Volkswagen’s Emission Crisis

The recent allegations that VW engaged in corporate fraud to deliberately manipulate emissions data and deceive environmental regulators has been met with global shock.

The ire of the US and German Governments in particular, as well as the United Nations, was quickly forthcoming; Barack Obama and Angela Merkel weighed in to demand answers and swift resolution. Then, the dismay of its loyal customers and workforce who have been faithful to the brand became overwhelming.

The level of scrutiny and outrage that the world’s largest auto manufacturer is now subjected to is enormous.

What has been witnessed since the scandal broke is sure to fit anyone’s definition of crisis; a black swan event with company destroying potential. It is simply one of the largest corporate crises this decade and, in the annals of history, will likely sit alongside Enron, Tesco, Barings Bank and News Corp’s similarly shocking scandals.

The Immediate Effects

From a strategically focused corporate crisis management perspective, an almost irreparable amount of damage has been done, which, at a glance, is immense:

• The Global CEO, Marin Winterkorn, delivered an unreserved apology prior to resigning.
• The President and CEO of VW Group America, Michael Horn offered a blunt apology acknowledging “we totally screwed up”.
• Senior Research and Development staff have been stood down pending investigations.
• VW faces financial liabilities of up to US$18B, based on 11 million cars worldwide that may be affected. Already, VW has set aside US$7.3B from the third quarter; an indication of how serious they suspect this could be.
• VW’s value has shed approximately 30% in the immediate days after the scandal broke.
• The crisis contributed to the European market slumping 3% immediately after the announcement.
• Many rival auto manufacturers saw sympathetic price drops as wary investors avoided the auto sector for fear of how the crisis could deepen and spread. Even Nissan, who do not manufacture diesel cars for the US market, saw a price hit.
• The United States Department of Justice has launched a criminal investigation into VW. The Environmental Protection Agency has also launched investigations as have similar branches within governments from countries including Germany, France, Italy, United Kingdom and South Korea.
• In addition to criminal investigations by the US and German Governments, there are, at the time of writing, 34 class action law suits filed in the US alone. Canada has also filed a handful of law suits as have Investors and Superannuation funds. Understanding how far the legal liabilities extend will be a gargantuan task requiring nothing short of a small army of lawyers.

  The cost of lost reputation

The costs of VW’s goodwill is where one of the biggest hits will likely be felt. Goodwill, the value of the brand which also includes intellectual property and patents, measures the company’s value beyond the assets it owns. It can also include future growth, brand value and human capital.

Interestingly, VW’s goodwill was estimated at around US$67B (before the crisis), or 16% of its total assets. Compared to Daimler (4%) and BMW (3%), some may conclude that VW’s ‘goodwill’ is overvalued.  Already, some estimates put VW’s loss of brand value at around $US10B.

What is certain though is that their brand has taken a seismic hit. If their goodwill is potentially overvalued (by comparison of other major auto makers) there may still be massive write downs of their valuation to come. If their brand value was brought into alignment with their competitors then the quantitative drop could be huge.

The Broader Strategic Issues

The effects of VW’s crisis are severely threatening the auto manufacturer’s long term viability. Given that it employs over 600,000 people worldwide, 270,000 of whom work in Germany alone, this is very concerning. The German Government has a vested interest in keeping the wheels of the beleaguered auto company turning, from both a financial and social stand point.

At a time when Germany is baring the large brunt of the humanitarian crisis affecting Europe, it needs  VW to remain a viable integral cog in German industry. While the crisis has a course to run, German Government involvement to keep VW alive is likely and we can expect to see continued diplomatic efforts and involvement by Angela Merkel to ensure transparency and complicity with US Authorities.

From a reputational perspective, VW has suffered a near knockout blow. Similarly, the overarching reputation of any item that has earned “Made in Germany” status has been affected. The global psyche has always associated German engineering as being amongst the best on the world; it is a shame to have seen that engineering prowess focused into deception over innovation in their attempts to break the back of the key US auto market.

Beyond Germany’s interplay within this burgeoning crisis, the global automotive industry has been reshaped, particularly the philosophy of diesel powered cars. Certainly, in the US, VW has likely delivered a significant set-back for diesel technology take-up compared with its gasoline competition. VW’s future revenues associated with the US market are likely to have suffered greatly as a result.

