Corporate crisis management and communication in CMS Energy case study

Crisis Management in VW’s ‘Dieselgate’ Scandal
Trust is the most important factor in the success of any organization. This trust extends to all levels of stakeholders. If customers feel that they cannot trust the company for any reason, they will not purchase their products. Stakeholders have to trust that the organization will make sound business decisions to keep profits high and manage value. This is becoming even more prominent in the global economy when people of different cultures must interact with each other. The most important factor is that customers and other shareholders have to be able to believe the company when they are told that something is true. This analysis explores the VW ‘dieselgate’ incident involving Volkswagen AG a.k.a. Volkswagen Group, commonly referred to as VW.
Background of the Case
Consumers on a global basis are becoming more environmentally conscious and sensitive to the emissions of their vehicle. Features that promise to improve gas mileage, reduce emissions, and have other positive environmental effects are a big selling point in the global market today. In addition to consumer demands, Federal clean-air requirements are becoming increasingly more stringent, with manufacturing’s having to comply with stricter regulations over time (Bartlett, Naranja, and Plungis, 2017). The case involved several Volkswagen models including the Touareg, Passat, Jetta, Golf SportWagen, Gold, Beetle, several Audi models, and the Porsche Cayenne (Bartlett, Naranja, and Plungis, 2017). Cars involved in the recall included models from 2009-2015.
The problem involves a part called the engine control unit (ECU). The Volkswagen models in question operate in two different modes, on road and dyno. In the models involved in the recall, the dyno mode is considered to be the “test” mode and the “on road” mode to be used for regular driving. The system has the ability to manage engine performance and switch between maximum fuel efficiency and a high-performance mode. In high performance mode, the car has more power, but it also highs high nitrous oxide emissions.
The problem occurred because the engines were switched to high-efficiency mode during the EPA tests, and then this was switched off when the car was sold to consumers. This means that when the car was being used by consumers, it was producing nitrous oxide emissions that were above the EPA standards (Bartlett, Naranja, and Plungis, 2017). Emissions exceeded maximum limits by as much as a factor of 15 to 35% on some models (Bartlett, Naranja, and Plungis, 2017). In addition, Volkswagen admitted to having known about this problem as early as 2008. They knew they were skirting the law and continued to do so up until 2015, when they were caught and issued EPA violations (Bartlett, Naranja, and Plungis, 2017). This analysis will examine the consequences of their actions in terms of stakeholder trust, legal issues, and the future of the company.
Stakeholder Relationships
Stakeholders in the case include consumers, shareholders, company executives, the workers who produce the vehicles, dealerships that sell the vehicles, manufacturing facilities that make parts, and other members of the value chain. On a larger scale, stakeholders also include communities and the countries involved. This is especially the case because Volkswagens are manufactured in Germany and shipped to the United States, where the violations were first brought to the attention of the authorities.
It is one thing to make a mistake, but it is quite a different thing to know about an issue and intentionally try to hide it from stakeholders on all levels. It is difficult to identify a group of stakeholders that was not negatively affected by the actions of Volkswagen. Factors that affect one group of stakeholders cannot be separated from the others. For instance, when trust has been compromised among customers, shareholders also know that this will have a negative impact on revenues and may react accordingly.
In today’s world, social media plays an important role in managing stakeholder relations. VW’s response to the emission violations on social media played an important role in perceptions about them and how the crisis progressed. The press release was issued by the EPA on September 18, 2015 (Zhang, Veijalainen, and Kotov, 2016). VW chose to monitor several social media platforms to gauge public response. The platforms chosen included Twitter and Facebook, and other official websites and major news companies, with particular attention to VW’s official Facebook page (Zhang, Veijalainen, and Kotov, 2016). VW responded immediately and offered solutions to affected customers. They also offered an apology immediately. It was found that nearly 88% of the Tweets contained a relevant news link, which means that customers and others were sharing the information (Zhang, Veijalainen, and Kotov, 2016).
Prior to the scandal, a reputation tracking company ranked VW consistently in the top 15 most trustworthy companies in the world (Reputation Institute, 2016). After the scandal was announced, over the next four fiscal quarters, VW’s reputation dropped 23 points in Germany and 11 points in the US (Reputation Institute, 2016). According to this company, trust is driven by the company’s ability to deliver tangible results. It also measures the companies’ corporate governance, products, and global citizenship. A failure to address the needs of stakeholders in these dimensions led to a dramatic decline in their reputation scores.
Legal and Regulatory Effects
It is not surprising that the announcement of the scandal had significant legal repercussions for Volkswagen. As recently as May 2018, CEO Martin Winterkorn was charged with conspiracy and fraud for his role in the scandal (EPA, 2018). In the future, regulators are more likely to keep a closer eye on VW and other auto manufacturers. Settlement of this case is likely to drag on for many more years with investigations, prosecutions, and settlement actions (GEC Risk Advisory, 2015).
The effects of the scandal are ongoing. As recently as May 2018, Germany ordered Porsche to recall another 60,000 vehicles from across Europe (AFP, 2018). In addition, Audi was also recently required to recall an additional 60,000 vehicles (AFP, 2018). The crisis was discovered in 2015 and continues to have ramifications as new information becomes available due to investigations. VW continues to face lawsuits from thousands of car buyers and dealerships all across the globe (AFP, 2018).
Business Ethics Considerations
A global brand such as VW, cultural intelligence plays an important role in management of the crisis. It also plays an important role on public perceptions of how serious the impact is and how it affects sales in the future. The impact of cultural intelligence is seen in differences in sales after the crisis was announced in both Germany and the United States. The impact on sales had a different effect in various countries around the globe. This suggests that in some countries this type of cheating is considered business as usual, while in others it is considered the basis for a loss of trust.
