The Volkswagen Lessons

Volkswagen continues its unwinnable public relations, legal and brand management war.  It will be far costlier than they presently propose and as an example of self inflicted injury, it will be in the top five of any conversation.  Probably forever.

As one friend pointed out, “It is not the conventional shooting in the foot.  Higher and more to the center-line.”

As the news catches up we discover that there had to be many versions of the software.  Each engine design and ignition change required another version.  Every emission system had to be accommodated.  Over the time, there would have been dozens of the “defeat device.”

I am skeptical by nature so I have always assumed there was more to it than some rogue employee.  To execute this requires a corporate executive decision.  Those people should be dismissed for cause.  Those that were in senior positions and knew nothing should be dismissed for lacking the necessary executive skills.  Not many will remain in the higher echelons.

The brand destruction is nearly perfect and the value of the fraud far less than its eventual cost.  People will study this for decades.  Partly in business school and partly in the psychology department.  The psych department part that deals with delusional beliefs and the psychotic “master of the universe” executive type.

As investors there are things we can learn.

  1. At the first hint of impropriety bail.  Accounting, engineering, labour standards, and more.  The worst is never the first announcement.  It is not good to panic, but if people must panic, you should panic first.
  2. Never believe the cost estimates the company produces.  VW started at around $6 billion as the set aside to deal with the problem.  In the fullness of time, I will be surprised if that will pay the lawyers.  I doubt you can solve this situation for much under $50 billion.  Buying at “the lows” may prove challenging as more information makes it into the world.  Assume there is another shoe.
  3. Pay attention to management attitudes.  Watch for short term profit derived bonuses and stock options.  If those exist, managers pursuing long run performance in exchange for short term cost will die immediately because they make such a good example for the angels.
  4. Watch history.  Some companies demand integrity and others do not pay much attention.  Warren Buffett has said, “In hiring, you want energy, intelligence, and integrity.  Without integrity the first two will kill you.” VW is now a case in point.
  5. Watch for special deals or favour.  VW was closely tied to German unions, banks and governments.  That is a tough crowd to please while holding the high ground of integrity.
  6. Common sense is a big advantage when investing.  There is no something for nothing.  Try not to seek it.

Every crisis has a lesson.  Try to use this one to improve your long term investing skills.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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