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CARMAKERS PYTHON - A MATTER OF OUTRAGE AND TRUST

Investors will tell you that hindsight bias and confirmation bias are risks in themselves. But, if you were the Chief Risk Officer at Volkswagen what would you have done different? Moreover, what should you be doing now?".

Dealerships are now distancing themselves to mitigate issues of liability on sales misconduct. Authorities and regulators are deepening investigations. A spate of vehicle recalls are now in progress. How can the industry Stewards now stop this from becoming a "Python" ?

The Python - "the slow-burning crisis which steals up and gradually crushes a company issue by issue".
Moore and Seymour, 2000

It has been a tough few years for the Automotive industry, but perhaps none tougher than today.  Now at the heart of consumer's trust and stakeholder's confidence is the emissions scandal.

In my last post, as the scandal was unravelling at Volkswagen. I published 8 practical reputation risk pointers.

This post outlines 5 action points for Chief Reputation Risk Officers operating in crisis. Dr Peter Sandman also weighs on the issue of outrage management in the auto industry.

  1. Understand your role as a contributor and leader in an industry issue 
  2. Identify, protect and build on your reputation currency
  3. Factor for outrage and loss of trust in your reputation risk assessment (See Frameworks / Tools)
  4. Be proactive and position for crisis leadership
  5. Air your other dirty laundry but be conscious of timing
1. Understand your role as a contributor and leader in an industry issue

We know now that Volkswagen used a device to falsify emissions. Yet, 3 independent reports, published as early as 2013, state that emission falsehoods are an issue for the industry, not only VW. 

These findings report that not only are emissions a concern for carmakers, so too are the fuel economy efficiencies that they tout - a key decision criteria when any consumer buys a car. In many markets, this type of misleading and deceptive behaviour would have the local Competition Commission in a flap. Class Action consumer lawsuits and tough industry action by its Regulators would be the order of the day.

Industry Issue Sources:

When facing an industry issue/crisis, a Chief Risk Officer might consider the following actions:

  • to manage any recalls/issues transparently, put in place strict controls and safety measures and resource and position for crisis leadership, 
  • contribute behind the scenes to the dialogue, message map and resourcing, but let the Industry Association do the primary communications on the issue on behalf of all industry participants - unless of course you are doing a recall.
  • clean up inhouse and communicate, communicate, communicate on your positive endeavours and progress. 

You saw in the Libor scandal, what happens when one player stands up to be accountable and wears the outrage for an entire industry's misbehaviour. Barclays wore the market's wrath. We also saw their peers take a different approach. All "negative message" communications on the issue went via the Industry Association and all positive market messages were communicated directly. This enabled them to weather the storm, ensuring public outrage was channelled at the industry, rather than themselves. The automotive industry could learn from this. 

2. Understand, protect and build on your Reputation Currency

 

We know from the work of Reputation Institute's Cees van Riel and Charles Fombrun (2004) that there are 7 drivers of reputation : Leadership, Governance, Economic Performance, Innovation, Products and Services, Workplace and Citizenship.

For all companies there are some non negotiable ‘Licence to Operate (Risk)’ components that can cause the collapse of trust in a market and escalate consumer outrage.  For the car industry, Leadership (ethics), Workplace (culture), Corporate Governance (compliance) and quality of their Products and Services is at the core. 

Source: RepRisk ESG Issue Map for Automotive Industry. 

One automotive manufacturer recognised after benchmarking their reputation, that despite these drivers having different weightings in each country, there are really only 3 core drivers that mattered consistently to their global stakeholders and underpinned their reputation currency, no matter which country they operated in. 

These drivers were:

  1. They made safe cars (Products and Services).
  2. They were an innovative company (Innovation)
  3. They looked after their employees (Workplace).

Once they understood this, they could design company communications and assess risk weightings accordingly to resource for both risk management (protect license to operate) AND position for opportunity and competitive advantage (leverage license to grow and innovate). 