When the United Nations weighed in on the issue in the days following, it did so in the knowledge that it needs the automotive sector on-side to meet its own agenda related to climate change. The mere notion of diesel possibly not being as green as they were led to believe, may have consequences for other industries related to how the UN advocates for meeting climate change objectives.

In some respects, VW’s future being so intertwined with Germany’s strategic direction is in the auto manufacturer’s favour. It would be catastrophic for Germany if VW went under and, bemusement and anger aside, it would be a global travesty too.

Where to from here for VW?

VW have replaced outgoing CEO, Martin Winterkorn, with Matthias Müller the former head of its subsidiary, Porsche. This move has generally been received well in terms of providing clear leadership focused on resolution and recovery.

Apologies by the former CEO, Winterkorn, and President and CEO of VW Group America, Michael Horn, have been delivered. There has been no ambiguity in taking responsibility for the scandal and both pledged the transparency demanded by global stakeholders.

As a company, VW is complying with authorities, Governments and clients, which bodes well for repairing many of the bridges that have been broken. The test for VW is maintaining this solidarity in the face of mounting conflict; particularly with increasing lawsuits.

Broadly there need to be displays of strong leadership, rapid action to control the event, effective two-way communication and sensitivity to stakeholder concerns. So far these attributes have been displayed, signposting how the company intends to continue responding.

VW’s stakeholder concerns have been given strong attention and there is likely to be an acute awareness of the social impact this crisis has had on its customers, workforce, suppliers and contractors, government and global audiences. All these stakeholders are key to VW succeeding at rebuilding its reputation and re-earning trust on the back of undoing much of the 55 years it has spent building its image.

In parallel, VW must demonstrate a drastic departure from the behaviours which landed it in this scandal. Their culture, transparency and risk-management processes must be robust to ensure this type of crisis can never occur again.

Indeed, holding those responsible or involved to account will deliver a twofold outcome: It will satisfy the insatiable desire of the public for those responsible to be dealt with appropriately but also demonstrate that VW intends to abolish the seeds of the toxic culture which caused this scandal. 

This all needs to be done carefully to confirm to employees that it is not a witch-hunt but a lesson in accountability and ensuring a new culture founded on moral integrity is formed. There is a need to protect those hardworking, honest and intelligent employees who are the life blood of the world’s largest auto manufacturer. VW will likely be focused on retaining as much of its workforce as it can. It simply cannot afford to lose the good people who remain in the company. If it does it will be that much harder to rebrand itself as an innovative car manufacturer making high quality products.

In an ironic way, it is usually these high impact, low frequency events which drive the most notable change-for-good in companies and industries. Whilst the current saga for VW is undeniably damaging, the company has a real opportunity to rebuild, rebrand and reshape itself.

Many of the processes that have contributed to this crisis will be exposed and eradicated. Internal structures that were difficult to change prior to the crisis will be modified; from moving, removing and elevating individuals through to the removal of inefficient corporate systems that create slow-burn issues. All of this change will be scrutinised under the microscope of public, Government and regulatory attention.  And, importantly, if investors like what they see in the future direction of VW, they will re-invest their capital.

The Lessons

In the same way that Nick Leeson brought down Barings Bank, a group of high powered individuals operating with a lack of oversight has inflicted major strategic damage to VW. The actions and inactions of a relative few have threatened one of the world’s largest companies, tarnished the reputation of diesel technology and the hard won reputation of German industry, threatened the careers and livelihoods of a largely innocent workforce and added risk to the financial and social stability of a nation. Certainly, white collar crime must remain high on the corporate threat agenda.

Disproportionate power divisions are always going to be present. It therefore underpins the critical role that Boards must play in the Governance of companies and ensuring they remain objectively aware of strategic corporate risk. The independence of Boards is one key element that makes them strong and gives them the positioning to take a helicopter view of the company so that they can ensure the company remains appropriately led, managed and governed.

More practically, the VW crisis underscores the need for all companies to have robust procedures in place to quickly respond, manage and recover from high impact low probability events. Processes must be endorsed and championed from the top, be implemented with a strategic focus and regularly rehearsed.

Crisis Management Teams must be able to interface with the board, understand each group’s role and control the strategic threats emanating from any major event. It should not matter whether the event is physical, non-physical, acute or slow-burn in nature. What needs to be continually assessed is how bad a situation could get and understanding the worst case scenario.

