyone off-the-hook. Even though the Department of Justice found that GM knowingly sold faulty cars that were resulting in driver deaths, no individuals were held accountable as part of the settlement. It is just the most recent example of what appears to be a long-standing, soft-touch approach to regulating the industry:
"The universe of automotive scandals has been a broad and often tragic one, including Ford's 1978 recalls of 1.5 million Pintos after evidence emerged that its gas tanks were prone to catch fire during impacts. The Chrysler Corporation was indicted in 1987 on charges of disconnecting the odometers of 60,000 cars used by executives and then selling them as new. The Ford-Firestone scandal that started in the late 1990s was linked to 271 deaths. And more than 23 million cars have been recalled by 11 automakers over airbags made by Takata that could violently rupture in an accident."
The list goes on. And, in case you thought that the VW crisis is in any way less of a concern than these others, here is the opening paragraph in The Economist's lead editorial this week:
"Emissions of nitrogen oxides (NOx) and other nasties from cars' and lorries' exhausts cause large numbers of early deaths—perhaps 58,000 a year in America alone, one study suggests. So the scandal that has engulfed Volkswagen (VW) this week is no minor misdemeanour or victimless crime. … The damage to VW itself is immense. But the events of this week will affect other carmakers, other countries and the future of diesel itself."
So, I am interested in the burden of fault in all this. Who do you think is most to blame—the regulators for failing to punish firms in a way that discourages rule-breaking, or the firms themselves for taking advantage of the weak enforcement? While there is plenty of blame to go around, I think the regulators are primarily at fault. By consistently failing to punish firms in a way that lets them know rule-breaking will not be tolerated and will threaten the firm's license to operate if life is endangered, the regulators are implicitly condoning corner cutting for competitive advantage. That is the behavior they were incentivizing, so that is the behavior that resulted. Regulators have the power (and authority) to put repeat transgressors out of business—in fact, it is their duty to do so. That they don't, to me (and to the firms), signals that the behavior is ultimately acceptable to those setting the rules. Underpinning the concept of "corporate stakeholder responsibility" (an important component of Strategic CSR) is the idea that stakeholders have a responsibility to hold the firm to account. It is this accountability that underpins the idea that firms' self-interest lies in adhering to their stakeholders' wishes. If stakeholders are unwilling to enforce their values by holding firms to account, we can only blame ourselves when we do not get the behavior from companies that we say we seek. For now, stand by for this crisis to grow beyond VW:
"While officially stated fuel efficiency and carbon-dioxide emissions figures have steadily improved over the years, real-world tests showed no corresponding improvement, according to the European Federation for Transport and Environment, an advocacy group based in Brussels. In fact, the group's testing found that the average diesel car was producing emissions five times as high as what was permitted. Some vehicles from BMW and Opel emitted 10 times as much pollution on the road as in the lab. The difference between the lab and real-world results swelled to 40 percent last year, on average, from 8 percent in 2002, the group also found."
Take care
David Chandler & Bill Werther
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An Industry With an Outlaw Streak Against Regulation
By Danny Hakim and Hiroko Tabuchi
September 24, 2015
The New York Times
Late Edition – Final