Key Takeout: Understand your country and global reputation currency and leverage this knowledge during a crisis to build reputation.

(Note, if you would like to understand your company's reputation risk management maturity, take our reputation diagnostic)

3. Factor for outrage and loss of trust in reputational risk assessment

It is likely that the VW CRO applied the traditional risk management approach of "hazard and probability" to this issue when it was first published by the industry watchdogs and did not assess it as a high enough risk. 

This could be accounted for the position in the reports that :

  1. It was an industry wide issue not only a VW issue, and
  2. The likelihood of hazard - i.e. that it would kill people and be directly attributed to VW was low.

However, risk communications expert Dr. Peter Sandman would argue that the real issue is that they failed to factor "outrage" into the equation when making their assessment.

Assess Impact to Outrage

However, risk communications RL Expert Dr. Peter Sandman would argue that VW managers failed to factor "outrage" into the equation when making their assessment. "The risks that kill you are not the same as the risks that upset you", Dr. Sandman has been telling clients for decades – and when it comes to stakeholder trust, countless companies have worn the price of a loss of either legal and regulatory or social license to operate because they didn’t take stakeholder outrage into account.  

I asked Dr. Sandman what he thought about the VW scandal from an outrage management perspective.  Here’s part of his answer:

"VW in particular is renowned for its green reputation (at least in the U.S.), going all the way back to “Think Small” Beetle ads in the 1950s.  As I discussed at length in my Two Kinds of Reputation Management article, companies are punished more for betraying an outstanding positive reputation than simply for confirming an already negative one. 

I think a lot of VW diesel owners in the U.S. bought the car they bought not just because they wanted to do something good for the environment, but because they wanted to be seen to do something good for the environment.  Driving a VW was a signal that the driver is seriously green.  Now it has become instead a signal that the owner is a sucker. 

I don’t think the outrage is mostly because VW allowed its diesel cars to emit 40 times the permitted amount of NOx.  Nor do I think it’s because the resale price of VW diesel cars (and even other VW cars) has plummeted.  Nor do I think it’s because VW has proved itself to be untrustworthy. 

I think it’s mostly because VW owners have been deprived of a source of pride in themselves.  Any reputation restoration effort has to focus on rehabilitating the amour propre of its customers."

Clearly given the impact to its market cap, stakeholder "outrage" matters to VW. The calculation of outrage is key to adapting to risk appetite/risk tolerance. It is also now critical for assessing how the company resources and rectifies the issues moving forward and the approach they choose to communicate on the issues. 

Dr Sandman maintains a comprehensive website with ready to use Risk, Outrage and Crisis "how to guides".  I also highly recommend his Rio Tinto training video accessible here.

One key point here is to apply a life cycle risk management approach to your outrage assessment. Taking only a single point in time view to a rapidly changing and digital court of public opinion is not useful.

In the case of VW not only did the CRO fail to calculate "outrage" in the assessment formula, they also failed to assess the impact of the risk on stakeholder trust.

Assess Impact to Trust

Published in 2009, Garry Honey's method for reputation risk classification offers a tool based on an analysis of trust recovery. Had VW's CRO consistently applied this simple formula in their reputational risk assessment process, the risk weighting for the issue would have been different. 

RISK IMPACT VS REPUTATION DAMAGE PROFILE

  • VERY LOW : Trust recoverable with little effort or cost – a minor blip on the radar. Risk containable locally – no need to involve senior management, keep informed.
  • LOW: Trust recoverable at modest cost with resource allocation within budgets. Risk containable at sector level – senior management to be kept informed.
  • MEDIUM: Trust recovery demands cost authorisation above and beyond existing budgets. Risk containable at group sector level – senior management involved.
  • HIGH: Trust recoverable at considerable cost and management attention. Risk demands immediate attention – dedicated budget and staff.
  • VERY HIGH: Trust severely damaged and full recovery questionable and costly. Risk demands attention of group board and priority action.
Source: Honey, G. 2009. A short Guide to Reputation Risk, Gower. 