Companies that establish high level frameworks of corporate crisis management, with defined links between the Board and the executive crisis management team, respond quicker and more thoroughly to events with company destroying potential. Their response is governed by an understanding of how to rapidly control the strategic exposures occurring across communications, human-resources, legal, financial, risk, operations and recovery.

VW has responded effectively so far but a long path to recovery remains. There are many strategic threats that still need to be addressed. But it is not beyond them and there are opportunities to prosper and recover strongly through strategically focused crisis management and recovery. 

Responding to Unpredictable Crises

Malaysia Airlines' two tragic incidents of an aircraft disappearing in flight and another crashing into a war zone are international worst case scenarios. The massive oil spill in the Gulf of Mexico was beyond a crisis of usual circumstances. A terrorist shooting in a coffee shop in Sydney is an unusual and rare event in that city.

A Crisis Management Plan has to outline courses of action to be taken in the event of a critical incident or catastrophe. Importantly, worst case scenario response to threats have to go as far as possible in providing orderly and efficient transition from normal to critical conditions. A plan must provide specific guidelines appropriate for complex and unpredictable circumstances.

The crisis you don’t expect or plan for will be the one that’s likely to cause the most damage.  And while a lot of pundits believe that a good manager is automatically a good crisis manager, it is important to understand that many managers cannot cope with the stress, pressure and abnormal behaviour that occurs during a crisis. 

Most normal management behaviour is reversed.  One minute you are managing a business, the next minute you have to manage a crisis.  Different skills under different pressures.

How many managers can move rapidly from the normal pace of a business meeting to the hectic, urgent demanding pace of life and death decisions, evacuation, emotional trauma and split-second timing?

Containment is the key.  Managers who are prepared, rehearsed, educated, trained and aware are those that can make the transition when crisis hits and contain the situation.

If there is a single, critical feature to being prepared for crisis, it is in treating crisis management and recovery as an ongoing process.  Seeing it as an integral part of an organisation's everyday business activities, not merely as a plan that is created, approved, then shelved until needed. 

It is a process that has the whole organisation - from site management to CEO and Board - trained, tested and involved in a crisis management plan that is integrated seamlessly across the whole organisation. And regularly monitored, reviewed and audited, just like any other quality control policy that is demanded by compliance factors in today’s business environment.

To achieve this, there are a number of critical features of a crisis plan that facilitates speedy business resumption. Whether the crisis is an aircraft incident, cyber crisis, oil and chemical spill or explosion, a tainted food product or charges of business corruption, or an act of terrorism a crisis management plan must:

• Have tactical decisions made at the crisis location and quickly.  (This is where the public focus will be initially)
• Localise the response while maximising corporate and strategic assistance.
• Provide training and support to give executive management the skills and confidence so they can manage the early stages of a crisis.
• Create a tailor-made plan around uniform standards, organisation-wide
• Develop realistic simulations and training exercises.
• Start planning for recovery before a crisis occurs.

What fundamentally distinguishes crisis-prepared, from crisis-prone organisations, is their overall cultural view of crisis management and recovery. 

Strategic actions, technical and structural response, communication initiatives and psychological support have to be part of an integrated management plan and checklist process that immediately puts the organisation in charge of its own destiny.

The worst case scenario requires more than critical risk analysis. It needs to go beyond the ordinary critical event and consider extreme escalation. This planning is essential for effective inter-organisational response. 

RELOCATING IN A CRISIS

What happens when your head office is compromised in a major crisis? You must leave your building and can't return for some time. This can happen as a result of a natural disaster, a man-made disaster, a systems collapse or an energy failure.  All of a sudden there is a need to move to temporary or new premises.

During a crisis exercise workshop, one of the first questions for the Crisis Management Team is:  "Where would you manage the crisis from if you couldn’t manage it from here?"  

Probably the most important element of any Team Leader’s responsibility is to ensure that the organisation can continue to function even though it experiences a major incident or accident.

Losing your building, your office, your site, your location or your precinct, should be an essential element of risk recovery planning.  The fundamental element in this situation is the back-up premises.  The time to prepare for this is well before an emergency occurs, not when an emergency occurs. 

