Governance, Corporate Culture and Lessons from VW

When scandals break senior heads roll to save face; but the real responsibility is often deeper in the organization and to do with the corporate culture. In a recent article Ralf Wetzel, professor of Organizational Behaviour at Vlerick Business School considers these dynamics in the case of the Volkswagen emissions scandal:

Martin Winterkorn had to go, there was no other option. After being praised as the powerful manager who even outplayed VW’s godfather Ferdinand Piech, his reputation melted like snow in the spring sun. And on top of this, he inevitably took other senior managers down with him - regardless of their performance. What some call ‘taking responsibility’ sociologists call ‘face lifting’. For now the search for those directly responsible for the scandal has started, and the names of those ‘in guilt’ will be presented at the very end of what is likely to be a lengthy process.

But however regularly this process is observed in companies, what is apparent is that the scandals themselves have little to do with their C-level people, and a lot more to do with the hidden powers driving organizations.

In VW’s case, two lessons can be learned; firstly, the lonelier it is at the top, the less senior managers are paid for their decisions. These decisions are largely left to the countless middle managers charged with transforming the great and visionary ideas of the corner office into something ‘actionable’. It’s the middle management that decides about implementation. The top floor is paid for showing face to the outside world, being an important part of the façade of an organization. The role of top management is almost literally ‘face work’. The Swedish sociologist Nils Brunsson found that organizations disseminate ‘talk’, independent from their formal structures and informal politics just to impress external stakeholders. And if expectations of these stakeholders such as the public, mass media or political bodies shift, the façade and the faces must shift accordingly. This was the scenario for Martin Winterkorn. He was the dominant face of VW and since he was identified as responsible, ‘face-lifting’ was the only answer. Changing faces helps organizations to remain the same internally while the impression to outsiders is that meaningful changes have been made and main decision makers have been let go.

The opposite holds true. Rotating top managers is the easiest way for organizations to indicate change while remaining immobile.

Did Martin Winterkorn know about the people who were truly responsible for the scandal? Probably not, because there weren’t any who could be easily identified. And this is the second lesson of the VW case. Beyond deliberate infringements, there is what the German sociologist Niklas Luhmann identified in 1960 – ‘useful illegality’: the deliberate deviation from formal rules of the organization – for the sake of the organization. Given the fact that there are often plenty of formal rules in organizations, both for internal or external reasons, deviations from formal rules are very common.

These illegal deviations are not necessarily sabotages. On the contrary, they serve the need to get things done faster and more efficiently than by following ‘red tape’. In one post-war airplane factory for example, screw taps were used, despite being formally prohibited for safety reasons. The use of these taps was broadly tolerated by those in charge, because the practice allowed the workers to work to tight time demands on the assembly line. The core mechanism that keeps such illegal, though useful, practices is silence. Both, workers as much as supervisors don’t talk about this illegal ‘short cut’ to prevent it being reported and someone being punished, removing the helpful practice at the end of the day. Who invented these practices is difficult to indicate, it is a practice which is developed and applied collectively, it ‘worms’ itself into everyday organizational practice. The occurrence of external management consultants is in this sense one of the biggest threats to useful illegality, since they may discover them and thus threaten the practice and the efficiency of informal rule breaking. The shop-floor resistance against consultants mainly stems from this fact, as Stefan Kühl, a German Organization sociologist, indicated.

And VW? Well, the invention of something which saves plenty of time and money in the development and production of law-conforming diesel engines is… useful. The high probability of those in charge not being aware of the practice is part of the informal method. The ignorance derived from not asking about or challenging a certain practice helps both senior executives and their staff. It is highly probable, that upper levels of VW knew well – without really knowing. In that sense, the names that will be presented at the end of the investigation might not be the ones who introduced it but who formally were responsible, helping the organization in one important effort: face-lifting.

The presentation of Christine Hohmann-Dennhardt, an ex-constitutional-court judge as the new face responsible for corporate governance at VW is already a looking a very smart move.