4. Listen for early warning signals, be proactive and position for Crisis Leadership

Two years before the scandal broke in the US this September, there were 3 events that publicised the falsifying of emissions and fuel performance across the car manufacturers - not only VW. This indicates that either VW failed to factor these signals into their risk register or had no early warning system in place. Irrespective of the reason, they could have chosen to proactively manage this issue. Even if they had assessed this as a low risk scenario, given the impact to consumer trust, once the scandal broke, they should have had a crisis and reputation risk scenario plan in place for the company's Executive Committee to take leadership on the issue.

In May and June 2013, Volvo, Fiat and other carmakers were also accused of falsifying emissions.  German Environmental Aid's report documents alleged inconsistencies between CO2 emission statistics released by carmakers and the actual CO2 levels of various cars. According to their report, at that time carmakers had fraudulently underestimated CO2 emission levels by at average of 23 percent to reduce vehicle and road taxes in Germany. In three cases of models produced by Fiat, Peugot and Volvo, thesis numbers diverged by well over 30 percent.

Other NGOs, Including Transport and Environment and the International Council on Clean Transportation (ICCT) have made similar claims, leading to calls for stricter government controls of the auto industry.

Signal 3:  2014: From Laboratory to Road Report

In September 2014, the International Council on Clean Transportation published their 2014 "From Laboratory to Road" report. The report claims that car manufacturers in Europe falsified their fuel consumption and emission statements by up to 50%. This study, benchmarked annually since 2012, demonstrates that the year-over-year improvements reported via the type-approval tests are not reliably matched in everyday driving—and that the gap between fuel consumption measured under laboratory settings and real-world road conditions was increasing.  It found that the average discrepancy between type-approval and on-road CO emissions increased from around 8 percent in 2001 to about 38 percent in 2013. The increase in recent years (as regulation kept tightening) was especially steep".

So with more than 2 years early warning, this issue could have been proactively addressed.  The timing of course would have been dependent on transparency to Board and their corporate governance and/or their ongoing review of risk tolerance/risk appetite at the Board level.  Even if the appetite for risk was high, they could have at the least positioned for crisis leadership on an industry issue, given the likely outrage factor from consumers. This could have included a proactive recall on their vehicles and c0nsumer compensation plan and/or new R&D investments and initiatives to protect for the environment via increased fuel efficiency and reduced emissions ie. make it do what it says on the tin!

5. Air your other dirty laundry but be conscious of timing

Once a company is in crisis and stakeholder confidence has taken a hit, some Companies choose to come clean with other related issues. 

Airing Dirty Laundry

On the 22nd October, Volkswagen also announced that more engines than initially disclosed might be in breach of Europe's pollution standards. Known as EA288 diesel engines, these were sold for several months in 2012. Apparently, Volkswagen sold vehicles with an earlier version of EA288 engines that don't comply with Europe's current pollution rules.

Then on the 27th October Volkswagen's leaders also chose to announce a recall of 5,906 imported Bentley Flying Spur and Continental GT cars in the Chinese market due to a potential defect related to the battery cable.

According to China’s General Administration of Quality Supervision, Inspection and Quarantine, the nuts on both sides of the battery wire connectors may not bite tight enough, which may cause the nuts to overheat. A key growth market for any Carmaker, this one was key for investors.

Volkswagen has also been implicated in the widening Takata airbag scandal, a scandal touted as one of the largest and most complex recalls in US history. With 19 million cars already recalled from an array of manufacturers, the US National Highway Traffic Safety Administration investigation will now include side airbags from all model years. Apparently, Takata engineers have known about this defect for almost two decades, but ignored the issue whenever they raised concerns about safety.  These defective airbags that rupture and cause metal splinters to injure passengers have been linked to eight deaths worldwide and dozens of injuries. Volkswagen is being targeted for a side airbag rupture in one of its cars.

Timing matters

Historically, it has been traditional practice for companies in crisis to release bad news on a Friday, after the market has closed. However, in today's digital economy this practice only works for specific types of announcements.

