By Matthew Lynn
LONDON (MarketWatch) — Unless it had been caught out trying to use protected species for its leather seats, or supplying free SUVs to the Islamic State, it is hard to imagine how the news could have been much worse for Volkswagen. We learned that the auto maker has been accused of manipulating the software in its diesel vehicles to fool testers into thinking the engines were much cleaner than they really were.
Shareholders, quite rightly, have fled the stock /zigman2/quotes/206919008/delayed XE:VOW -0.13% /zigman2/quotes/206919008/delayed XE:VOW -0.13% . Volkswagen, one of Germany’s biggest and most respected companies, lost a quarter of its value on Monday alone, and the shares were still getting hammered on Tuesday. It is likely to get a lot worse before this scandal is over.
But there is a deeper problem here than just VW. Major European corporations have been caught out in a string of scandals that have, at their heart, a way of doing business.
BP /zigman2/quotes/207305210/composite BP -2.15% suffered massive reputational and financial damage from the Deepwater Horizon oil spill. A group of major banks were caught out manipulating the Libor rate in London. BNP Paribas /zigman2/quotes/203020019/delayed XE:BNP -2.18% has suffered massive fines for sanctions violations. And now VW looks to have been engaged in systemic cheating.
Corporate Europe increasingly looks to have woven dishonesty into its DNA. It needs to find a way of reversing that, because if it does not, no one is going to want to invest in these companies.
Right now, the focus is on VW.
Five Things on the Volkswagen Emissions Scandal
The Volkswagen emissions scandal worsened Tuesday after the German auto maker said up to 11 million vehicles worldwide could be affected by software allegedly used to cheat emissions tests and it announced plans to take a $7.27 billion provision. Here are five things about the scandal. Photo: Reuters
On Friday, the U.S. Environmental Protection Agency said the company’s diesel cars had far higher emissions than tests suggested and that software fitted to the vehicles had been deliberately designed to mislead. The cars were creating far more pollution than either the government or the drivers had been led to believe.
In response, the company has already set aside 6.5 billion euros to deal with the crisis, and the head of its U.S. arm, Michael Horn, admitted that the company had “totally screwed up.” In what way, however, neither he or anyone else has made clear.
There are always going to be accidents, but this was nothing of the sort. The software was designed and installed, and someone at VW must have authorized that. The full facts have yet to be established, but it is going to be very hard to convince anyone that VW did not embark on a deliberate strategy of deception.
There is a pattern here, and it is a disturbing one.
After the Deepwater Horizon oil spill in the Gulf of Mexico, the British oil giant BP faced claims of carelessness and negligence. The company was forced to pay record fines for its role in the catastrophe — fines from which it has yet to fully recover. While it may not have set out to deceive, it certainly seemed to have allowed a culture of recklessness to develop.
The Libor scandal was even more serious. A key interest rate set in London, but used to value financial instruments around the world, was systematically manipulated by traders for their own advantage. Banks such as Barclays /zigman2/quotes/208409333/delayed UK:BARC -0.10% , Royal Bank of Scotland , and UBS /zigman2/quotes/206172872/composite UBS -0.54% were forced to pay huge fines for their role in the affair. Likewise, the French bank BNP Paribas was forced by American regulators to pay a $9 billion fine for the bank’s role in breaking sanctions imposed on Sudan, Cuba and Iran.
Europe’s top companies have been hit by a whole series of scandals, and while the details may vary, each had some form of deception at its heart.
That means something is going wrong. No one would ever pretend that companies are angels. They are meant to maximize profits, and if they sometimes bend the rules a little to make that happen, then no one should be too shocked. Capitalism has never been a system for the overly squeamish.
And yet, that said, there does appear to have been a big increase in the last few years in the number and scale of the scandals that are coming to light. They are, of course, worrying in themselves — deception of that kind is always wrong. They are also, however, increasingly an issue for shareholders as well.
When you are investing in a big European multinational, how do you know that a sudden scandal is not going to hit it, one which will knock a third or a half off its value in the space of a few days?
The answer is that you don’t really.
The core problem is that key executives within companies care more about their own careers and bonuses than they do about the long-term health of the business. In investment banking, before the crash, there used to be a phrase — “I’ll be gone, you’ll be gone” — to describe the way executives could strike a deal which would look great for this year’s profit figures, and boost their bonus up to astronomical levels, but which everyone knew would be terrible in the long term. It didn’t matter, because you would collect your bonus, and by the time it all went horribly wrong, you’d be safely installed at another bank.
The same culture appears to have seeped out from banking into the wider corporate culture . It is hard to believe anyone at VW thought they would get away with fiddling with emissions software forever. But, heck, perhaps you could be running Toyota by then. Likewise, Libor manipulation or sanctions busting was always likely to come to light one day.
But with any luck, it wouldn’t be on your watch that it happened.
Shareholders need to change the way incentives work within European companies. They need to rework the managerial merry-go-round so that executives are forced to think of the long-term health of the business, and not just hitting this year’s target. And they need to think about the pressure for short-term performance they impose — because a 3% decline in the share price on some mildly disappointing numbers is a lot better than a 50% drop.
If they don’t, the scandals will keep on coming — and they will keep on losing vast sums of money as the value of businesses crashes. And presumably no one wants that.