Volkswagen, Why?

Management by Default, Defeat and Inertia

The simple answer is this: “Disabling the emissions controls brought major advantages, including much better mileage — a big selling point in Volkswagen’s push to dominate in America.”

So wrote The New York Times. That put VW’s actions in the category of deliberate deception. In the light of today’s news stories about how it built its advertising campaign on those deceptions, it becomes egregious fraud, analogous to a Ponzi scheme. They promised – and aggressively sold — what they knew did not exist.

That is an extremely risky strategy for a multi-billion dollar global company. So one wonders why they did it.

Some have speculated that it made those claims while planning and hoping to find the technology that could make it work. But while that may have been the initial intent, it’s clear that they soon gave up trying to make it work, settling for “defeat technology,” instead, and fraud.

The Times suggested the motive was their ambition to displace Toyota as the world’s largest auto-maker. That seems more plausible. But whose ambition was that? I doubt that the workers on their assembly lines cared, or even if it mattered to investors, so long as the company turned in a good profit and its share price rose. It must have been the CEO and other top executives who stood to get the credit for a “victory” that would burnish their reputations.

In that case, it was a form of narcissism, but a pathological narcissism built on lies. Or is VW living in another world where ordinary measures of truth don’t apply?

Actually that may be the answer. Background stories that are now coming out about the scandal reveal that European carmakers “are used to getting away with a great deal,” according to The Guardian. “Their trickery is an open secret within the industry.” Volkswagen maintained for years that there was a problem with the testers, not the vehicles, a strategy that may have worked in the past, as lax European regulators left a lot up to the manufacturers themselves. They may have felt invulnerable.

But it is also true that the coherence and integrity of the company may be largely an illusion. Another way of putting this is that there may not be as much “they” as we tend to think when we talk about it. VW may have a legal structure, and it may contain a collection of well-known brands, but, in the final analysis, it may actually be a poorly managed collection of bits. That would be difficult for an outsider to see

It is an unusually structured company, to begin with, responsibility divided among board members elected by shareholders, some chosen by unions, and some by government. Moreover, it is iconic, its identity coming largely from external factors, including it role in German society. Add the fact that it is global with diverse products, we have a recipe for internal conflict and disarray.

In other words, there may be little that actually holds it all together. A fitting analogy in terms of US business might be a bank that’s deemed “too big to fail,” which actually means too big to manage, too sprawling and diverse to be controlled.

And here is another thought that may be too big to think: are our governments capable of rising to the challenge of regulating such anarchy in the private sector?

Rewarding Executive Incompetence

What About Jail?

Researchers at Notre Dame’s business school “have found a correlation between generous option grants and the incidence of serious product recalls.”

How could that be? Companies need to maximize quality and profit. They try to hire effective managers. Everybody suffers when quality fails. Right?

Gretchen Morgensen, the business reporter for The New York Times, picked up on the disturbing results of the study and offered a plausible explanation. “This heads-I-win, tails-I-barely-lose arrangement encourages executives to swing for the fences.”

She notes that option-laden executives are often too eager to reap the riches from a rising share price but also have been found to make unwise acquisitions or, even worse, to undertake aggressive accounting practices. “Now comes evidence that product recalls are often linked to abundant option grants handed to chief executives.” (See the study, “Throwing Caution to the Wind.”).

But she also noted a less unexpected finding: “Product recalls were less common among companies whose chief executives founded the companies or had long tenures there. Such executives may be more risk-averse because they are generally large shareholders and may also feel that their personal reputations are intertwined with their companies’ actions.” They may also identify with their companies and believe the failures of the company reflect badly on them.

And they do reflect badly – if anyone ever stops to think about it. Family run businesses tend to care about such things because the pride and self-esteem of family members are wrapped up in the business. Fathers and grandfathers look down from walls of their board-rooms. Children and grandchildren look up at their elders. Many other businessmen and women feel keenly the impact of their mistakes on customers.

But then, on the other hand, many see business as an opportunity to exploit and mislead others. This morning’s paper brought news of Volkswagen’s deliberate efforts to defraud its customers and the government by installing “defeat devices” in cars so that emissions controls in diesel engines would work only when they are being tested.

“This is several steps beyond the violations that we’ve seen from other auto companies,” said Tyson Slocum, director of the energy program at Public Citizen, a consumer advocacy group. “They appear to have designed a system with the intention to mislead . . . . If that’s proven true, it would merit a heck of a lot more than just a recall and a fine. We would see criminal prosecution.”

