Das Awful? VW, Social Licence & Public Trust

I had written a different blog for today but this week’s events in Germany have moved me to write on something more topical and timely. The revelation that Volkswagen has been tricking emissions tests using computer software is directly tied to the question of social licence. The team at All-In Gaming & Hosptiality Advisory Group has been working on a paper "Social Licence & the North American Casino Industry" , so this real-life example could not be ignored.

The tone of the media coverage is shock, disbelief and outrage. VW’s brand equity and consumer confidence has taken a huge hit across the globe. Its stock price has dropped, as illustrated in below. Class action lawsuits are underway. I wonder how long it will take the brand to recover, or if it even can?

Obviously, Volkswagen has violated the public trust. Emissions testing is a key input into the social licence equation for the auto manufacturer. Another key input is the trust governments, the public and, most importantly, VW’s customers place in the corporate leadership to act ethically and responsibly.

Earlier today, Martin Winterkorn, the CEO of Volkswagen resigned. In his statement he said:

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. I am doing this in the interests of the company even though I am not aware of any wrong doing on my part.

Volkswagen needs a fresh start – also in terms of personnel. I am clearing the way for this fresh start with my resignation.

In my opinion, this resignation is a necessary step for Volkswagen to start the long and arduous process of rebuilding the public trust. You will notice Winterkorn, does not accept any personal responsibility. He does, however, understand that he was at the helm of a company that was caught in a scandal and he needed to resign as a public symbol of the company’s contrition.

Volkswagen was taking short cuts to fool the environmental regulators. In the end this will cost the company vast amounts of capital in lawsuits and repairs to their manufacturing process (The New York Times reports that the investment necessary to correct the cause of the problem is $7.2 billion USD). There are more significant costs now and into the future that, are more difficult to quantify. The loss of the public trust has implications that include the lost revenues from car sales. This will impact not just the company, but the dealers in local communities around the world. It will also cost the industry. Public will demand increased scrutiny and governments will respond with even more stringent regulations on all auto makers to make the public happy. The consumer will, no doubt assume, the associated costs through product price increases.

Maybe I am cynical but the news did not surprise me. I suspect VW is not alone in its manipulation of environmental tests. This is a dangerous game to play and could do a great deal of damage to the social licence on which the operation of the entire automotive industry is dependent.

Thanks so much to Helen for the idea to title this blog "Das Awful".