By Geoff Colvin and Ryan Derousseau
April 22, 2016

The Volkswagen emissions cheating scandal is shaping up as a leadership case study for the ages, especially after developments yesterday and this morning that further increase the scandal’s potential cost. This is clearly a story of failed leadership, not a rogue employee or two, and the lesson we’re learning is that the cost of poor leadership can be more staggering than anyone would imagine.

The company this morning said it’s taking an $18.3-billion charge related to the scandal, after taking a $7.6-billion charge last fall; the company reported a deep loss and will slash its dividend almost to nothing. Yesterday it barely met a deadline for reaching an agreement with federal regulators on how to fix most of its cars in the U.S. equipped with emissions cheating software – except that the company won’t necessarily fix them. It may just have to buy them. Analysts have estimated the cost of buying back all the affected U.S. vehicles at $7 billion to $9.4 billion, and that would be just the beginning of the costs. Owners will have the option of getting their cars fixed if that’s possible, but in either case they will also receive “substantial compensation.” VW also agreed to invest in clean technologies to offset some of the environmental damage caused by the affected vehicles. The company still doesn’t know how large a fine it will pay to the government, but the amount could be in the billions.

Analysts are still struggling to estimate the actual eventual cost. Evercore ISI says $34 billion; UBS says $43 billion. But no one knows.

Even those numbers are certainly too low because they ignore costs that are incalculable but definitely real. VW will have trouble attracting and keeping top talent not just because of its tarnished reputation but also because public opinion is forcing the company to cut the pay of managers, even those who were uninvolved in the scandal. VW sales are already suffering because of the scandal. What’s the present value of reduced sales for years into the future? Brand Finance, a U.K. consulting firm, guesses the VW brand has lost $10 billion of value. That may not account for the cost of turning the German public furiously against VW for damaging the country’s largest industry, autos. Even the nation itself has been damaged. Engineering excellence is a key attribute of brand Germany, and the cheating software was an attempt to conceal a gigantic engineering failure.

Such large, far-reaching, long-lasting damage is rare. Its cause is becoming clear. Under former CEO Martin Winterkorn and former chairman Ferdinand Piëch, VW developed a culture of declaring titanic ambitions and ruthlessly punishing anyone who failed to perform his assigned tasks in achieving them. When it became clear that VW engineers could not simultaneously meet targets for cost, fuel efficiency, and emissions, managers felt they could not tell the truth to their superiors. So they cheated.

VW’s leaders thought they were heroes for being so demanding. But forbidding bad news doesn’t mean there isn’t any. It only means the leaders don’t hear about it. And then it just gets worse.

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