How Volkswagen’s Insular Culture Damaged Both the Brand and the Bottom Line
How Volkswagen’s Insular Culture Damaged Both the Brand and the Bottom Line
Not only did Volkswagen engage in deliberate deception that enabled its flawed vehicles to pass emissions tests, the company exacerbated the crisis by failing to acknowledge its fraudulent behavior in a timely manner.
Why this matters
Corporate misdeeds often have serious long-term effects that can negate decades of successful brand building.
PR departments do more than just provide spin; they actually serve many useful functions, one of which is to acknowledge instances of corporate wrongdoing as soon as possible.
Public Relations and Corporate Deception: What Not to Do
A few months ago, as part of a huge and expensive campaign to win back the trust of its customers, Volkswagen announced that it will now offer a 72,000-mile warranty on its SUVs. Since September 2015, Volkswagen has spent billions of dollars buying back and fixing cars with defective emissions testing devices. And it has paid $4.3 billion in civil and criminal penalties to the United States Department of Justice. As the company has acknowledged, defective software enabled thousands of vehicles to pass emissions tests, even though they actually spewed into the environment up to 40 times the nitrogen oxide allowed under the Clean Air Act. This fraudulent behavior alarmed regulators because scientific studies have repeatedly shown a link between high levels of nitrogen oxide and both lung ailments and premature deaths.
The emissions scandal has cost the company tens of billions of dollars, but “the loss to Volkswagen is actually much greater than that” says David Sicilia (University of Maryland College Park). “You also need to take into account the precipitous decline in both its share price and profits.” In fact, in the middle of September 2015, when the Environmental Protection Agency first announced the company’s deliberate deception, Volkswagen’s stock price immediately went down by about a third. In 2014, before the scandal hit, the stock was often trading in the low 50s, and in late 2015, it reached a low of about 23. Today the cost of a share has climbed back up to the 30s.
Sicilia, who is working on a book entitled, Persuasion: A Transnational History of Modern Public Relations, believes that Volkswagen’s public relations department shares a lot of the blame for the company’s huge losses. “Volkswagen acted exactly contrary to what the history of PR has taught us,” he says. “It should have instead worked aggressively to repair the executive wrongdoing as soon as possible. In spite of its generally negative reputation, PR often performs socially valuable functions. Nowhere is that role more valuable to society—and to the bad actors themselves—than in those rare case of wanton wrongdoing.” Sicilia’s book project focuses on the evolution of public relations after World War II. In response to various political developments such as rise of the consumer protection and environmental movements, many companies—particularly those in the auto, gas and chemical industries—often found themselves under attack in the press. In order to manage their corporate image, some firms ended up expanding their public relations departments by as much as thirty fold. “While we often think of PR as just spin, PR is often a necessary means for corporations to get the word out about their products,” says Sicilia.
But in the case of Volkswagen, the company’s PR department did not present the company’s response to unfair accusations. Instead PR actively participated in a cover-up of the company’s misdeeds. According to internal company memos, first obtained by the German newspaper, Bild am Sontag and later reviewed by The New York Times, when initially confronted by regulators, Volkswagen stonewalled. As The New York Times reported, in May of 2014, Bernd Gottweis, a highly respected Volkswagen executive, wrote to Martin Winterkorn, then the company’s CEO, saying that the company would not be able to give American regulators “a sound explanation for the dramatically elevated” nitrogen oxide levels. That was nearly 16 months before Winterkorn publicly apologized for the company’s longstanding use of the deceptive software to the EPA. “PR should have begun doing damage control much earlier,” says Sicilia.
Public Relations and Corporate Deception: What to Do
The Volkswagen scandal involved deliberate deception by senior executives, who knowingly harmed consumers in an attempt to improve the company’s bottom line. “Fortunately, as I have learned while doing research for my book, PR departments rarely have to deal with such egregious corporate wrongdoing, but when they do, they need to do just the opposite of what the team at VW did,” says David Sicilia, a historian of business affiliated with the Snider Center.
According to Sicilia, since the end of World War II, public relations specialists have performed a wide range of functions. They typically help with marketing, internal communications, consumer affairs and government relations. “Crisis communications is just one slice of their work, and this broad category includes several other areas besides management deception such as natural disasters, bankruptcy and product failures,” says Sicilia. As he notes, in a casebook prepared by David P. Bianco—the founder of PR News, a leading trade journal—that includes 1000 cases designed to teach public relations—only one features a company that like VW, engaged in repeated instances of deception. The offender was the Beech-Nut Corporation, the baby food company, which began engaging in illegal activities shortly before it was acquired by Nestle in 1979. In this case, says Sicilia, the leading PR firm the company hired to deal with the crisis did precisely what the PR executives at VW should have done.
In 1988, two former senior executives at Beech-Nut—its former CEO and its former VP for marketing—were convicted of consumer fraud for their roles in peddling a chemical concoction from 1978 to 1982 that was misrepresented as “pure apple juice for infants.” The phony product, which actually contained little juice, consisted mostly of beet sugar, cane sugar and corn syrup. Beech-Nut also agreed to fork over $25 million in fines and restitution payments; about $2 million went to the federal government for violating food safety regulations and the rest went to settle class-action lawsuits filed by consumers and retailers. To repair the company’s image, notes Sicilia, its PR team responded immediately with a well-conceived two-pronged approach. Rolling out its “Apple Juice Crisis Management Plan,” Beech-Nut publicly admitted its wrongdoing and systematically addressed the concerns of all stakeholders using a variety of media platforms. The company also repaired and restored its hitherto strong reputation and “sacred trust” as a supplier of baby foods. The strategy worked quickly and in 1989 the company was sold by Nestle to Ralston, which, as one banker put it, was interested in acquiring Beech-Nut because the scandal had not damaged it “beyond repair.”
Sicilia argues that his historical research shows that PR often does valuable work that is helpful both to the company and the public. “PR departments have a bad reputation,” he says. “We tend to think of them primarily as ‘spin doctors.’ But they can play an important role in getting out the truth. And nowhere are their efforts more critical than in cases of corporate malfeasance where extreme contrition is required.” In the case of Beech-Nut, by doing their job well, PR specialists were instrumental in saving the company.
Joshua Kendall has written on business and healthcare for numerous publications including BusinessWeek, Fortune.com, The New York Times, The Boston Globe and The Washington Post. For more about his work visit JoshuaCKendall.com.