Tuesday, September 22, 2015

Volkswagen bombshell shows RBC is crucial to the bottom line

Volkswagen AG's share price collapsed after the uncovering of VW's "defeat devices" that conceal massively non-compliant emissions during testing of diesel cars like the Jetta (pictured below) in the United States. CEO Winterkorn has lost his post as a result. Reputational damage is likely to spread not only to other companies in the VW stable but to the whole German motor industry, to German industry in general and to diesel car manufacturers in other countries. Nor will this damage be limited to the US: regulators in Europe and Asia are already checking to see what has been happening in their own jurisdictions. First estimates of VW's liability total USD 18 billion, but the potential loss via reduced sales could be many times higher.

This is the clearest demonstration of the failure of current procedures for ensuring good behavior in major companies, despite the plethora of "CSR" and other corporate conduct standards to which most of them claim to adhere.

What companies need is a thorough RBC (responsible business conduct) audit and business plan. The costs of such a program are a minute fraction of the potential losses from such masssive reputational damage. CEOs who want to keep their jobs should heed this lesson.