Immediately after the scandal was announced in 2015, Volkswagen lost €1.6 billion, which was its first loss in 20 years (AFP, 2018). Sales in the US fell, but as of 2017, European consumers seem to have forgotten about the controversy. VW is still the world’s largest carmaker and sold 10.4 million vehicles in 2017. This is even more than before the crisis was announced. However, share in the diesel market fell significantly across Europe (AFP, 2018). Immediately after the scandal was announced, VW was quickly able to recover from the losses and showed a net profit of €5.1 billion in 2016 and €11.35 billion in 2017. They continued to show profit even though they face billions in lawsuits from consumers and dealerships around the world, which highlights the strength of their sales (AFP, 2018).
One important consideration when one considers the handling of a global crisis in an international corporation is that the manner in which it is handled can have different effects in different countries. The advent of social media and the Internet makes it difficult to manage reputation in individual countries because various consumers and groups can share information readily. This creates a need for greater transparency on a global basis and makes the handling of a global crisis difficult for the company.
Consumer and Employee Impacts
The announcement of the crisis in 2015 had a significant and immediate effect on corporate governance. It resulted in massive resignations, changes in senior management, layoffs, hiring freeze, and the end of marketing of diesel vehicles (Crete, 2016). It resulted in vehicle recalls, declining car sales, drop in market capitalization, and the launching of many internal and external investigations by VW themselves and public authorities (Crete, 2016). The most significant impact was on the line of diesel vehicles. However, the scope of the impact is dependent on the percentage of sales that sales of diesel engines account for overall.
Of course, the most significant impacts involved employees who worked in that segment of the company. If other segments of VW remained strong, then the impact of dieselgate would be negligible on the overall profitability of the company, which explains how they could remain profitable two years after the scandal was announced. Although it destroyed trust and diesel products, sales of VW products remained strong for their other lines (AFP, 2018).
An important part of corporate governance is brand management. If there is a problem found, such as a defect in a product, this can be easily fixed by repairing and making reparations for the defective part. However, when it comes to cheating, this points to an underlying character flaw or problem within the organizational culture (Lyons, 2015). The core competency of VW is innovation, and they failed to deliver to customers as a result of intentional cheating (Lyons, 2015). This scenario is more difficult to recover from than a product defect that affects a particular brand. One of the most difficult types of crisis to manage is the one that builds slowly and then reaches a tipping point, which is the case with the VW scandal (Continuity Central.com, 2015). It appears that senior managers were unaware of the problem, as the information was not passed up from middle-management (Continuity Central.com, 2015). This points to a significant flaw in communication within the organization.
Prior to the crisis, it seems that VW did everything wrong in terms of communication and taking actions that could destroy consumer trust. One cannot separate the effects on one stakeholder from the others. However, because the diesel sector was only a small portion of VW’s business, they were able to recover and become profitable again within a year. This hints at good risk management strategies. The question is how they recover the reputation of their brand in the eyes of government officials and consumers around the globe. It appears that after the crisis they did everything right in terms of issuing an apology and responding to the crisis quickly. Even though the crisis continues to have an impact on the organization, as new information is discovered through investigation, it appears that for VW as a whole, this was just a bump in the road.

References
AFP (2018). Five things to know about VW’s ‘dieselgate’ scandal. Phys.org. Retrieved from https://phys.org/news/2018-06-vw-dieselgate-scandal.html
Bartlett, J., Naranja, M., & Plungis, J. (2017). Guide to the Volkswagen Emissions Recall. Consumer Reports. Retrieved from https://www.consumerreports.org/cro/cars/guide-to-the-volkswagen-dieselgate-emissions-recall-
Continuity Central (2015). Five crisis management lessons from the Volkswagen incident. Retrieved from https://continuitycentral.com/index.php/news/business-continuity-news/563-five-crisis-management-lessons-from-the-volkswagen-incident
Crete, R. (2016). The Volkswagen scandal from the viewpoint of corporate governance. Cambridge University, 7(1): 25-31.
Environmental Protection Agency (EPA). (2018). Former CEO of Volkswagoen AG Charged with Conspiracy and Wire Fraud in Diesel Emissions Scandal. Press Release. Retrieved from https://www.epa.gov/newsreleases/former-ceo-volkswagen-ag-charged-conspiracy-and-wire-fraud-diesel-emissions-scandal-0
Ferrell, O., Fraedrich, J. & Ferrell (2013). Business Ethics: Ethical Decision Making and Cases. Stanford, CT: Cengage Learning
GEC Risk Advisory. (2015, Sept. 23). The Volkswagen Emissions Scandal Will Be One for the Books: the Long-Term Effect on Stakeholder Trust. Retrieved from https://gecrisk.com/gec_blog/the-volkswagen-emissions-scandal-will-be-one-for-the-books-the-long-term-effect-on-stakeholder-trust/
Lyons, S. (2015, Dec. 7). Road to recovery: How does Volkswagen bounce back from emissions scandal? Hub. Retrieved from https://hub.jhu.edu/2015/12/07/volkswagen-scandal-explained-sylvia-long-tolbert/
Reputation Institute (2016). How VW Lost the Public’s Trust. Retrieved from https://www.reputationinstitute.com/sites/default/files/pdfs/How-VW-Lost-Public-Trust-2016.pdf
Zhang, B., Veijalainen, J. & Kotov, D. (2016). Volkswagen Emission Crisis – Managing Stakeholder Relations on the Web. In Proceedings of the 12th International Conference on Web Information Systems and Technologies (WEBIST 2016), 1: 176-187. Retrieved from http://www.scitepress.org/Papers/2016/58924/58924.pdf