Volkswagen’s CEO, Professor Martin Winterkorn, has done the decent thing and fallen on his sword. This is his resignation announcement, posted on the company’s website:
“I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group.
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.
I have always been driven by my desire to serve this company, especially our customers and employees. Volkswagen has been, is and will always be my life.
The process of clarification and transparency must continue. This is the only way to win back trust. I am convinced that the Volkswagen Group and its team will overcome this grave crisis.”
It was hard to see how he could remain in post. Within a day of the US Environmental Protection Agency’s announcement on Monday September 21st that Volkswagen had rigged emissions tests on approximately half a million diesel automobiles sold in the US, Volkswagen’s share price had dropped by over 30%, wiping $27bn off its market cap. On Tuesday September 22nd, after giving a 6.5bn Euro profits warning that was quickly dismissed by analysts as vastly over-optimistic, Volkswagen admitted that 11m cars worldwide were fitted with the “cheat” software. The German newspaper Die Welt speculated that the costs of customer redress, regulatory fines and lawsuits might be sufficient to bankrupt Volkswagen (my translation, original in German):
The scandal has reached a dimension that could threaten the existence of what is currently the largest automaker in the world. The billions of costs and penalties that await the company, could crush even the best-capitalized corporation.
Volkswagen’s Executive Committee accepted Prof. Winterkorn’s resignation and indicated that other heads will roll too. And then they said this:
The Executive Committee have decided that the company will voluntarily submit a complaint to the State Prosecutors’ office in Brunswick. In the view of the Executive Committee criminal proceedings may be relevant due to the irregularities. The investigations of the State Prosecutor will be supported in all form from the side of Volkswagen.
According to the UK’s Telegraph newspaper, while the Executive Committee was meeting, the public prosecutor’s office in Brunswick announced “a preliminary investigation of unnamed employees at Volkswagen in connection with the allegations of diesel emissions manipulation”. It seems the Executive Committee, anxious to prove their goodwill, will voluntarily cooperate with this investigation. Something tells me a few Volkswagen middle managers are about to have the book thrown at them.
Prof. Winterkorn’s resignation is the latest in a spate of high-profile CEO resignations. Earlier this year, Toshiba’s CEO, Hisao Tanaka, resigned when the company’s six-year accounting fraud was exposed. And the CEO of United Airlines, Jeff Smisek, resigned on September 8th over a federal investigation into whether the airline had traded favors with the chairman of the Port Authority of Newark and New Jersey.
But not many have been so prompt. In fact most embattled CEOs try to hang on. Being pushed, rather than falling, is the order of the day. Some even manage to stay put. Here’s a sample:
- BP’s Tony Hayward resigned after three months of such inept handling of the political fallout from the Deepwater Horizon oil spill in 2007 that he was described as the “most hated man in the US” (in an interesting twist, Fortune reports that Volkswagen has just hired the legal team that handled the Deepwater Horizon lawsuits)
- Barclays’ Bob Diamond famously refused to resign after the bank was fined over $450m by regulators on both sides of the Atlantic for rigging benchmark rates: he was eventually forced out by public outrage
- Deutsche Bank’s Anshu Jain suddenly resigned in June 2015 to everyone’s consternation, only two weeks after being given full responsibility for devising and implementing a new strategy to restore the ailing behemoth’s fortunes: but not long afterwards, the German regulator BAFIN issued a damning report which held Jain personally responsible for the bank’s numerous regulatory failures
- It took UBS’s CEO, Oswald Grübel, over two weeks to resign after the rogue trader incident that nearly destroyed the bank in 2011
- Maria das Gracas Foster finally got round to resigning as CEO of Petrobras in February 2015 after over thirty executives were arrested on corruption charges
- Stuart Gulliver remains at the helm at HSBC despite the bank’s indictment for sanctions breaking and money laundering
- António Horta Osório still runs Lloyds Bank despite a string of regulatory fines for offenses committed on his watch.
Prof. Winterkorn is to be commended for his prompt action. If only other CEOs were so willing to accept responsibility. Sadly, far too many prefer to delegate blame to their juniors.
But there is a wider issue here. Prof. Winterkorn may not have personally been involved in the test rigging, or even known about it, but in the rarefied world of multinational corporate CEOs, ignorance is no defense. That such corrupt practices took root and became widespread indicates weak corporate governance and executive incompetence. When this happens in a bank, we say it is “too big to manage” and call for it to be broken up. But “too big to manage” is not simply a phenomenon of the financial sector. Very large corporations such as Volkswagen are also next to impossible to manage. And they are also too big to fail. The US bailed out General Motors in the 2008 financial crisis because of the consequences for its massive workforce if it were allowed to fail. The same is true of Volkswagen.
Prof. Winterkorn presided over the massive expansion of Volkswagen, priding himself on the fact that it had become the largest vehicle manufacturer in the world. Pride goes before a fall, they say. Nowhere is that more true than at Volkswagen. Prof. Winterkorn’s pride has caused not only his own fall, but also possibly that of the bloated corporation he created. And who knows what the economic consequences will be. I fear that it will not be Prof. Winterkorn who will pay for his folly, but Volkswagen’s employees, shareholders and customers, and ultimately the people of Germany.