The Diesel Dupe: How corporate transparency can make or break a company
Remember the Ford Pinto? The 1970s two-door sedan had a pretty memorable, albeit undesirable, attribute – it could burst into flames if it was rear-ended at a speed of 20mph or higher. While design flaws and recalls aren’t uncommon with car manufacturing, what made this particularly noteworthy is that Ford execs knew about it before the cars ever hit the road. The decision to sell the Pinto, fiery flaw and all, was based on a scandalous cost-benefit analysis that showed it would cost Ford $137 million to repair the gas tank defects in all Pintos ($11 per car)…but the monetary benefit of preventing serious burns and deaths was only $49.5 million. Since the costs were nearly three times the benefit, the Pinto was rolled out as is.
Don’t think that mathematical logic holds up? Neither did the courts. And while the Pinto went the way of the dodo in 1980, Ford certainly hasn’t gone anywhere; despite the fact that the company weighed the value of human life against an eleven dollar car part, and serious accidents did occur. That wouldn’t be the case today. With consumers placing increasing importance on corporate transparency, dishonesty now has the potential to literally destroy companies.
It’s hard to read the news these days without seeing tales of corporate transparency gone wrong… And unless you’ve been under a rock for the last couple months, you’ve surely heard the holy grail of recent “corporate opaqueness” stories: The Volkswagen Scandal.
In late September 2015, VW admitted that about 11 million cars worldwide were designed to cheat on emissions tests – a “defeat device” was installed that could “sense test scenarios” and make the engine run below normal power and performance, effectively producing emissions low enough to meet regulating standards. Once the car is back on the road, it returns to operating – and emitting – normally. The actual emissions reported from the affected cars were 10-40 times higher than regulations allow; making VW potentially responsible for upwards of a million additional tons of air pollution worldwide. And if that’s not bad enough, the device was installed in the “clean diesel” vehicles VW has been marketing as fuel-efficient and environmentally-friendly.
The costs to VW will be astronomical. The company has set aside $8 billion for recalls, and the EPA fines alone could cost VW $18 billion ($37,500 per car). Combine that with a $28 billion market value decline in the wake of this discovery, regulatory fines from other countries, and lawsuits from consumers and dealers, and the conservative estimate is that “The Diesel Dupe” could cost Volkswagen and its shareholders at least $54 billion. But even with this staggering figure, the company will likely incur no greater cost than the ramifications of destroying customer trust and its own public image.
In today’s marketplace, consumers are demanding greater levels of corporate transparency – customers want to know how their products are sourced, manufactured, and created, and they are placing increasing importance on whether a company is open and honest. This trend is strongest among the “Millennials,” who represent the largest percentage of future purchasing power. The expectation for corporate transparency is not unique to large corporations, however; consumers are holding businesses of all sizes accountable.
The Volkswagen scandal begs the question: Do we as consumers hold different companies to different standards? In other words, if the “defeat device” was installed in a Hummer – a vehicle that never claims to be environmentally-friendly – would the backlash be as severe? Are people angry at Volkswagen for cheating on emissions tests…or for doing so while publicly touting their “greenness?” With so much competition in the market, that distinction is likely irrelevant. Companies can no longer afford to risk deceiving their customer base in any way, shape or form, or even withholding information. Too much has changed since the days of the Pinto.