Does Volkswagen fail to manage the crisis? A managerial argument

Within the last weeks the front pages of business journals have been filled with numerous articles about the unethical behavior of Volkswagen’s group in the United States, where they admitted they cheated on the exhaust-emissions tests for some of their car brands.

Since the very first headline, the company has been losing heavily. The share price has decreased significantly (VW’s shares value less than half they valued before the scandal burst) and clients started to lose their confidence (VW’s owners begun lawsuits against the company unhappy with the fact that their cars turned out not to be environmentally friendly as the manufacturer claimed in the first place).

Having in mind the management principle according to which “any decision is better than no decision at all”, the group made the first changes and announced that they allocated a budget of € 6.5 billion to cover the costs related with the issue. According to Credit Suisse, the emission scandal could cost Volkswagen anywhere between € 23 billion and € 78 billion depending on recall costs, engine performance post repair and fines that VW will have to deal with. However, these do not seem to be the only problems that VW faces these days. According to a forthcoming article (“Investor perceptions of CEO successor selection in the wake of integrity and competence failures: A policy capturing study”), the company made a mistake when it chose one of its own, Matthias Muller as new group chief executive officer. Muller, who was previously in charge with the prestigious Porsche unit argued that there is an utterly need for change in the company’s culture.

The authors of the article that is to be published in the Strategic Management Journal claim that stakeholders and investors as well are much more favorable to an outside CEO, rather than to an insider, especially if that appointment comes after an integrity failure. The problem when promoting from within is that consumers will tend to assimilate the new CEO with the culture where the unethical behavior prolonged earlier.

Willing to repair the image, VW did not waste any time when it named the new CEO. It did not take into consideration the possibility of an interim CEO as they wanted to move fast and minimize the damages as much as possible. Still, the research findings suggest that going to rush with such a decision is not the best thing to do. Instead, they should had concentrated on convey a clear message to wide public that they are ready to leave past conduct aside and embrace change by having someone from outside running the company.

Assoc. Prof. Ovidiu Bordean, PhD

Babes-Bolyai University of Cluj-Napoca/Faculty of Economics and Business Administration/ Department of Management

References:

Connelly, B.L., Ketchen, D.J., Gangloff, K.A., and Shook, C.L. (2015), Investor perceptions of CEO successor selection in the wake of integrity and competence failures: A policy capturing study, Strategic Management Journal (forthcoming).

http://harbert.auburn.edu/news/Volkswagen.php#sthash.9g7e6aRE.dpuf

http://www.hl.co.uk/shares/shares-search-results/v/volkswagen-ag-ordinary-npv/share-news

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