Leiden Law Blog

Die Fraudi und das Auto

Posted on by Anthon Verweij in
Die Fraudi und das Auto

On my way back from the INSOL Europe Conference in Berlin I read a copy of Bild Zeitung where a full-page advertisement by Volkswagen caught my eye. In this advertisement the Board of Volkswagen sincerely apologised for the recent diesel scandal and stated that the company will do everything in its power to win back the trust of its customers, employees and rescue its business relationships. Naturally, the scandal at Volkswagen was a topic of discussion during the conference. Speculations of who will represent Volkswagen in the United States and whether Volkswagen might even file for bankruptcy were easy conversation points during coffee breaks at the conference.

Yet, during all these conversations and while reading the advertisement in Bild Zeitung a well-known saying crept to mind: “trust is hard to gain, but easy to lose”. For companies in trouble, trust among its creditors, customers, employees and business contacts is essential to survive. However, regaining trust is perhaps one of the hardest tasks a company can face. Will customers for example still be interested in buying a car which does not perform as had been claimed in the past? The image of Volkswagen has suffered a considerable blow. Although restoring trust is most likely one of the aspects Volkswagen will have to address, a more fundamental problem must be taken into account by Volkswagen as well.

Becoming number 1

One can wonder if the problems Volkswagen is facing were merely caused by a small piece of emissions software and the subsequent PR debacle, or if the naked ambition of Volkswagen to become the most successful, fascinating and sustainable automobile manufacturer in the world could be the underlying problem. This desire by the Board of Volkswagen to expand in order to become the biggest car manufacturer in the world and overtake Toyota, might have led to the undisciplined pursuit of more. By climbing up the food-chain in order to be the number 1 car manufacturer around the globe, Volkswagen set out on a steep climb where the path gets narrower and the abyss deeper. A minor slip up can then have substantial consequences. 

Perhaps to the untrained eye this may seem like a ‘chicken and egg’ situation all over again, as one can wonder what is the true cause of the problems Volkswagen is facing. The use of the fraudulent emissions software or the mere desire to grow and sell the most cars in the world? Yet fraud or fraudulent behaviour is not considered one of the more common causes of financial distress. Argenti (1976) ascertained many years ago that fraud is rarely associated with failure unless the (financial) distress is part of a fraudulent plan. This seems to apply to Volkswagen as the use of fraudulent emissions software was most likely based upon the desire to sell more cars and was not part of a covert fraudulent plan.

The pursuit of unrestrained success

This pursuit of more scale, growth or more of whatever one defines as ‘success’ can be explained by the “curse of success theory” propagated by both Miller (1990) and Ranft and O’Neill (2001). They state that success breeds failure in the sense that it creates overconfidence, hubris and arrogance which can spiral a company into decline. Due to past success, the Board of Volkswagen may have become insulated and viewed this success as a form of entitlement. Once success has been tasted,  company directors simply want more. The most successful companies in the past can become the most vulnerable to failure in the future, according to Whetten (1988).

In any case, bankruptcy practitioners and academics shall have to wait to see how events unfold at Volkswagen with the added benefit of hindsight of course. For now, I myself should perhaps settle for reading “The Very Hungry Caterpillar” by Eric Carle to my young nephew Noah. In order to practice modesty or restraint instead of pursuing the impossible.

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