Long before the horrendous World Trade Centre catastrophe, in one of the worst terrorist attacks in the City of London, the Commercial Union building was literally blown to pieces.  This Head Office building was rendered totally inoperable.  Three people lost their lives and 30 people were injured.  Almost immediately, the huge British insurance company was able to locate alternate premises. 

Their temporary crisis management team moved to a specifically identified location and managed the crisis issues from that office while the company set up an empty building to move all their staff and management into over a weekend.  Telephones, computers and communication systems were rapidly brought on line and staff were contacted about the move to this new location and briefed on the changing situation that had rendered their normal office unusable.

Their recovery plan allowed the firm to get back in business virtually over a weekend.      

Some organisations have made their crisis management team and its facilities portable.  In other words, they have prepared a comprehensive crisis and recovery transportable unit for dealing with a situation that prevents them from using their normal crisis control room.  The portable unit (a crisis case) allows them to respond quickly at any location with the appropriate equipment and supplies such as mobile and sat. phones, manuals, contact lists, maps and checklists.

Organisations that want to keep their losses to a minimum and need to take immediate control of a crisis situation, should identify alternative premises to manage a crisis well in advance.  These premises can take a number of forms:

  

1.   Close sites.  These can be alternative and temporary premises close by.  Usually these premises are linked with sufficient immediate communication access to the organisation’s main line of information.  This allows a switch-over to support the database and telephone system.

  

2.  Friendly neighbours.  This is a back-up site for full or temporary operation.  It might not have the immediate technical communication lines to link computers and telephones, but can give immediate access to key stakeholders and is still within close access to the original operation.

3.   Corporate regional office location.  This can be one of your organisation’s offices that is located some distance from the original organisation location.  It provides “hot”, instantaneous links to databases, telephones and email, but takes you away from the location of your crisis.

4.  The portable location.  This is more a mobile situation which has been pre-organised to give you an ongoing temporary back-up facility.  It can be set up from suitcases, in a van, bus or local hotel, and can provide the necessary switch-over to back up databases, telephones and communication systems.   This unit is often used by the transport industry and emergency services for managing protracted events that happen at distant and inaccessible locations.    

Frozen berries recall crisis and Hepatitis A

An Australian company, Patties Foods, has been hit with a serious product recall of Nanna’s Frozen Berries and Creative Gourmet Mixed Berries after the Victorian Health Department advised them of a potential Hepatitis A virus contamination. These products originate from China and are distributed by Patties to major supermarkets – Woolworths, Coles and IGA. The outcome of this recall and public outrage over the source of the products and their labelling could have serious ramifications for the business and has led to a large sell off in Patties shares.

The recall has also created a crisis in confidence regarding the Nanna’s brand of frozen berries. The Chief Executive, Steven Chaur, went public early with a well-structured statement: “While our quality control testing to date has not revealed any concerns with the food safety of either product, further detailed testing is being done and the recall is an important step to ensure public safety and confidence. We have decided that all our frozen berries should be recalled until such time as we receive the results of further laboratory tests.”

While consumers have expressed their concern regarding the frozen berries products through social media and talk radio, the company has been on the front foot with the general and financial media.  The ABC’s Peter Ryan on the current affairs program “The World Today” asked Steven Chaur – “in terms of managing the situation or, some would say crisis management, how many hours of the day is this taking for you as Chief Executive?” Steven Chaur said - “it’s something we’re taking very seriously: we’re all working around the clock to work with the departments and working with our suppliers and indeed our customers to manage the situation.  We are fielding lots of consumer enquiries: we were taking nearly up to 8,000 calls a day last week on our consumer hotline.”

Not planning for a product recall escalating to crisis leaves a business, its brand and reputation extremely vulnerable.

Globally, there is a tightening of product safety controls although product labelling is still sadly lacking in detail in terms of product origin. Regulators are looking for a more thorough, fast response to recalling a faulty or contaminated product in terms of consumer contact and recovery of products. The fact is incidents of product recalls escalating to crisis are occurring with greater frequency than ever before.

Corporations need to establish crisis teams that can respond fast to a critical product recall. Threats need to be identified well in advance. Product recall processes need to include a crisis trigger.

Running regular product recall and integrated crisis/risk exercises will anticipate and deflect or reduce the impact of the worst case scenario.