Such egregious violations suggest that a kind of war is going on in the corporate world. Not all but, clearly, some corporations see few limits to the practices they are willing to engage in to beat the competition or raise profits. In real war, we have the Geneva Conventions to provide guidance to combatants. What would it take in business?

Morgensen concludes her account of how the judgment of executives is distorted by their craving for more money by emphasizing the responsibility of boards: “Having fielded complaints from shareholders about excessive executive pay for decades, corporate boards say they have gotten the picture that chief executives’ pay should be aligned with their owners’ interests. As this new study shows, directors should understand that executive pay needs to line up with consumers’ interests as well.”

But what kind of “defeat devices” would we need to dismantle in boards to make this happen?

The Paradox of Work

Blessing and Curse

Work is probably the most important thing we do. It is how we support ourselves, how we relate to each other, how we contribute to society, and how we build self-esteem. But our culture has always been ambivalent about it.

The bible viewed it as a curse we can’t escape because we disobeyed god. More recently, Marx saw it as the primary source of our alienation from ourselves as we are forced to sell our labor. Countless management gurus pore over schemes to make work more meaningful, flexible, and even joyful – but to little avail.

Recent studies show that many of us are working longer hours. As I noted on a June 28th blog post: “The time Americans spend at work has sharply increased over the last four decades . . . . We work an average of 1,836 hours a year, up 9 percent from 1,687 in 1979.” This is substantially above the norms for other industrialized western countries.

The conventional wisdom is that women suffer more from this than men because women are torn between professional success and taking care of their children. But the fact seems to be that men also suffer from lack of time with their families, and resent it.

Now, a recent study suggests our unhappiness with work is getting worse as it is increasingly incompatible with friendship. According to a report in The New York Times: “In 1985, about half of Americans said they had a close friend at work; by 2004, this was true for only 30 percent.” Moreover, “in nationally representative surveys of American high school seniors, the proportion who said it was very important to find a job where they could make friends dropped from 54 percent in 1976, to 48 percent in 1991, to 41 percent in 2006.”

Friendship increasingly seems incompatible with work. But why? Does the intimacy of personal relationships clash with the demands of making deadlines or production quotas? Do we fear that work will lead us eventually to betray our friends? Do we protect ourselves from exposure to that painful dilemma by keeping them apart? Or is it that work is becoming more relentless, leaving less and less space for personal gratification. Friendship, then, becomes an unwelcome distraction if we want to succeed?

There may not be a single reason, but the conclusion seems clear – as is the fact that more and more us us are reaching it: important and meaningful as it is, work is setting us at odds with our selves.

Economists and politicians have been paying a lot of attention to jobs recently, and for good reasons. But the their quality also matters and their compatibility with our need for gratifying relationships. We need to be productive, but we also need to be satisfied and fulfilled.

Our growing income inequality may well be exacerbating the problem. Those at the lower end of the scale will be relieved that minimum wages are being raised. That will reduce their anxiety significantly. But at the upper end, who can push back against the pressure to work longer hours, give up weekends and vacations, when the rewards are increasingly so enormous and the consequences of dropping out so permanent?

Turmoil in China


Not Just a Bubble

Sometimes, we seem to be surprised and alarmed that financial markets in China are troubled, as if we expected that capitalism there was going to be different. Sometimes we are condescending about it, as if we knew all long it was going to be exactly the same.

It’s not surprising that the Chinese themselves were caught off guard. They have not had our lengthy experience with capitalist boom and bust cycles. Moreover, their pride in the remarkable progress their economy has made in just over 35 years may have blinded them to the risks. They might well have believed it could go on forever.

The Wall Street Journal put it rather smugly: “the Chinese Communist Party’s leaders have now been forced to confront a creature of their own making as it rises up and goes its own way, immune to their attempts to bend it to their will.”

But as The Economist pointed out, there has been an extraordinary amount of state intervention: “a spectacle of ever-more drastic actions to save the market. Regulators capped short selling. Pension funds pledged to buy more stocks. The government suspended initial public offerings, limiting the supply of shares to drive up the prices of those already listed. Brokers created a fund to buy shares, backed by central-bank cash.” And so on.

