Business

VW and the never-ending cycle of corporate scandals

VW factory Image copyright Getty Images

Another year, another corporate scandal.

After Libor, payment protection insurance, phone hacking and every other scandal, nothing appears to have been learned to stem the tide of bad behaviour from the world's largest companies.

And now VW has been caught cheating on emissions tests.

Not only is this a close repetition of other corporate attempts to dodge regulation, it's actually so uninventive that VW was caught and fined in 1973 for dodging similar tests. It paid $120,000 (the equivalent of about £400,000 today) and admitted no wrongdoing.

So, why does no-one appear to learn anything?

'Getting rid of the stories'

Andre Spicer, professor of organisational behaviour at Cass Business School, part of City University in London, has been looking at what companies do in the wake of a crisis. And this very much informs how they approach the next one.

"What you get in the first three to six months is lots of activity. And then they try to scapegoat people, calm it down, and that often works in the short term," he says.

"After that, they often then get rid of even more people who have experience or may have seen what went wrong but weren't involved. They get rid of evidence like reminders from around the building. And you get rid of the stories around it, which is really crucial."

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Image caption Nasa keeps failures in mind as well as successes

In other words, it's swept under the corporate carpet. Often, the old leadership is sacked or quietly moves on, and new leaders want to start afresh, he says. "We don't like being reminded of our mistakes."

But some organisations do learn. The textbook case of learning from a disaster and not doing it again is the changes Nasa made following the Columbia space shuttle disaster in 2003. The orbiter's left wing was damaged by a piece of insulating foam falling off its external fuel tank. All seven crew died on re-entry.

"They often then go through that case in detail with their new recruits. So the stories remain," says Prof Spicer. This engenders the idea of safety first and that speaking up is a good idea.

Failures that cause immediate death are obviously the most potent, he says. Sadly, without such a stark outcome, some lessons are less compelling. Will we remember emissions in 10 years' time?

Remembering and learning are part of the problem. Over-ambition is another factor.

Doing something 'clever'

"In Anglo-Saxon style companies where people are coming and going more, people are promoted on delivery - I can deliver stuff, I can get things done. And often they become obsessed with getting things done rather than questioning how they get things done."

Which explains some of the blind eyes or lack of interest from senior managers in this and other scandals.

Many of the problems come from over-promising first and panicking over delivery second. Which leads to the temptation to bend the rules.

From hereon in, a problem known as normalisation of deviance creeps in. That could be what happened for the Volkswagen engineers the company has blamed.

"Probably the chaps who did it didn't think they were doing something awful, just something quite clever with their software," says Stephen Carver, a lecturer at Cranfield School of Management and a consultant for banks, air lines and car firms.

"But what was lacking was anyone really understanding what they were doing and saying hang on, is this a smart, long-term move?"

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Image caption Failure to remember can doom a company to repeat its own mistakes

Normalisation of deviance is a consequence of herd behaviour. It occurs most soberingly where something bad happens and nobody says anything because everyone is expecting that someone else will instead.

As a result more and more odd behaviour is tolerated; like selling insurance people don't want or need, rigging international loan or currency markets or hacking people's phones.

Failure to adapt

This odd behaviour is often perpetuated because the organisations in question keep hiring the same people with the same views, says Mr Carver. The cure is diversity.

"Darwinian survival is not survival of the fittest - he never said that. It's the most able to adapt. And that means diversity."

If you think diversity means political correctness, consider its opposite - groupthink and monoculture, says Mr Carver. Exclusively hiring maths- and bonus-obsessed workaholics has not served banks well, for example.

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Image caption Hiring like-minded people limits challenges to the existing order

Another problem is ever-higher targets for companies in markets that aren't growing. Like the car market in the US. Car and truck sales peaked in 2000 at 17.8 million and haven't beaten that figure since.

"The difficulty of standing up against these situations is drowned out by the here and now. And the pressures for short-term gain," says Alan Stevens, director of Vector Consultants, a firm which aims to help companies improve their culture. Quarterly profit targets trump ethical behaviour.

A few years ago, a company could bank on boasting of a few percent sales growth, he says, on account of inflation in raw materials and from suppliers - growth for standing still. But with zero inflation in many economies, even that comfort has evaporated.

Those are the symptoms. What is the cure?

'Hang on'

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Image caption Top executives should bear some of the blame, says consultant Alan Stevens

Some of the solutions being offered in industries now trying to heal themselves after a crisis are looking wobbly, says Prof Spicer. Banks are building up their number of risk and compliance officers.

However, this internal police force of do-gooders can create an incentive for more clever traders to come up with more clever ways to duck the rules, he says. Just like they did last time with Libor and currency trading.

Better to hire people with a variety of skills and approaches and give them the freedom to disagree, says Mr Carver.

Because markets and information now move so quickly, business leadership means hiring good managers, entrepreneurs and diplomats, and as no one person can be all three, having an all-powerful leader who decides everything no longer makes sense. So dissent is a must: "Hang on chaps, let's talk about this. Is this the direction we really want to go?"

Another thing to fix is the current consequences of being a whistleblower. Today it's a quick way to end a good career, says Mr Stevens. Catching things before such intervention is needed is one solution, and treating people doing the right thing as winners is another.

There must be some consequence for bad leaders who have perpetuated poor culture, says Mr Stevens. "Time and time again you say, 'what is the consequence for senior execs?' Two years' later they are back on their feet, making more money."

And finally, make sure failure isn't buried or swept under the carpet, says Prof Spicer.

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