VW in Need of Risk Management Rehab After Multiple Emissions-Testing Scandals Emerge
Steven Minsky | March 27, 2018
According to reports uncovered earlier this year, Volkswagen conducted diesel-emissions testing on humans and animals from 2013 to 2015.
This report is the latest development in a global scandal which revealed that VW diesel cars were emitting 40 times the legal standard of nitrogen oxide, causing smog and posing risks to public health. Volkswagen has already issued a guilty plea in response to federal charges of fraud and conspiracy in the United States and agreed to pay more than $26 billion in fines.
VW appears to have intentionally attempted to mislead both regulators and the public into believing that diesel emissions from their cars posed no public health risk.The purpose of the test was to prove that VW’s latest diesel technology had solved diesel pollution problems.
Activities can be outsourced, but accountability cannot.
Volkswagen Chief Executive Matthias Müller, who in 2015 became CEO after the company was hit with a scandal for evading emissions standards, condemned the experiments as “unethical and revolting.” Stating they had nothing to do with scientific research, he added that “there are things that you just don’t do.”
Volkswagen claimed that poor decisions were made by a few negligent employees, who funded an independent car lobby group, EUGT, to conduct illegal experiments and that management had no knowledge of the experiments.
The fact remains, however, that this scandal was 100% preventable. VW outsourced the activity by paying an outside research group, which is a failure in vendor risk management. Operations can be outsourced to a vendor, but the ownership and accountability for the risk cannot be outsourced and belongs with VW, who funded the study.
The activities and funding were known by managers on the front lines and would have been uncovered and prevented through an enterprise risk management process.
The VW emissions scandal highlights the weakness of many ESG-guided investment portfolios.
ESG (environmental, social and governance) is a generic term used in capital markets that describes investors who evaluate corporate behavior to determine the future financial performance of companies. The VW story also highlights the weakness of many ESG-guided portfolios that held full positions in VW shares. Such investors lacked meaningful transparency into their investment portfolios because they did not evaluate VW’s risk management programs in order to validate their ESG claims.
A year of vehicle recalls, plummeting sales and falling profits followed, and Volkswagen has seen 30 percent wiped off its share price and $18bn in fines from US regulators. Companies claiming to have ESG practices should be required to demonstrate the effectiveness of their governance, risk and compliance practices with the RIMS Risk Maturity Model I authored, which scores the effectiveness of risk management programs and is a proven model for assessing governance risk.
An independent study by Queens University in the United Kingdom proves that organizations with adequate enterprise risk management programs have a 25% higher market value, meaning their stocks outperform their competitors. Investors and customers need to required evidence of effective risk management and governance processes to validate the ESG qualifications purported by corporations and the likelihood of a good investment.