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Volkswagen's Corporate Leadership Needs Re-Engineering

10/06/2015 08:08 EDT | Updated 10/06/2016 05:12 EDT
ASSOCIATED PRESS
Volkswagen ornaments sit in a box in a scrap yard in Berlin, Germany, Wednesday, Sept. 23, 2015. The revelation that Volkswagen rigged diesel-powered cars to emit lower emissions during EPA tests is particularly stunning since Volkswagen has long projected a quirky brand image with an emphasis on being environmentally friendly _ an image that now appears in tatters. (AP Photo/Michael Sohn)

As the Volkswagen emissions scandal was breaking, Stewart Parnell -- former head of a peanut company in Georgia - was sentenced to 28 years in prison for knowingly shipping salmonella-tainted peanuts to customers. His actions resulted in an outbreak that killed nine people and injured hundreds, not to mention one of the largest food recalls in U.S. history and the liquidation of Peanut Corporation of America. But you wouldn't know that from the apology he issued.

Parnell claims he never imagined that creating fake certificates to indicate contaminated peanuts were uncontaminated would harm anyone. Prior to being sentenced, he said, "It's just been a seven-year nightmare for me and my family. All I can do is come before you and ask for forgiveness from you and the people back here. I'm truly sorry for what's happened."

Back in Germany, former Volkswagen head Martin Winterkorn initially tried to ride out his leadership crisis, claiming he was unaware of the company's use of pollution-hiding software in diesel engines marketed as green technology. Nevertheless, Winterkorn eventually agreed to resign to give the German company a chance at a fresh start. And that might have been worthy of some applause, but then Winterkorn issued a statement as insulting as Parnell's self-absorbed apology. "I am doing this in the interests of the company even though I am not aware of any wrongdoing on my part," Winterkorn said.

Nothing wrong, sir? What about failing to lead in a way that ensured the decisions made on your watch were ethical?

As the New York Times notes, the auto industry has a tradition of scandal and skullduggery, "but few schemes appear as premeditated as Volkswagen's brazen scam." The fallout goes well beyond lost reputation, trust and shareholder value. The company has already put aside $7 billion (U.S.) to cover costs, but few industry watchers think that will be enough. Fixing the millions of vehicles sold with software designed to trick regulators will cost several billion alone. Meanwhile, the U.S. Environmental Protection Agency can fine the automaker up to $37,000 (U.S.) for each of the almost 500,000 offending vehicles on American roads. That's another possible $18 billion (U.S.) out the door. And then, of course, there are the potential class action lawsuits from dealers and customers.

The auto sector is under huge pressure to cut both costs and emissions while also improving vehicle quality and safety. As a result, as everyone worth a CEO title knows, the temptation to cheat is enormous. And that's why nobody should shed a tear for Winterkorn. As put by the New Yorker, "given that this was not, as in most auto-industry scandals, a case of a defective part but rather a deliberate corporate effort to deceive consumers and regulators, it was impossible for him to stay on, particularly given his reputation as a hands-on, technically adept micromanager: he either did know or should have known, and, in either case, he has to bear the blame."

When corruption under his successor destroyed SNC Lavalin's reputation, former CEO Jacques Lamarre felt betrayed. And yet, he put in place a decentralized structure that encouraged bad behaviour. As an Ivey Business Journal editorial noted, according to a company history written prior to the SNC scandal, Lamarre "put his trust" in his people and was rewarded with "a more profitable and integrated company." Unfortunately, that history now needs a rewrite because the long leashes Lamarre put in place at SNC eventually strangled the company.

Simply put, Lamarre liked giving executives lots of freedom to act how they pleased because he grew up that way. "I was a good student, so I was completely free as a kid," Lamarre told IBJ editor Thomas Watson in 2003. "By the time I was 16, I was living on my own in Quebec City with nobody expecting any reports except for good grades."

Parenting may be different, but as a leader it clearly never pays to focus on rewarding results, while ignoring how they are achieved, especially when conducting business in environments that are highly competitive, not to mention in nations prone to corruption. In other words, trust is only a good thing when you have a culture that supports right behaviour.

As executive director of Ivey's Ian O. Ihnatowycz Institute of Leadership, one of my interests since the financial crisis involves helping organizational boards actively seek leaders with the character dimensions that Ivey research shows are required to live up to the responsibilities of leadership. But it is not enough for leaders to have sound judgment and understand where to draw the line when it comes to decision-making. They must also ensure other decision makers care about ethics. That means ensuring leader character exists all the way down the chain of command. And that requires developing a culture that fosters candid conversations and constructive dissent.

The essence of good risk management is asking appropriate questions and getting truthful answers. And so, if a CEO doesn't make it clear that he expects unethical behaviour to be outed by managers asking tough questions, then it probably won't be outed. This clearly didn't happen at Volkswagen, where a company culture that has been compared to that of North Korea (minus the labour camps) prevented employees from raising issues that jeopardized ambitious goals formulated by senior management.

In accordance with German law, Volkswagen's board includes employee representatives. It also includes directors delegated by the state of Lower Saxony. As a result, employees' and other stakeholders' interests were supposedly aligned with those of management. But as a Bloombergcommentary on German governance traditions points out, this strong esprit de corps "isn't necessarily conducive to a clean, value-based culture."

True enough. Developing value-based cultures requires CEOs who are humble, open-minded, considerate, reflective, curious, respectful, composed, principled, future-oriented and socially responsible, among other character elements.

ABOUT THE AUTHOR: Gerard Seijts is a Professor of Organizational Behaviour, holds the Ian O. Ihnatowycz Chair in Leadership, and is Executive Director of the Ian O. Ihnatowycz Institute of Leadership at the Ivey Business School at Western University in London, Ontario. He can be reached at gseijts@ivey.ca.

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