The Volkswagen emissions scandal highlights three key principles: 1) An ethical tone set at the top is not enough - it must be enforced throughout all management levels and the entire company. In VW's case, lower management did not uphold the stated risk policies. 2) Unethical behavior is rewarded when employees are highly compensated for meeting profit and production goals by any means, without oversight into how those goals are achieved. 3) Whistleblowers are rarely protected and often face punishment like job loss rather than reward for reporting illegal activity. As long as the reward/punishment system encourages unethical behavior, more corporate scandals will continue to happen.

1. Tone at the Top: Volkswagen
Since this story broke in September, we have been reading almost weekly how widespread this
fraudulent, unethical and illegal behavior was throughout the Volkswagen (VW) companies. Let’s take
Winterkorn at his word – that he knew nothing about this. If you search the internet, you will also see
several risk appetite statements from various VW entities. So with a strong ethical culture and stated
conservative risk appetite – how does something like this happen?
I believe that there are three basic principles at work.
The first is that having the right “tone at the top” is not sufficient in and of itself. It must permeate
through all levels of management, down to every worker on the factory floor. Given that the emissions
test cheating crossed every automotive line of the VW companies, it is clear that the management
level below the board did not have a commitment to the stated risk tolerances. They all were
comfortable in moving forward across company/legal entity lines and country borders in a manner that
was completely opposed to the guidance set at the board levels (we’ll leave moral and ethics aside for
the moment).
This leads us to the two other principles impacting this – and other (London Whale; LIBOR Fixing; et.
al.) – breach of corporate ethics. These guide human behavior at its most basic level – reward and
punishment.
When you look at the recurring nature of these types of cases, it is clear that the actors were all highly
compensated for the results of their unethical/immoral/illegal behavior. The only focus was meeting
stated profitability/production/efficiency goals – at any cost. Neither management nor the
shareholders asked questions about how the company was meeting these goals. And the actors were
very handsomely rewarded for their contributions to the corporate profit - that is their behavior.
Which leads us to punishment. Most companies have very explicit and robust “whistleblower” policies.
Confidential telephone lines are put in place. Annual training is mandatory in the US and Western
European countries. Again – senior management encourage employees that see these things
happening to come forward and report their concerns.
In the VW scandal, two independent researchers gave their results to the California Air Resources
Board and the federal Environmental Protection Agency in 2014. The reality is that at best,
whistleblowers are ignored, as with the VW case. At worst, the whistleblowers lose their jobs, are the
subject of multiple law suits, and are blackballed in their industry, preventing them from ever finding
another job.
Until this reward/punishment equation is reversed – illegal/immoral/unethical behavior is punished
and whistleblowers are rewarded – we will continue to see these corporate scandals unfold.