For example, bad earnings results have been found by Stanford academics to get equal and in some cases even more scrutiny if released on Fridays.

Source: Simmons, L. The best times to release bad earnings, Stanford Business, Nov 21, 2014

Their study found that not only will it take points off your stock price before the data is even released, financial journalists who are called in to cover the story over the weekend will be less enamoured.  

Many argue the Friday rule does not apply in a 24/7 digital economy. However, while communicators should benchmark best practice in the specific country, the following generalisations have been touted as best practice when seeking the least engagement from stakeholders : infographic.

  • Facebook: Weekends before 8pm and after 8pm
  • Twitter: Everyday after 8pm, Fridays after 3pm
  • LinkedIN: Mondays and Fridays - 10pm - 6am
  • Pinterest: sharing during normal work hours
  • Tumbler: Anyday before 4pm
  • Google: Any day early mornings or evenings.

Social media is an important channel for any company, extending traditional reach and our ability to effectively engage our audiences. But, we must remember that timing matters.

To conclude...

Shares in Volkswagen have fallen by more than 40% since the world’s second biggest carmaker issued a public apology in response to their US allegations that it in fact used a defeat device to falsify its emissions data. With more than 11 million vehicles to refit and recall and $USD7.3B set aside to cover the costs in the US alone,  the road back to trust with its consumers, shareholders and regulators, is expected be a long one. 

Reputation Institute's Dr. Cees van Riel observes that it is the balancing of the gap between reality and stakeholder perception that is key to sustaining trust and reputation. When it comes to reputation drivers, leadership, corporate governance and quality of products and services are at the core here.

This post has outlined 5 steps that CRO's can take to manage reputational risk in a crisis:

  1. Understand your role as a contributor and leader in an industry issue 
  2. Identify, protect and build on your reputation currency
  3. Factor for outrage and loss of trust in your reputational risk assessment 
  4. Listen for signals, be proactive and position for crisis leadership
  5. Air your other dirty laundry but be conscious of timing

There is an opportunity here to clean up the industry's image and be rid of the perception that misleading and deceptive conduct is the "norm".

Company Stewards take note: Ethics, compliance and products and services are some of the non negotiable ‘Licence to Operate risk’ components that can cause the collapse of trust and consumer outrage for a market.  

It appears that this crisis could still turn out to be a python for the carmakers - and one that will not have its head chopped off until all of the facts are revealed and its industry Stewards have been held accountable. 

#myindustry

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I appreciate that you are reading my post. Here, and on LinkedIn, I write about board related issues - corporate strategy, human capital, reputation risk, technology, corporate governance and risk management trends.

If you enjoyed reading this post, please click the thumbs up on my LinkedIN profile and let me know. 

If you are interested in your company's RepTrak reputation currency, contact us.

You may also enjoy this excellent read on the topic: NYU Stern Professor Aswath Damodaran's: Putting a Price Tag on Scandal: Sturm und Drang at Volkswagen!

If you would like to read my regular posts then please click 'Follow' (at the top of the LinkedIN page). If we have met, do send me a LinkedIN invite. And, of course, feel free to also connect via Twitter and Facebook

For more on these topics, check out other selected LinkedIn Influencer posts:

About Leesa Soulodre:

Managing Partner and Director of RL Expert Group, an international reputation risk management think tank and consulting practice and Asia Associate of the Reputation Institute. A Member of the Global Advisory Council of NY Investment Advisory Firm, Cornerstone Capital; an Innovation Advisor to the University of Illinois Urbana Champaign Advanced Digital Science Centre, Singapore and Board Advisor to Belgian PR Software firm, Prezly and US Sports Analytics firm, Autoscout.

Research Fellow of TIAS - the School for Business and Society, working to deliver predictive reputation risk analytics for financial strategies and complex global supply chains - r3Intell.

Connect: Leesa Soulodre, Managing Partner RL Expert Group - ls@rlexpert.com

www.rlexpert.com

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