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VW's Irresponsible Behavior has Consequences

VW joins GM and Toyota in allowing Deficient Cars to be Sold

By now you know that Volkswagen has apologized for selling hundreds of thousands of diesel cars in the U.S. with software specifically designed to evade government pollution tests. The company disclosed that the irregularities on diesel-emission readings extend to some 11 million vehicles globally. The company has admitted that it rigged diesel vehicles using a "defeat device" to pass lab tests, even though they emitted as much as 40 times the legal limit of pollutants on the road.

At this early stage, putting a precise price tag on the ultimate cost of pollution penalties, criminal fines, private settlements, and the like is virtually impossible. I’ve heard an $18 billion liability figure reflects the maximum per-car clean-air penalty the Environmental Protection Agency could, in theory, assess. Some 482,000 four-cylinder VW and Audi cars, sold in the U.S. since 2008, multiplied by $37,500 for each non-compliant vehicle. Volkswagen has set aside €6.5 billion ($7.3 billion) to cover the scandal. That’s a huge amount. However, it’s not enough, in my view, because this is a case where intent to deceive is easy to establish making it a slam dunk for fraud. In fact, early reports indicate that the German government may have known that VW was rigging its emissions tests.

Satisfying the EPA and Justice Department is not the end of the liability story for VW. State attorneys general are going to want in on these settlements using state environmental laws and pollution emission regulations. Then there are private plaintiff attorneys who will file lawsuits seeking compensatory and punitive damages for hundreds of thousands of car owners whose vehicles are worth thousands of dollars less today than they were last week. Yet another category of suits will seek compensation for shareholders who have seen the value of their VW stock shrink by more than a third since the scandal broke last week.

The company is not disputing any of the charges. In fact, Chief Executive Officer Martin Winterkorn said that his company is “deeply sorry” for the emissions-cheating scandal and will do “everything necessary in order to reverse the damage this has caused.” Michael Horn, head of the brand in the U.S., elaborated: “Our company was dishonest with the EPA, and the California Air Resources Board, and with all of you. And in my German words: We have totally screwed up.”

Well, it didn’t take Winterkorn long to bail out after the admission. He resigned as CEO last Wednesday, taking responsibility for an emissions cheating scandal that has gravely damaged the carmaker’s reputation. “As C.E.O., I accept responsibility for the irregularities that have been found in diesel engines,” Mr. Winterkorn, said. He then turned around and undid all the good by apologizing when he qualified it by saying that he had personally committed no misconduct. “I am not aware of any wrongdoing on my part,” he said.

It may be too strong a word to call Winterkorn a “dummkopf.” He needs to realize that even if he knew nothing about the missions scam, he should have known and that puts him into the “bonehead” category. Not knowing about fraud that occurs under one’s nose and during one’s watch is just as bad (all right, not quite as bad), as knowing and doing nothing about. Not knowing the truth when one should know it is not a defense for irresponsibility.

The worst scandal in VW's 78-year history showed no sign of abating as Germany’s transport minister said last Thursday it had manipulated tests in Europe as well as the United States. To her credit, German Chancellor Angela Merkel showed courage when she came out and said that VW should act quickly to restore confidence in a company held up for generations as a paragon of German engineering prowess.

What is it with the automobile industry? How many times are we going to stand idly by while another car company issues another disclosure and, eventually, mea culpa, about ignoring defects or gaming the system as did Volkswagen?  Just a few days before VW’s admission, General Motors agreed to pay $900 million to resolve a federal criminal investigation of ignition-switch flaws linked to at least 124 crash deaths and the recall of 2.59 million cars. So far, no individuals have been criminally charged in the GM case, but prosecutors have said the probe is continuing. In an earlier case concerning cars that allegedly accelerated spontaneously, Toyota reached a $1.2 billion settlement with the Justice Department, the largest-ever U.S. criminal penalty for a car company. I could go back to the 1960s and rehash the Ford Pinto debacle when crashing testing sat low speeds determined that the gas tanks regularly ruptured and the cars could be engulfed in flames causing accidents or deaths.

Trust is the basis for good business. If the driving public cannot trust that their cars will operate safely under all conditions, then the guilty company’s should be punished. Irresponsible behavior is unacceptable, especially in an industry where people’s health and welfare – and very life – is at stake. VW should be ashamed of itself. It has forfeited the right to be considered an elite car company. Let’s hope consumers think twice before being any VWs in the future if for no reason other than to teach the company a lesson that actions have consequences.

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on September 28, 2015. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: