Volkswagen’s Diesel Crisis: Are You Prepared for a Business Disruption-Related Risk Event?

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As the Volkswagen ‘diesel scandal’ continues to unfold, taking corporate scalps as it goes, its consequences starkly demonstrate the old adage that an organisation’s reputation can take decades to build but a moment to destroy.

While Volkswagen’s crisis management response has been praised by some as a ‘textbook’ response, this praise is in the context of another scandal suffered by the company two years ago when its response was less satisfactory. The fact that Volkswagen has had two global crises in three years is a statistic that no organisation would like to be able to claim. And despite Volkswagen’s non-disastrous handling of the recent crisis, there is a consensus that significant reputational damage has already occurred and will continue to plague the company for years to come.

The organisation’s handling of this ongoing global crisis is a reminder to all organisations to test their own Business Continuity Management (BCM) plans or, if they don’t have a Plan, develop and implement one as a matter of risk-management priority.

The crisis

In what some have called the ‘diesel dupe’ Volkswagen has admitted to cheating the emissions tests for 11 million of their diesel cars across the world. The German car giant developed and installed devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve emission results and bypass compliance standards.

While full details about how the device worked have not been provided yet, the Environmental Protection Agency (EPA) in the US, where almost half a million cars are fitted with the device, has said that the engines had computer software that could sense when test scenarios were being carried out by monitoring speed, engine operation and air pressure.

Essentially, the device, upon sensing that the car was under test conditions, switched to a safety mode in which the engine ran below normal power and performance and switched back to full power when the car was back on the road.

The result of this software programming is that Volkswagen diesel engines are emitting up to 40 times more pollutants than allowed by the US emission standards. Assistant Administrator for the EPA’s Office of Enforcement and Compliance Assurance Cynthia Giles has said ‘using a defeat device in cars to evade clean air standards is illegal and a threat to public health’. The device has left Volkswagen open to multi-billion dollar fines, reputational damage and class action lawsuits from consumers around the world, including Australia.

Volkswagen’s crisis management: it’s happened before

Just two years ago Volkswagen was forced to recall 34,000 cars that had defective direct-shift gearboxes.

In 2013, despite hundreds of complaints and an investigation by Fairfax newspapers, Volkswagen initially denied that there was any problem with the gearboxes. This is the number one ‘do not’ in crisis management. At the time Senior Lecture in Branding and Marketing at Deakin University Dr Paul Harrison said that after the poor handling of the 2013 crisis, it would ‘definitely be used as a case study of how not to do it’. He commented that ‘if Volkswagen had said ‘we got it wrong, we’re recalling our cars now’, it would have had an effect on the brand but it would have given people resolve – it would have put trust in the brand.’

In comparison, Associate Professor Mark Ritson of the Melbourne Business School has commendedVolkswagen on its 2015 crisis management of the ‘diesel dupe’, saying that it has followed the three simple rules of crisis management: act fast, take responsibility and declare the crisis over by taking action to rebuild trust and brand equity as quickly as possible. Mr Ritson has said that while this latest crisis for Volkswagen, despite effective management, will likely have significant legal and reputational repercussions for the company, it has given them an opportunity to manage this crisis more effectively than the last.

Volkswagen managed to get ahead of the scandal this time around. Within 48 hours of news breaking that the company had installed ‘defeat devices’ in 500,000 American diesel cars, Volkswagen released a statement from CEO Mark Winterkon in which he admitted the use of the devices, took full responsibility, apologised and promised action. Within the week, Mr Winterkon resigned, announcing that ‘Volkswagen needs a fresh start – also in terms of personnel’.

Since then Volkswagen Australia has confirmed that approximately 90,000 Australian vehicles feature the defeat software and have launched an online tool via which owners can determine whether their cars are affected. VW Australia assured consumers that all vehicles remain technically safe and driveable and are not being recalled at this stage. The car manufacturer has advised that they will contact the car owners when a corporate strategy for recall is confirmed.

Denial of the problem, delayed reactions and keeping consumers in the dark were the nails in Volkswagen’s crisis coffin back in 2013. The management of this year’s diesel engine crisis has been praised as a comparatively better approach.

That said, two crises in three years should be seen as two ‘too many’ for any organisation that cares about its consumers and its reputation.

Patties Pies and VW Cars: a bad year for berry and diesel lovers

The Volkswagen crisis is the second major consumer related product crisis to impact Australian consumers so far this year. At least in the Volkswagon crisis, the health of its consumers was not directly at stake.

In February this year, Patties Foods recalled various varieties of frozen berries because of known cases of Hepatitis A contamination. The Patties Chief Executive went on Sydney radio in the days following the announcement to discuss the problem, however little was communicated by the company after that. As a consumer driven brand, Patties employed the use of its social media accounts to communicate the warning and recall, and to answer consumer inquiries.According to Stuart White of the Public Relations Institute of Australia, this strategy was poorly executed.

Patties share price plummeted on the day of the recall and has not recovered since. Marketing industry leaders pointed to poor communication with the public as the sole reason for long term damage. Social media and digital communications specialist, Venessa Paech said ‘it seemed as though the company had no social media strategy, no social media staff, no professional moderators and no crisis management plan.’

Patties’ initial media releases lacked sufficient detail, and the combination of a poor response on social media and a lack of communication from the company’s executives revealed a poor crisis management plan, which in turn has left Patties Foods still suffering from lower sales and a battered share price.

Lessons in BCM – A Risk Perspective

We’ve previously written blogs explaining the importance of pre-planning in the BCM process to improve the chances that an organisation will survive a major business disruption event.

For those new to BCM the concept is pretty simple. By anticipating what types of disruptions may occur (e.g. office fire, flood or major product recall) a BCM Plan can be developed to ensure that, as far as possible, the likelihood of the disruption event happening is reduced, and if it does occur, critical functions can be maintained or restored in a timely fashion, thus minimising the operational, financial, legal, reputational and other consequences arising from the disruption.

The Australian Business Continuity Standard AS/NZS 5050:2010 provides useful guidance for organisations that have already taken steps to implement an enterprise risk management framework based on ISO 31000, or its precedessor AS/NZ 4360.

The ‘risk based’ focus of AS/NZS 5050:2010 is an approach also adopted by subsequent standards, including the recently introduced compliance standard AS/ISO 19600:2015 (AS/ISO 19600).

We believe that AS/NZS 5050 provides a good roadmap for effectively integrating business continuity management practices into existing corporate governance infrastructure.

So if your organisation is in the mindset that ‘the Volkswagen/Patties scandal couldn’t or wouldn’t happen to us’ and glosses over how it could learn from Volkswagen’s experiences, your governance, risk and compliance approach and culture could do with a rethink.

Importantly, your BCM plan should not be left languishing on a shelf or in an isolated folder on a hard drive – it should be tested regularly and  be accessible to key personnel in the BCM program.

How Can CompliSpace Help?

CompliSpace combines specialist governance, risk and compliance (GRC) consulting services with practical, technology-enabled solutions. Our BCM module has been built in-line with AS/NZS 5050:2010 to ensure that clients are provided with a best practice solution.

If you have any questions about topics raised in this blog, or if you would like to find out how CompliSpace can assist you to streamline your existing governance, risk or compliance programs and make them more relevant to your organisation please feel free to contact us on 02 9299 6105 or email contactus@complispace.com.au.

 

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