The puzzle is why so much effort and alarm? China’s economy’s over-all growth is stable and asset markets are performing well. Turmoil in financial markets is not the same thing as economic collapse.

As The Atlantic observed: “the Chinese economy is more insulated from stock market fluctuations than those in developed countries like the United States. The stock market just isn’t a huge driver of economic activity in China: According to The Economist, less than 15 percent of overall household assets are invested in it.”

We, on the other hand, the poster child of Investor Capitalism, are almost fully invested with our mutual funds, mortgages, retirement accounts, hedge funds, college funds, etc. Moreover, our businesses are constantly resorting to financial markets to fund a steady stream of buy-outs, mergers, acquisitions, and restructurings.

So why the alarm in China?

To be sure, many Chinese were lulled into the belief, a common feature of financial bubbles, that investments can only go up. And some investors in the west, mesmerized by China’s economic miracle, rising so quickly to become the world’s second largest economy, might have been convinced that China is an exception – as, in the past, digital technology once seemed an exception, and sophisticated financial instruments seemed to make subprime mortgages safe.

But what China is experiencing is no different from the many episodes of turmoil in financial markets we have experienced repeatedly over the years, most recently, of course, in 2008. That is the conviction of Kenneth Rogoff of Harvard, who has written extensively about the long history of market meltdowns and our susceptibility to the erroneous conviction that This Time Is Different, as he and Carmen Reinhart put it in their prize-winning history.

What is different this time, though, is that China is troubled by extensive corruption in its ruling class, severe environmental pollution and dramatic failures to monitor safety, as witnessed by the devastating explosions in the port of Tianjin.

As Rogoff put it recently in The Times, “Financial meltdown leads to a social meltdown, which leads to a political meltdown. That’s the real fear.”


The Fear of Depression

We spend over 2 billion dollars a year on anti-anxiety medications. What are we so anxious about?

Three years ago, Ruth Whippman, a British writer who moved to the US, noted that Americans “taking part in ‘happiness pursuits,’ as a rule, don’t seem very happy.” Unlike her fellow Brits, it seemed we cared too much and tried too hard.

“This obsessive, driven, relentless . . . daily application of the Declaration of Independence . . . is creating a nation of nervous wrecks. Despite being the richest nation on earth, the United States is, according to the World Health Organization, by a wide margin, also the most anxious, with nearly a third of Americans likely to suffer from an anxiety problem in their lifetime.”

T. M. Luhrmann, writing in The New York Times, more recently, quoted similar statistics, and commented on Pixar’s new film “Inside Out,” in which an 11-year-old girl forced to move across the country, leaving behind her old friends and her beloved hockey team, struggles between the pressure to be Joyful and the reality of Sadness. Unable to resolve the conflict, the girl is taken over by Anger, to everyone’s dismay. Eventually Joy discovers how important Sadness is for human connection.

It’s a cute movie, if a bit abstract and boring at times, and it does illustrate Luhrmann’s point about our culture. How could anyone think that the girl, dislocated from her community and struggling with the loss of friends, should possibly continue to be the happy person she had always been? The parents in the movie are alarmed by her state of mind – but what were they thinking? And they add to her anger, it seems to me, by not being able to accept or understand her unhappiness. They need her to be perpetually joyful.

To be sure, optimism is useful as it inclines us to keep on trying. If we believe we will succeed, we are less likely to give up and accept disappointment and defeat – and giving up could easily lead to depression. That may be the underlying point.

Like the family in “Inside Out,” we are afraid of unhappiness. We need others continually to affirm our optimism, our belief that things will get better, that solutions to problems will surely be found. Our happiness is a sign of our success.

Sadness is not depression. Indeed, feeling acute sadness while understanding why we are sad is quite the opposite. It is a sign of life, often an adaptive connection with reality. In fact “Inside Out” is saying something like that at the end. Luhrmann puts the underlying problem succinctly: “Americans believe that excessive sadness makes us sick.”

And we have reasons enough to be disappointed, frustrated and sad. Opportunities for success are diminishing, as the gap between the rich and poor widens. Our political system is deeply flawed, making it harder to address problems like climate change, our decaying infrastructure, human rights, and terrorism. In fact, it often seems that the levels of fear and hatred are rising, fanned by politicians looking to score points. And the world is looking increasingly dangerous.

It’s more and more of a challenge to keep from feeling helpless and depressed.