In May 1973 the British Prime Minister Edward Heath in a statement in the House of Commons on the Lonrho affair said “It is the unpleasant and unacceptable face of capitalism, but one should not suggest that the whole of British industry consists of practices of this kind.” The phrase “The unacceptable face of capitalism” was well-coined and stuck to Lonrho’s reputation and that of its Chief Executive, ‘Tiny’ Rowland like glue but as is often the case, the facts are probably not so well remembered.
Rowland was recruited to the London and Rhodesian Mining and Land Company, later Lonrho, as chief executive in 1962. Under his leadership, the firm expanded out of its origins in mining and became a conglomerate, dealing in newspapers, hotels, distribution, and textiles, and many other lines of business. During 1973, Rowland’s position was the subject of a High Court case in which eight Lonrho directors sought Rowland’s dismissal, due to both his temperament and to claims he had concealed financial information from the board. Rowland failed in his legal attempt to block the move but was subsequently backed by shareholders and retained his position. Edward Heath criticised the company and made his famous statement about these events.
What high standards we must have had back then four decades ago, soon after I began my own career in business, if a relatively minor dispute over governance could make such headlines. By contrast this week’s headlines have been full of a corporate scandal of huge dimensions touching the lives of millions. I refer to the Volkswagen case.
Writing in The Times
, Tim Montgomerie, an excellent commentator with whom I had the pleasure of having lunch last year, said “Volkswagen has abused the trust consumers put in western free enterprise. Bosses must pay the price to restore it.
We “screwed up”. So said Michael Horn, the head of Volkswagen in North Americas. No, Mr Horn. You did a bit more than that. Your company cheated at least 482,000 customers who bought doctored cars from you. Collectively, you deceived regulators and lied to journalists. By installing illegal software in your cars you bypassed emission tests – enabling them to spew out up to 40 times more pollution than is allowed under US law. More people are likely to have been vulnerable to respiratory diseases such as emphysema and bronchitis as a result. More lives have been made uncomfortable. “[i]
You have all heard of this scandal. But what you may not know is that the story can trace its roots back to May last year, as detailed in the notice of violation report, submitted by Mr Phillip A. Brooks, Director of the Air Enforcement Division office in the US, to senior executives at VW.
– The California Air Resources Board (CARB) and US Environmental Protection Agency (EPA) are alerted to emissions problems with two diesel cars, a 2012 Jetta and a 2013 Passat, when the West Virginia University’s (WVU) Centre for Alternative Fuels published results of a study that found significantly higher in-use emissions from the light duty diesel vehicles.
– Over the course of the year following publication, VW continued to assert to CARB and the EPA that the increased emissions from these vehicles could be attributed to various technical issues and unexpected in-use conditions.
– VW issues a voluntary recall of approximately half a million vehicles to address the emissions issue.
– After follow up testing from the recall by CAB and the EPA, results show that the recall has only produced a minor improvement in emissions from vehicles for both the laboratory and normal road driving testing.
CARB broadens the testing to pinpoint the exact technical nature of the vehicles’ poor performance and why the vehicles’ on board diagnostic system were not detecting the increased emissions. None of the potential technical issues suggested by VW can explain the higher test results consistently confirmed during further testing by CARB.
– CARB and the EPA make it clear that they will not approve the certificates necessary for VW to sell its 2016 model year vehicles in the USA until the car manufacturer adequately explains the anomalous emissions and reassures the agencies that the 2016 model year vehicles would not have similar issues.
Early September 2015
- During a meeting VW admits it has designed and installed a defeat device in these vehicles in the form of a sophisticated software algorithm that detects when a vehicle is undergoing emissions testing.
18 September 2015
– CARB and the EPA make their findings public, stating that VW has violated two sections of the Clean Air Act, firstly by selling or offering for sale vehicles that did not comply with their certificates of conformity, and secondly by manufacturing and installing in these vehicles an electronic module capable of switching its calibration to beat the emissions tests.
Under the Act the EPA can take civil or criminal enforcement actions against violators of environmental laws and at this stage I do not know which route they will take. But to my eyes these actions by Volkswagen, which it has admitted, are indeed criminal. It has deliberately set out to evade the rules relating to permitted levels of pollution and so illegally offer for sale its vehicles in the US going back to at least 2012. It remains to be seen whether this affects vehicles sold in Europe but already VW has admitted that 11 million vehicles, equivalent to a year’s production, will need to be recalled. It has provided €6 bn for the cost of this but in time the costs may be considerably more.
It is reported that VW could face up to $18bn in fines by the administration in the USA and perhaps other countries. There will be the costs of recall in the USA and perhaps other countries. There may be the costs of fighting and perhaps settling class actions by consumers who feel that the second hand values of their cars has been compromised by the damage to VW’s brand reputation. And then there is the untold cost of damage to its reputation. Its share price has plummeted and it remains to be seen how sales will be affected. Switzerland has already banned the sale of specific VW diesel models.
VW has a justifiably fine reputation for the engineering excellence of its vehicles sold under the VW, Audi, Seat and Skoda brands among others. My wife drives a Skoda and is very pleased with it but, of course, she cannot know the actual level of pollution emitted by her vehicle and so places her trust in the claims made by VW who offered her car for sale through one of its exclusive dealers. We will have no hesitation in joining in any relevant class action.
For too long some of the leading companies in the world have behaved as if the law did not apply to them. There was the Enron scandal: a massive fraud on the public including its own employees. At least the perpetrators went to jail. Then there was the banking crisis of 2007-8 with Northern Rock, HBOS and RBS on this side of the Atlantic and Bear Sterns and Lehman Brothers on the other side. Almost noone went to jail.
Noone in his right mind would buy the arguments that Jeremy Corbyn and his comrades put forward for the overthrow of capitalism. But scandals like these give succour to their arguments and will strike chords with the young and impressionable.
Worse, as Edward Heath in his maladroit way tried to suggest, the whole of industry is tarred with this brush, though the bad apples are the rare ones. When the bad apples are so famous and so large, one is tempted to think that the problem is one of size. The chief executive of VW, Martin Winterkorn, made a round of apologies this week saying he was “endlessly sorry” for the “manipulation”, but he was forced to resign. I doubt whether he knew anything of this fraud but it was so sophisticated that it had to have been signed off by senior management. Clearly there is something very wrong with the culture of a company that can behave in such a way and so I conclude that VW is too big and should be broken up.
VW is the second largest vehicle manufacturer in the world. The largest is Toyota which has also had a series of problems in recent years, particularly in the US. Both companies seemed to be bent on volume growth for its own sake when that is never a sensible objective on its own. It is one thing to aspire to be the best. It is quite another to target to be the biggest.
In 1996 President Nelson Mandela awarded ‘Tiny’ Rowland the Order of Good Hope, the highest South African honour.