Written on 08 March 2016.
At EDHEC, research must make an impact on companies and society as a whole. The VW scandal presented an opportunity for a profound collective reflection within the community of professors and researchers at EDHEC Business School. This reflection simultaneously focused on issues of ethics, law, organisation, communication, strategy and finance.
These different viewpoints shed new light onto the subject and try to draw lessons for the future, not only for companies, but also in terms of managing organisations or investments. Although this scandal has been the subject of heavy media coverage, it did not, in our opinion, result in sufficient reflection on the lessons to be learned.
Here, we present a series of short points of view.
In his contribution, Geert Demuijnck - Professor of Ethics, states that “an ethical corporate culture cannot totally avoid immoral behaviour, but it is an influential factor, the responsibility of which is collective. From an ethical management point of view, raising awareness of this collective responsibility in order to maintain a responsible corporate culture (even if the leaders bear more responsibility) is a key element.”
Against this backdrop, Björn Fasterling, Professor of Law, raises the question of whistleblowers speaking up when they observe improper conduct within the organisation. How can we ensure that their voices are not only protected, but also heard? This is a crucial issue, but a number of major companies, including VW, do not appear to have integrated it into their culture.
Christophe Roquilly, Professor of Law, highlighted the difficulty of invoking the individual liability of VW executives, both in civil and criminal terms, concluding that “...the destruction of the Volkswagen Group’s value, be it financial, strategic or reputational, and the resulting legal risk, cannot be neutral for them, especially when it relates to a company that has promised its investors a firm and unequivocal commitment to respect the law and certain values.”
This is precisely the strategic dimension that Philippe Very and Emmanuel Metais, Professors of Strategy, focus on to understand the organisational and strategic reasons behind VW’s decision to cheat emissions tests. They posit their reflections on chaos theory. They recall that it was born out of the observation that within “industries with exacerbated competition, where one must continually innovate, the pursuit of high ambitions can create this phenomenon of escalation of commitment. It is an onward rush, whereby the company continues to invest even if these investments are unreasonable, or they no longer make sense”... “The people (or team) immersed in this escalation of commitment could gradually have taken it that ‘anything goes’ when justifying additional investment, and especially to achieve the expected return on investment in spite of the regulations.”
Arnaud Chéron, Director of the Economics Research Centre, looks at the risk of economic value destruction and argues that even if VW “ were to take such a blow, it would easily have the means to overcome the obstacle. It has registered more than €20 billion of cash on its books, and Matthias Müller has already announced that €15-20 billion of expenditure could be scrapped from the €100 billion envelope of investments planned for the 2015-2018 period .” He concludes: “ To summarise: Yes, they will put on the brakes, but a full exit [from the market] seems unlikely. ”
Philippe Foulquier, Professor of Finance, and Liliana Arias, Research Engineer, reach a similar conclusion that VW has the means to deal with this crisis, and added that “this scandal presents a real opportunity to restructure the Group and come out stronger”... “So, if VW can survive these scandals, the abovementioned measures could constitute a real opportunity to take the company back to the drawing board and carry out the necessary restructuring changes that the Group had not yet made. Once again, ‘What does not kill you makes you stronger’.” So, while this sideslip has not resulted in VW making an exit, it might perhaps signal a change in direction.
Noël Amenc, Professor of Finance, Sivagaminathan Sivasubramanian, Quantitative Analyst, and Jakub Ulahel, Quantitative Research Analyst with ERI Scientific Beta, also showed that in their desire to gain exposure to well-rewarded risk factors (such as the Value factor, for example) over the long term, investors’ portfolios were often heavily concentrated in the stocks most exposed to this factor, as was the case with the VW stock. Investors have de facto forgotten one of the foundations of Modern Portfolio Theory, which postulates that the good risk-adjusted performance of a portfolio stems from its diversification. They observed, for example, that the J.P. Morgan Europe Multi-Factor index was very strongly exposed to the risk of the Volkswagen AG stock, as was the MSCI Europe Diversified Multi Factor index. In fact, these indices respectively contained almost 1.5 and more than 2 times more Volkswagen AG stock than the Stoxx Europe 600, and almost 10 times and 16 times more Volkswagen AG stock than the Scientific Beta Extended Europe Multi-Beta Multi-Strategy EW index.(1)
Lastly, how are the VW executives communicating on this scandal? Michael Antioco, Professor of Marketing, provides us with a reading grid of VW’s communications explaining that, depending on their culture, investors all react to the style of communication differently. He makes a few recommendations directed at companies.
It remains to be seen whether this whole “affair” can trigger any sense of guilt among the VW executives. Fabian Bernhard, Professor of Management and member of the Family Business Center, refers to his work on the emotion of guilt within a professional context and states that “… professional culpability could be desirable. It is hoped that repentant VW executives will have the critical view required to bring through the necessary changes. Otherwise, the recent Volkswagen campaigns will not have signalled a real transformation, but were simply advertising .” Only time will tell...
(1)-This article, not included in the present case study, is available here.
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