Power Sheet – November 9, 2015

November 9, 2015, 3:06 PM UTC

We haven’t updated the Volkswagen disaster in a few weeks, and it definitely merits another look. The situation so far reminds us of at least a couple of important truths: One, even a really terrible situation can get worse, and two, poor leadership can do more damage than anyone would imagine.

Produced by Ryan Derousseau

This mess is deteriorating in all manner ways. Most seriously, more fundamental bad news of VW deception continues to be revealed. The company announced last week that it had misrepresented emissions not just in diesel cars but also in some gasoline cars in Europe, and that carbon dioxide levels, not just nitrogen oxide levels, had been misstated. The company immediately took a $2.2 billion charge in addition to the $7.3 billion charge it took after the initial revelations of emissions cheating. Hardly anyone believes those estimates of the scandal’s cost are remotely large enough.

U.S. regulators alleged that VW had installed deceptive software on its Audi and Porsche vehicles as well as on VW branded vehicles. The company first denied it, then admitted it, extending the scandal into VW’s highly profitable luxury brands and potentially touching the new CEO, Matthias Mueller, who previously ran Porsche. The company has halted the sale of seven models in the U.S.

Those are some of the immediate first-order effects of the cheating. Now take one step back and look more broadly. Moody’s has cut the company’s debt rating, so the capital costs of this highly capital-intensive company may well rise. Owners of VW products are suffering as the resale or trade-in value of their vehicles plunges; the company will reportedly announce this week that it will send owners money in compensation, though we don’t yet know important details, especially whether they would forfeit any legal rights by accepting the money. VW dealers are of course suffering and may sue, and some may fail, cutting the number of dealerships worldwide. A German newspaper reported over the weekend that some VW employees are afraid to travel to the U.S., where the company could face criminal charges, and that U.S. law enforcement has taken the passport of a VW employee in the U.S., though these reports are unconfirmed.

Every part of this scandal is even worse in VW’s home territory than in the U.S. Europeans are far more sensitive to environmental matters than Americans are. Germany intends to phase out all non-renewable sources of electric power. The latest United Nations Conference on Climate Change begins here in Paris on November 30 and is big news that will only make VW look worse.

Handling communications in this affair is one of the mammoth public relations challenges of all time, and here we see another second-order effect. VW needs extra PR help. But the veteran chief of a big global PR agency – whose firm represents one of VW’s major competitors – tells me that some agencies will decline an assignment like this, as many also decline work with tobacco companies, because it’s so demoralizing to employees. There is no innocent explanation for what happened. VW deliberately designed software that enabled its vehicles to emit vastly illegal quantities of noxious pollutants. Who wants to get up in the morning and spend his or her day defending that behavior?

The leadership failure goes back a long way; we may never know how far back. The problem is deeply cultural. The lead story in this morning’s Le Monde is headlined “VW, the culture of fear at the heart of the scandal.” It says, “Faced with unreachable objectives, engineers preferred to cheat than to spark the boss’s anger.” Mueller has said the right words about changing the culture, but action is so far invisible. Until he makes culture change at VW his personal mission as CEO, this worsening crisis won’t start to get better.

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What We're Reading Today

Volkswagen engineers admit to cheating

A number of VW engineers, in a report by German newspaper Bild am Sonntag, said they tweaked tire pressure and mixed fuels in order to reduce the amount of fuel some vehicles used during inspections. The deceptions began in 2013. Last Tuesday, VW and CEO Matthias Mueller said the company understated the true fuel consumption of 800,000 vehicles in Europe, separately from the diesel engine emissions cheating scandal that has roiled the company. Fortune

Ericsson, Cisco team up 

But don't call it a merger. The alliance will connect the two telecom equipment makers as they work on wireless network projects. The partnership by Ericsson's Hans Vestberg and Cisco Systems CEO Chuck Robbins will add $1 billion to the bottom line of both businesses, they say. But by not merging, they avoid a drawn out approval process while responding to Nokia's $15.6-billion bid for Alcatel-Lucent. WSJ

Aung San Suu Kyi's party holds large lead in Myanmar elections

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Obama, Netanyahu try to mend fences  

In his first trip to the U.S in over a year, Israeli Prime Minister Benjamin Netanyahu will meet with President Barack Obama to discuss Iran and a new security agreement. While the two leader's relationship was strained as the U.S. brokered the Iran nuclear deal, both men have reasons to put the past behind them. But some don't think they will. NYT

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Missouri football players protest president

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Dupont has named interim CEO Edward Breen its permanent successor to Ellen Kullman. Reuters

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