Lindt crisis management response to siege

The dramatic events in Sydney this week resulting in the tragic deaths of Katrina Dawson and Tori Johnson by a radicalised individual represents not only a dark day in Australia’s history but is a sobering reminder that all organisations must be prepared for the unexpected. Over 17 hours the eyes of the world focussed onto the Lindt Café in the otherwise busy Martin Place and the extensive response by the New South Wales Police Force’s Tactical Operations Unit.

With the national terror alert recently elevated to ‘high’ by the Federal Government in September 2014, the realisation that Australia is not immune from the effects of violent extremists was brought to the forefront of our collective mind.

This week’s horrific events should clearly cement the fact that the threat of a major act of violence must remain high on the corporate threat agenda.

In the coming weeks and months there will be debates, questions, reviews and constant differing opinion about this event. What is clear is this critical incident again highlights the need for organisations to have up-to-date, rehearsed and seamlessly integrated Incident and Crisis Management Plans.

What are the learnings for business?

Firstly, a critical event can affect any organisation at any time.  Response must be immediate to take control. Moreover the effects of “someone else’s” crisis could rapidly become your crisis; drawing you into a situation for which you may not be prepared. A routine morning coffee quickly escalated to involve multiple organisations whose employees were tragic victims. In this case Lindt Chocolate Australia and Eight Selborne Chambers.

Secondly, if your organisation has identified the threat of an act of violence or armed intrusion as a risk to its operations then the Lindt Café siege is confirmation of that risk’s validity. Not all events can be prevented, however your organisation can control its response through the application of crisis management best-practice process and response.

Every Chairman and CEO should confirm that their organisation is prepared to deal with the worst case scenario. Does the organisation have a validated Crisis Management Plan that manages people issues immediately while strategically positioning the business to respond and recover from adversity? If the answer is ‘No’ then now is the time to reinvest in protecting your business and brand from company destroying events.

The age of social media

The Lindt Café siege again has highlighted the immediate power of social media. It confirms the necessity of incorporating this communication platform into your organisation’s response. Social media must be a front-line integrated part of the arrowhead that is your organisation’s crisis response.

  

The high profile effects of social media were visibly seen: The hostages were directed by the perpetrator to use it to communicate during the crisis, the solidarity characteristics of the crisis spawned the viral and global trending of the #Illridewithyou hashtag and the NSW government used it to communicate with affected publics.

An equally valuable learning for business was also demonstrated through Lindt Australia’s social media response. Within the early stages of the siege unfolding, Lindt delivered through social media a caring and concerned message strategy that was timely, appropriate and consistent. They demonstrated their compassion through an explicit stating of what their corporate priority was: People. Within two hours of posting their first message on their two Facebook sites (Lindt Australia and Lindt Chocolate Café Australia) there was a combined 35,000 likes, 2,000 shares and 2,000 comments. This necessarily excludes those who simply viewed the message only. As the situation developed, more messages appeared and their priority remained steadfast. Business leaders would be well served to familiarise themselves with Lindt’s social media response by viewing their Facebook page.

The Lindt communications response is a valuable contemporary learning that demonstrates the positive reach of social media. Conversely a poor message strategy could indeed create a secondary crisis for an organisation. The court of public opinion can be an unforgiving arena; if you do not get your message out fast and correctly someone else will fill the void with an alternative, inaccurate and potentially damaging message.

Don't blame the media in a crisis

Presidents, Prime Ministers and CEO's are given to blaming the media during a crisis.  It doesn't work because crises are news and there are hundreds of leading journalists, commentators and broadcasters who must get the facts to satisfy the ever-increasing public demand.

Don't blame the media.  They are doing their job and if you are not involved in a crisis, you would expect them to give you the news. All too often journalists are blamed for being too intrusive.  But, if they don’t give us the facts, we soon ask why.

Of course the media is interested and if they can’t get it immediately, they will go somewhere else.   They must have a spokesperson to lead their story.

The prospect of taking the high ground and doing the interview or press conference may strike terror into the heart of most corporate leaders, however it must be one of their early priorities.   There seems to be a mind-set in some management circles that by providing the media with facts early on, they are going to be accused of mayhem.  It is just the opposite.  Every fact that is provided in the early stages will release the pressure from both the spokesperson and all the internal stakeholders. 

In the case of one therapeutic products company during an escalating product recall, the leading network “warrior” interviewer demanded he spoke to the Chief Executive so he could get the news “right from the horse’s mouth”.  He shouted down the phone that there would be hell to pay if the company didn’t come good and give the network the story.  “I will stand outside your plant with the company name in the background,” he shouted, “and tell the story as I see it until you submit”.  

The CEO was experienced in media interviews and took on the task of meeting the “warrior”.  His organisation’s image and, to a degree, his reputation, was on the line.  Certainly there was going to be some difficulty in getting the message across and there will be traps and perhaps his words will be twisted, but he must tell the story. 

The CEO met the “warrior” and turned the setback into a springboard.  Questions were asked about the quality of the product and its future in the market place.  The CEO positioned the product as essential and vital to saving lives and identified the problem in the product recall as being controllable and the company as being in control of that problem.  He offered cool, clear and instant advice to the public about how to get advice or information on the situation and by the end of the interview, he had total clarity on the company’s confident approach to managing the situation.   He retained the initiative throughout and was never outmanoeuvred.  The sad end to this story of investigative dynamics was that the interview was never used.  Was it too good to be true or too true to be good?        

For the uninitiated, a period of media attack can be disastrous.  A barrage of cameras, microphones and tape recorders coming at you from every angle.  How do you avoid being ambushed by the early questions and how do you contain the situation without looking like you are on the defensive?   You understand what the media will want well before an incident occurs.  You plan, prepare and practice.

The Radio and Television News Directors’ Association in the US was surveyed on media expectations of an organisation during a crisis or disaster.  They wanted to find out how television stations covered an incident.  They  also interviewed people from the public relations industry who had been involved in a crisis.  The most important responses were to the question of “when a crisis occurs, how often does your organisation want updated information?” The most frequent answers were “constantly”, “immediately” and “as soon as possible”.  Respondents to the research also wrote “as soon as new developments warrant the public being informed”.  

Don't blame the media.  Have a plan to respond when they come and communicate your core message from the start of any critical incident. Move to the high ground with your spokesperson and be seen as the centre of information. Work with the media to win and hold the high ground.

Crisis apology from CBA - from CAN'T to CAN.

At last, under the threat of a Royal Commission, the Commonwealth Bank's Chief Executive has apologised unreservedly for its multi-million dollar financial planning scandal. In such high-profile corporate crises, "no comment" is no win. It is only a few days ago when a spokesperson for the Bank said "the CBA does not comment on rumour and speculation".

The Bank's highly-promoted brand slogan, "Can", categorically became "Can't" in their initial response to this critical and escalating disaster. When a strong brand and reputation need the protection of an early executive response, it is essential that the top management come out fast, loud and clear. And in this case, the Australian Treasurer, Joe Hockey, says the Bank did not act quickly enough to address the problem. And he should know. His own mother-in-law was affected by the scandal.

Public outrage must be managed fast, particularly in this age of social media igniting rumour and innuendo. Malaysia Airlines. Costa Concordia. BP oil spill. All criticised for early failure of a corporate message strategy to key stakeholders.

Corporate crisis communications pre-planning is central to the management of how an organisation delivers information to others during a critical event. This process should identify:

• who are the stakeholders who will be seriously affected by the event and must receive information immediately?
• what is the message strategy (not the media strategy but the central message strategy for all stakeholders)?
• how will the messages be delivered with pace and priority?
• who is the most appropriate spokesperson at the top of the organisation? If it's a major negative event, it has to be the CEO.  There is no hiding place.

Communicating with employees, customers, shareholders, government, media or regulators is an essential part of deescalating a crisis situation. This requires strategic pre-planning, constant monitoring and feedback. As the crisis develops, it is vital that communication is analysed and that the receipt of central messages to key audiences is confirmed.  This is now more important than ever with social media driving messages further and faster from the hub of the incident through the organisation nationally and internationally.

In a round of recent executive exercises with 10 sites in Asia, one common factor kept feeding back to our facilitator in the hot debrief - "our communication of key messages to stakeholders was too slow - we needed faster approval of corporate messages and clearer pathways to our key audiences".

Without doubt, "no comment" is no win. Early communication allows those who are affected to know what is happening and that it is being managed effectively.