Anatomy of a Corporate Scandal

A FULL YEAR AFTER THE DISCOVERY OF FALSIFIED EMISSIONS TESTS, IT IS STILL HARD TO SAY WHEN VOLKSWAGEN WILL RIGHT THE SHIP

by Julien Jourdan, Teacher of Global industry of the imaginaries

It was supposed to be a year of honors and glory: Volkswagen was about to steal the crown from Japanese rival Toyota and reign over the global automobile market. Then the world discovered that one of the most admired companies in the world had falsified engine emission tests. In a matter of days, dishonor and shame fell upon the corporation and its top management, accused of cheating, lying, and “breaking the trust” of its customers and the public. The Tarpeian rock, the Ancients knew well, is close to the Capitol.

And VW fell hard. A fourth of the company’s market value evaporated. Public outrage soared, forcing CEO Martin Winterkorn to resign. The firm lost ground in all major markets, retreating from the leading positions it had patiently built over decades. Adding insult to injury, legal bills started piling up as prosecutors across the globe were investigating fraudulent practices. A few months in the scandal, nobody knows how long it will take for VW to start recovering. The healing process will involve explanation, contrition, and rehabilitative change. The hubristic “Das auto” tagline is already history. Major management and strategic changes are under way. No doubt the turnaround will require considerable expenses and time.

Scandals are intriguing social phenomena. They involve misconduct, real or alleged, that runs counter to established moral norms. Surprisingly, the transgression is often known. In Victorian London, Oscar Wilde’s homosexuality was public knowledge but was ignored until a trial brought it to the forefront of the debate. Early evidence of VW misconduct was published in a 2014 scientific study but remained under the radar. Publicity is what turns transgression into a scandal: it acts as a detonator, forcing third parties who might have otherwise turned a blind eye to denounce the perpetrators. Once the story is out there, bystanders have no other option than condemning the publicized transgression. Scandals then start diffusing. In the age of social media and instant news, they spread like wildfire.
Quickly, former associates of the perpetrator and actors categorized as being similar suffer from a suspicion of culpability. “If VW does it, others are probably doing it, right?” At this point, being guilty or innocent does not really matter. The taken-for-granted assumption that corporations act in a morally acceptable manner vanishes; entire sectors become subject to public scrutiny. The practices of Ford, BMW, Renault-Nissan, and others, are questioned. Eventually, misconduct at one firm may cast a cloud over a whole industry.

Corporate scandals are not always bad news though. When they weaken one or more central players, they open market opportunities to competitors. In the aftermath of the Enron scandal, for instance, the ‘big four’ audit firms ended up capturing most of the former Andersen’s clients. Last November, Fiat-Chrysler and Volvo both recorded all-time high sales in the U.S.
Scandals may also have a greater virtue: they call attention to moral issues and durably affect how consumers and key stakeholders evaluate organizations. In a recent research project, find evidence that organizations providing a close substitute to the offer of the perpetrator and known for being morally stricter are best positioned to benefit from a scandal. By providing virtuous firms with a competitive hedge, scandals may contribute to positively shape the evolution of industries.
It’s obviously too soon to tell but we can only hope that happens to the global automobile industry.