Power Sheet – June 21, 2016

Many reports, including a harrowing one in the New York Times, describe a nation of food riots, soldiers guarding bakeries, many people eating once a day, and conditions growing worse. In a recent survey, 87% of respondents said they don’t have money to buy enough food.

The situation is above all a leadership disaster, as we’ve noted before. Venezuela has the world’s largest oil reserves. No one needs to starve. Even without the oil, no one needs to starve. But years of strict socialism have so hobbled the economy that the nation is collapsing. Maduro, a tragically classic leader in crisis, is doubling down on the failed system, blaming “criminals,” business owners, and America, seizing more power for himself. He’s also cracking down on opponents who want a referendum on recalling him.

Until then, as cancer patient Lucila Fonseca told the Times, “We are now living on Maduro’s diet: no food, no nothing.”

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Former Volkswagen CEO Martin Winterkorn is no Maduro, but since last September he has just kept looking worse. The latest news is that German prosecutors are investigating him for allegedly failing to inform investors of potential losses from the emissions scandal. The company responded to the news by saying that VW lawyers had found no evidence that company executives failed to inform investors as required. I’m definitely no expert in German securities law, but that seems hard to believe.

The scandal broke last September, when the U.S. Environmental Protection Agency charged VW with violating the Clean Air Act. Winterkorn professed shock, but documents have since revealed that he was told 15 months earlier that VW faced a U.S. investigation into whether it had installed an illegal defeat device in its cars, and several VW executives and lawyers were assigned to the matter. The WSJ reports that it has seen slides used at company meetings that include charts of fines VW could face in the U.S., including a potential maximum of $18 billion. In addition, on September 3, two weeks before the scandal became public, VW admitted officially to U.S. regulators that it had rigged diesel engines to cheat on emissions tests.

To repeat, I don’t know the precise requirements of German law. But if a CEO is supposed to notify investors of potential significant liabilities, a common-sense test seems to suggest that maybe September 3 would have been an appropriate time to do that.

The larger point is that this case continues to degenerate as a crisis management nightmare. After nine months, the company under CEO Matthias Müller has failed to contain the crisis and is nowhere near doing so. Tomorrow management meets with investors who want an independent investigation of top management’s role in the mess. This could get worse for a long time.

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