Shadow of Volkswagen scandal hangs over Germany

March 10, 2016

While Germany has been praised for its moral leadership during Europe’s refugee crisis, a big question mark remains over whether the same could be said about the country’s corporate world. The Volkswagen scandal grabbed global headlines and cast a shadow over German corporate compliance in a manner similar to the infamous 2008 Siemens bribery scandal.

One contention is that Volkswagen’s scandal considerably damaged the ‘Made in Germany’ brand internationally, and that the German companies that overtly promote their ‘Germanness’ will take a break from pro-German advertisements. However, German Chancellor Angela Merkel, who featured as Time magazine’s Person of the Year for 2015, was quick to reassure industry leaders that she did not agree, claiming, ‘I do not believe that “Made in Germany” got a scratch by what happened at Volkswagen.’ And she may be right, as Siemens announced that it will launch a new global branding campaign in early 2016 to stress the qualities of German engineering.

If nothing else, the abject failure of authentic leadership at Germany’s largest corporation this year was an excellent reminder that success and reputation should never be taken for granted – something that has always been true for executives as well as employees of all levels. A strong compliance policy is important, but there are more pressing problems at hand. For one, it is no longer sufficient for management to simply preach and implement a compliance framework, as we cannot ignore human behaviour and country-specific organisational culture.

Germany mirrors active United States enforcement

Germany is a location and jurisdiction where enforcement has been very active for a number of years. There were more than 20,000 cases of corruption filed with prosecutors in 2015 alone. Possibly because of this, little media attention was given when Germany’s new anti-corruption law was enacted in November 2015. Based on European Union legislation, the scope of the German legislation was broadened in various ways and considerably deepened the authorities’ powers in the fight against corruption.

With amendments to the German Criminal Code, the law extends territorial scope, strengthens anti-money laundering, and applies a stricter and extended approach relating to corruption in the private sector as well as corruption of foreign officials.

Given the broad scope, some legal scholars have commented that they think the law is now going too far. On the other hand, however, concerns have been raised as to the authorities’ capabilities to effectively monitor companies that behave unethically. The Volkswagen scandal and its failure of authentic leadership was a prime source to fuel criticism of regulators’ abilities in a technically-changing and rapidly-advancing global business world. It has also often been said that financial institutions and investment companies can outsmart regulators due to their ability to attract the most talented people.

Companies in Germany need to take compliance seriously

Following the events at Volkswagen and Siemens, it seems that certain core values have been lost and there is an urgent need to ensure that these traditional moral values are restored. Since many German executives rank trust and integrity as the most important values, scandals are not welcome.

To get a real understanding of their organisation’s culture and an appreciation of the major and minor compliance risks it faces, a compliance officer needs to speak in person with as many employees as possible. The extent to which the personal ethics of a corporation’s leadership team matches the values of their organisation can vary greatly because people compromise their personal value system as they are seduced by greed and success.

The next step is to use training and education to teach employees to vehemently oppose non-compliant behaviour and thinking. An important part of this is promoting incentives for whistleblowers as well as protecting the rights of those who stand up against injustice and adherence to the law.

Compliance programmes have to be embedded into a company’s strategy and cultural principles. Clearly, a lot of time will be required to achieve this – often many years – yet it is important to keep this goal high on the agenda and to immediately implement effective and creative measures.

Germany must extend moral leadership to corporate compliance

The introduction of a strengthened anti-corruption framework, shortly after one of the biggest corporate scandals in the country’s history, reinforced the appreciation that businesses operating in Germany need to take compliance very seriously.

The Siemens and Volkswagen scandals provided ample evidence that some companies require a change in business culture and that a ‘tick-the-box’ approach to compliance is not effective and will not satisfy regulators.

The extremely high respect of authority in Germany also played a part in the Volkswagen scandal and this might have been underestimated in the company’s compliance programmes. The lesson learned is that companies need to refocus on integrity and traditional moral values. Weaknesses will always be present in the C-suites of global businesses and authentic leaders need to show their strong ethical beliefs. Executives need to stimulate a culture where employees are very clear on integrity and moral components. This can only be achieved by leaders with purpose and passion for compliance.

Those companies operating in Germany with an authoritarian work culture that hinders employees from reporting compliance breaches must do their utmost to make significant changes. Most importantly, businesses have to promote general social concern and genuine integrity in people of all levels of seniority and experience.

 

Volkswagen scandal prompts EU regulatory rethink

The European Union is seeking more regulatory control of the automobile industry above and beyond national car regulations in an effort to prevent a repeat of the Volkswagen cheating scandal. The proposed legislative changes, which represent the strongest response yet by the EU to the scandal, have sparked heated debate among governments and the automotive industry, with many resistant to change.

The proposed changes would fall short of creating an independent regional regulator akin to the United States Environmental Protection Agency, which unearthed the misconduct at Volkswagen. However, they do cover the following:

  • The EU would be able to demand spot checks on vehicles
  • The imposition of fines of up to €30,000 (US$32,600) per vehicle for non-compliance of environmental laws – where a member state fails to impose penalties
  • The encouragement of peer review, whereby individual member states could recall cars in violation of regulations but approved by other EU bloc members
  • The formation of a funding pool to pay testing agencies – so as to break the close ties between testing laboratories and carmakers
  • The imposition of fines or suspension of licences for inadequate testing bodies
  • The requirement that carmakers provide access to their software protocols
  • Each new vehicle to have a certificate citing its level of toxic nitrogen oxide (NOx) emissions – as a push for further transparency.

If the above changes are approved by EU member states and the European Parliament, any future misconduct could potentially result in multi-billion dollar penalties for automakers, according to Reuters.

The proposed reforms will likely face resistance from countries that house large automotive industries, such as Germany, as well as from nations that generally oppose the removal of controls from national authorities, such as the United Kingdom.

If an industry sweep begins in a sector relevant to your business, it is prudent to conduct an internal audit before being subjected to an external investigation. The audit should include an examination of the compliance programme and the books and records of the business.

It is equally important to talk to staff and determine whether procedures are being followed on a company wide basis. Both old and new employees will be able to offer valuable insights into the business, as the former have experience and the latter have fresh eyes to view practices and habits in the business.

Examples of other industry members falling foul of the law should be utilised in training to give employees a real time and relatable example to draw on.

 

 

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