24 May 2016 14:47:37 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment. He lives with his wife and son in Texas. Rao has been a columnist for from the year the website was launched, in 2015, and writes regularly for BusinessLine as well. Twitter: @rajkamalrao

Why do companies cheat?

Suzuki admits to mixing emissions data from older, out-of-production models in tests of its current line

Take a look at why reputed companies engage in outrageous conduct

In the 1990s American sitcom Home Improvement , the oldest teen of the family, Brad, dumps his girlfriend because she refuses to do his Math homework for him. When caught with a poor report card afterwards and on being questioned by his parents as to why he stooped so low as to cheat, he retorts, “This was all your fault, Mom! A couple of weeks ago, you were so excited when I brought home a B grade that I felt I should keep getting good grades just to make you happy. I was just trying to be a good son!”

As ridiculous as Brad’s argument may have been on a TV show, it is frightening that some of the world’s top companies are using the same reasoning, 25 years later.

First, it was Volkswagen which admitted to doctoring emissions tests on 11 million diesel cars. About a month ago, Mitsubishi revealed that an investigation by Nissan (which had outsourced micro-car manufacturing to Mitsubishi) showed that the former was routinely cheating on its fuel economy tests. And now, Suzuki admits to mixing emissions data from older, out-of-production models in tests of its current line.

‘Made in Germany’ and ‘Made in Japan’ stickers elicit awe among Indians and the rest of the world for legitimate reasons. These two manufacturing behemoths have set global standards for what design and engineering excellence should be, right from the smallest electronic gadget to the largest machines that work miracles on the world’s shop floors.

So why would respected companies from these countries engage in such outrageous conduct?

The answer

The honest answer may be hidden in Brad’s reasoning. The companies initially found success in their innovations and, prodded by markets, environmental groups and government agencies, they were forced to deliver more.

In the hyper-competitive automotive market, a vehicle claiming to have it all (performance, affordability, looks and fuel economy) will have an edge over lesser models. When the limits of their engineering abilities had been met, these firms were under pressure to deliver even more. And they took to cheating because doing so could get them continued benefits without having to do the hard work in their development labs — until, of course, they were caught.

Stages of grief

The aftermath of getting caught is fairly straightforward. Much like the stages of grief, companies initially resort to outright denial, hoping that the trust equity built into the brand can quieten critics. However, if charges persist, they publicly express anger that a venerable brand like theirs is being subject to such unthinkable nonsense. Nothing quite drums up the foot soldiers as an angry CEO at a press conference.

Then, they resort to bargaining. In the case of Volkswagen, it took an 800-pound gorilla (the US Government) to get the company to negotiate a way out. No one can expect to win a lawsuit against a US government agency, which literally has unlimited powers to grind its opponent to dust. The final stage is that of acceptance of the inevitable, along with a token acknowledgement of remorse.

On April 21, 2016, the federal district court for the Northern District of California announced that Volkswagen will offer its US customers “substantial compensation” and car buyback offers for nearly 500,000 vehicles. Assuming the total cost per customer is $8,000, the settlement will end up costing Volkswagen $4 billion. In 2014, the company earned profits of €3.7 billion, or about $4.1 billion. So in effect, a full year of the company’s profit on global revenues approaching $70 billion, will be consumed by the settlement in just one country.

Hard as it is to believe, Volkswagen’s settlement cost is the least of its worries. Having lost out in the court of public opinion, it has a tough decade ahead to build its trust back among picky American consumers. Let’s not forget that it had a market share of less than 3 per cent to begin with. And many of these drivers have vowed to never buy the brand again.

Mitsubishi saga

Thousands of miles east, Mitsubishi, an also-ran in Japan's car industry, chose an entirely different route to salvation.

Not blessed with the deep pockets of Volkswagen, it agreed to be technically acquired by Nissan at a fire-sale price. With Nissan, Mitsubishi at least has a fighting chance of redeeming itself; something it could never have done on its own. Also, Mitsubishi is strong in South-East Asia, a market that is not as demanding as its mature American counterpart.

Not a lot is known about Suzuki’s troubles, but initial reports say it was not as systematic in deceit as Volkswagen was. Suzuki is also a regional brand with little presence in the wealthy G-7 economies, other than Japan. It pulled out from selling cars in the US in 2012 and Canada in 2013.

Is there a solution?

Corporate governance experts talk about having elaborate checks and balances in organisations to prevent illegal, or worse, unethical conduct. The ethical bar is almost always higher than the legal bar.

But critics of strong governance have maintained that volumes of rules and procedures simply end up making organisations more bureaucratic. What is needed, they insist, is a certain sense of morality and honesty among a company’s employees — the kind we all learned in grade school.

Companies from Japan and Germany have, until now, been an embodiment of this latter view. The words of a Japanese or German businessperson have always been valued to mean what they said. For the sake of the brands of these countries, let us hope that the three companies are poor outliers. The world just cannot afford one more story of ethical lapses like the Volkswagen debacle.