September 28, 2015

Repair the Corporate Image

By Dr. Ken Broda-Bahm:

VW Logo Image

I’ve had a fond and favorable impression of Volkswagen. Partly that’s due to my childhood memories from the 70’s of driving around with my large family in an old VW bus, and partly that is the result of the company’s conscious marketing as a slightly off-beat, countercultural, and environmentally aware company. When the company reintroduced the bug in the late 90’s, they did so with the promise, “If you sold your soul in the 80’s, here’s your chance to buy it back.” Over the years, the larger Volkswagen group’s reputation for reliability, performance, and economy has led to it passing Toyota to become the world’s largest automaker. But what a difference a week can make. Volkswagen is currently embroiled in what is likely to be one of the biggest frauds in automotive or, for that matter, corporate history. The company has admitted to having employed a kind of defeat software in its “clean diesel” engines that switches on emissions control technology in response to patterns indicating that an emissions test is in progress, and then switching off that technology once the test is over. In other words, the cars are programmed to cheat the test.

Affecting 11 million vehicles worldwide, including half a million in the U.S., the scandal is certain to carry some big ripples: potentially billions in fines, criminal sanctions, and civil suits. Already, there is notice of 30 class action lawsuits representing all 50 states plus Canada. It is a tremendous blow, some say potentially fatal blow, to the company’s place in the market because it strikes at the heart of Volkswagen’s image. The Washington Post, for example, quotes Christa Morgan, a customer from Portland, Oregon who bought a 2011 Jetta SportWagen, based in part on its low emissions. “I don’t want this car,” she said. “It makes me feel sick that I’ve been driving this car for about four-and-a-half years and belching all these toxic fumes into the atmosphere.” Volkswagen has a public relations crisis on its hands, and that will soon be joined by a litigation crisis. A recovery might be hard to imagine at this point, but other companies have bounced back from dramatic losses of face and credibility. If that image recovery does happen, it will happen because Volkswagen is able to develop an effective PR message that is in sync with its litigation message. That is where the debacle carries a lesson for all corporate defendants: There is a pattern to how they, and other similarly situated companies, should respond.

Volkswagen’s Problem: A Worst Case Scenario

What is particularly striking about Volkswagen’s current trouble is that it contains a high measure of all three of the factors that resonate with the public and magnify the perceived scandal. That “dark triad” of factors is that it is harmful, intentional, and deceptive.

Harmful

The “defeat software” was designed to circumvent emissions rules that have been in place for decades, and that have improved air quality over the years. The manipulation allowed the release of mononitrogen oxides, or NOx, at up to 40 times the legal limit. NOx causes asthma and respiratory illness. According to an analysis by The Guardian, the estimated worldwide total of Volkswagen’s extra emissions, one million tons per year, is equal to the total amount produced by the United Kingdom’s power stations, vehicles, industry and agriculture.

Intentional

The story emerging so far sets Volkswagen apart from most other automotive and corporate scandals. Instead of being caused by an inattention to safety or to quality, the problem was created on purpose. While the “who” and “how” still aren’t completely clear, it seems that those coding the software built in the emissions defeat as a feature not a bug. That means that at some point in the corporate hierarchy, someone made the choice to trade-off environmental quality in favor of better performance.

Deceptive

Another compelling feature to the story is how it was discovered. In 2012, a $50,000 grant enabled West Virginia University to road test the vehicles, and they found emissions levels up to 35 times what should have been expected based on the emissions control technology. That was followed by several years of communication before the company finally admitted they misled regulators and consumers. The defeat software was itself a lie to regulators, and when the data became available, the company seems to have continued to hide the ball for several years.

The Corporate Image Repair Solution

It will be a long road to recover its image, and the outcome is still questionable at this point. But if Volkswagen does make it, part of its message, both in and out of court, will need to include a comprehensive apology that shows a consistency in words and deeds. Unfortunately, corporations facing a public crisis don’t always do that. Recent research (Mena et al., 2015) shows that large companies tend to first apologize, but then “forget” the irresponsible action by removing any trace of the act. By simple avoidance, the company can end up not learning any lessons from the scandal.

We have written previously about the difference between a partial or compromised apology and a complete apology. In a complete apology, four elements need to be both evident and credible: remorse (“We feel badly about this”), responsibility (“We hold ourselves accountable for it”), repair (“We will fix the damage we caused”), and reform (“We will do our best to see that it never happens again”). Let’s take a look at how these ‘Four R’s’ apply to Volkswagen.

Remorse

As he resigned, former CEO Martin Winterkorn said he is “deeply sorry that we have broken the trust of our customers and the public.” He also added that he is “shocked by the events of the past few days,” and “stunned that misconduct on such a scale was possible in the Volkswagen Group.” Similar communications from the company are likely to continue, but what needs to be made clear is that the company sincerely appreciates how its customers, shareholders, and the regulators might feel blindsided and betrayed, and that as a result, the company is genuinely remorseful.

Responsibility

Martin Winterkorn also attempted to hold himself accountable for the debacle. “As CEO I accept responsibility for the irregularities that have been found in diesel engines and have, therefore, requested the Supervisory Board to agree on terminating my function as CEO of the Volkswagen Group.” The solution in this case, however, is not likely to be one sacrifice in leadership. A recent article, CNN Money lays out a good list of next steps, and the first among them is to come clean and communicate clearly. Given that the data was made public a year and a half ago, Volkswagen may have missed a chance to beat EPA and the journalists to the punch by taking responsibility earlier. Now, their best opportunity is to be as transparent and direct as possible in investigating who was actually responsible.

Repair

Part of the repair has got to be to make the customers whole. That is going to be a tall order, however, because they can’t expect to be able to simply recall the cars, take out the emissions-cheating code and then send them back. Without the software feature, the cars will not perform as advertised, and will not have the same resale value. It is difficult to see how they will propose to make customers whole without buying the cars back. In addition, the large-scale buy-back will also have to be very well run. As Peter Bible, the chief risk officer at consulting firm EisnerAmper, is quoted in the CNN Money piece, “They have to make [it] the easiest recall known to man. It has to be very consumer-centric.” In addition to customers, stockholders who have seen a substantial drop in value need to be looked after as well. In total, the company has set aside $7.2 billion to repair the problem.

Reform

For either the market or jurors to be reassured, Volkswagen will have to demonstrate that a deception like this cannot happen again. As the CNN Money piece notes, that means fixing the culture by identifying whatever policies and incentives led to the defeat software in the first place, as well as whatever led to it being either undiscovered or allowed within the company for so long. The company will need to dissociate the old personnel, policies, and priorities from the new ones. If Volkswagen’s response is decisive and emphatic, then the crisis is an opportunity to show how much the company values honesty.

Taken together, the four parts of an apology form a story, and that story tracks with a familiar theme: redemption. Both in public communications and in a courtroom, Volkswagen will need to convincingly show that the company and the new leadership have seen the light. It cannot be just words either, and will need convincing large-scale actions in order to be credible. At this point, a full apology may or may not work. But one thing is for sure: Without it, Volkswagen will not be able to repair its image. 

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Other Posts on Corporate Image: 

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S. Mena, J. Rintamaki, P. Fleming, A. Spicer. On the Forgetting of Corporate IrresponsibilityAcademy of Management Review, 2015; DOI: 10.5465/amr.2014.0208

 

Photo Credit: spatz_2011, Flickr Creative Common

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