Power Sheet – September 22, 2015


A German newspaper is reporting this morning that Volkswagen CEO Martin Winterkorn will be fired by the end of the week. The report is unconfirmed, but it’s totally unsurprising, in fact inevitable. Winterkorn has to go, and while the full story probably won’t be known for weeks, this drama is already looking like a classic in the annals of business and leadership crises.

Produced by Ryan Derousseau

The immediate crisis began only last week, when the U.S. Environmental Protection Agency accused VW of programming 500,000 diesel-powered vehicles sold in the U.S. to cheat on emissions tests. VW didn’t dispute the charge. That was bad, a multi-billion-dollar problem that deeply damages the company’s reputation. Then things got rapidly worse.

The test-cheating software was actually installed in 11 million vehicles worldwide, the company has now revealed. The U.S. Justice Department has begun an investigation into possible criminal behavior by the company or its executives. South Korea has launched its own investigation. So has Switzerland. There’s no reason to think the list will stop there.

VW has said it will take a $7.3-billion charge to earnings, and this estimate of the scandal’s financial damage may be overly optimistic. Fines for the violations in the U.S. alone could total $18 billion. The stock is down 40% in two days. The damage that’s impossible to quantify is the reputational damage that could last for years as the world comes to understand what VW did: It programmed its engines for the explicit purpose of deceiving emissions testing equipment so that when this equipment was connected, the engines sensed it and drastically reduced their output of pollutants. In normal use, the engines emitted up to 40 times more nitrogen oxide, which contributes to asthma, bronchitis, and emphysema.

The deeper story is that Winterkorn, 68, has been pushing VW toward historic goals and, until last week, appeared to be succeeding brilliantly. He declared a few years ago that VW would become the world’s largest carmaker, bigger than Toyota – an insanely ambitious target, or so it seemed. This past spring he faced a challenge to his leadership when long-time chairman Ferdinand Piech, the corporate patriarch and grandson of the man who designed the VW Beetle in the 1930s, tried to force him out for reasons that were never clear. But Winterkorn rallied support from government and labor leaders, and Piech was forced to resign. Then, in June, Winterkorn achieved his goal; VW sold more vehicles in this year’s first half than Toyota did. Three weeks ago VW’s supervisory board agreed to extend his contract through 2018. Formal approval was scheduled for this Friday. Winterkorn triumphant.

It’s too early to say how things went so wrong. Winterkorn oversees R&D, and he ran the Volkswagen brand in the years when the deception took place, so he may have known about it, or he may have been willfully ignorant, or he may have been deceived. It’s tempting to imagine a storyline of overweening ambition that led to desperate measures, but any evidence for that has not been brought forward.

I’d be amazed if Winterkorn isn’t gone by the end of the week. It’s a terrible story that will be rich with lessons.

What We're Reading Today

Gov. Scott Walker drops out of presidential race

It's a quick end for Walker, who had entered the GOP primary as a favorite. But as voters seem enthralled with non-politicians Donald Trump, Ben Carson, and Carly Fiorina, Walker saw no path to winning, particularly as funding dried up. He took an apparent shot at Trump as he stepped away from the race. Washington Post

Judgment day for Bank of America's Brian Moynihan

BofA investors will vote today on whether CEO and Chairman Moynihan can hold both spots atop the bank. BofA had a policy that no one could hold both the CEO and chairman positions, but the board made Moynihan chairman last year anyway, as it is allowed to do. Moynihan said he will remain in one job, probably as CEO, even if investors choose to vote against him holding the dual roles. Fortune

Tim Cook targets 2019 for the Apple Car release

The decision to lock in a timeline followed the tripling of Apple's 600-person car development team and labeling the goal a "committed project" internally. A major  unanswered question: Will Apple use a manufacturing partner? The timeline is particularly aggressive considering that Apple has never created a car and will need to ensure the vehicle passes extensive testing before it reaches the roads.  MacRumors

China's president finally speaks

In what seems as far too little, far too late, President Xi Jinping spoke to the press about China's economy. As its stock market roiled last month, Xi remained silent, offering rate cuts and shows of military prowess in response. But Xi says China is fine, and investors must just wait out the choppy waters. The comments come as he begins a U.S. visit today, in Seattle.  WSJ

Building a Better Leader

Business travelers shun on-demand tools

Only 12% of those traveling for business use Uber or Lyft consistently, while 4% use AirBnB. Travelers would use them more, but company policies stand in their way.  Inc.

Why a mental health expert joined Alphabet

When Thomas Insel, who headed the National Institute of Mental Health, decided to join Alphabet (Google's parent company), the move took insiders back. But in this interview, he explains why he thinks the private sector has a chance to make bigger changes in mental health than the public sector can. MIT Technology Review

Macy's to hire 85,000 temporary workers for the holidays 

It's 1,000 fewer holiday hires than Terry Lundgren's company needed last year.  Reuters

Bad Behaviours

Volkswagen recall deepens 

The car manufacturer embroiled in a scandal over cheating on its emission tests in the U.S. has set aside $7.3 billion for a recall that could rise to 11 million vehicles. On Monday, Volkswagen U.S. chief Michael Horn admitted "we have totally screwed up," while CEO Martin Winterkorn may have to do something drastic to stave off the company's stock free-fall. CNNMoney

Outrage rises over drug price gouging  

Last month, Rodelis Therapeutics bought a drug that fights tuberculosis. Rodelis then raised the price from $500 for 30 tablets to $10,800. The practice of turning old drugs into "specialty" offerings, though, has drawn the ire of critics and even presidential candidate Hillary Clinton. The backlash prompted Rodelis to return the drug to its previous owner. But some, like Turing Pharmaceuticals Martin Shkreli, are going on the offensive. NYT

Peanut executive gets 28 years over salmonella outbreak 

Stewart Parnell, who used to head Peanut Corporation of America, was found guilty of 71 charges, including negligence. The case stems from a 2009 salmonella outbreak that caused 714 to fall ill and possibly nine deaths. Parnell and his brother Michael were accused of knowingly shipping tainted peanut butter to customers, which included food giant Kellogg's. USA Today

Up or Out

Athenahealth has named Tim O'Brien chief marketing officer.  Boston Business Journal

Dawn Airey has been hired by Getty Images as CEO.  The Guardian

Fortune Reads and Videos

AT&T, Verizon spend $47 million...

...in order to prepare their networks for Pope Francis's visit. Fortune

Harvard Medical School to teach with YouTube

Students will start utilizing YouTube videos in addition to textbooks to learn the finer points of tying a surgical knot.  Fortune

Here's what Carly Fiorina's time as HP CEO looked like

Hewlett-Packard's revenues and cash flow were up, while the stock dropped 62%. Fortune

A budding rivalry

Will Puerto Rico and Cuba soon become adversaries in the tourism business? Fortune

Today's Quote

“Today I believe that I am being called to lead by helping to clear the field in this race so that a positive, conservative message can rise to the top of the field. With this in mind, I will suspend my campaign immediately... I encourage other Republican presidential candidates to consider doing the same so that the voters can focus on a limited number of candidates who can offer a positive, conservative alternative to the current front-runner.” -- Governor of Wisconsin Scott Walker announcing he was ending his Republican presidential campaign and imploring others to do the same.  NYT

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