Adopt Risk Management as Essential Governance Behavior
Why am I writing on Volkswagen’s misadventure with the defeat device? Not only because it is about unmasking a ‘clever’ software meant to cover up the polluting levels of their diesel cars… Yes, the investigators would be keen to find out who commissioned this project and perhaps who executed it - maybe even whether it was outsourced or off-shored. But most importantly, someone got their eyes off the risk management process. Was it one of the boards (Germans have two), a committee, designated officials or a bunch of auditors? What are the possible consequences and are there any forms of mitigation? Moreover, would the storyline be any different if it was an emerging market brand? Let us also not divorce brand from risk management. Last but not the least; is there any lesson for Indian businesses with multinational ambitions?
• ERM is the buzz and everyone who is someone professes to practice it. VW’s board, executive team and auditors would be expected to prove that they were doing something to correct this situation before being caught. If they could prove it, the impact of punitive damages and shareholder lawsuits could be minimised. As of now they “would have to slash costs to foot the as-yet-unknown bill” to quote Andy Sherman of FT.
• Transferring Risks to Insurance is a good starting point. VW has a Euro 500 million Director & Officers insurance. D&O insurers are generally not expected to pay for claims resulting from managers’ deliberate wrong doings. However, if deliberate wrong doing did take place at a lower management level and it is obvious that the chief executive or the supervisory board neglected their duties of supervision, this may become a D&O case. Likewise, claims could be brought by investors in the company or from the company as class actions against the directors involved in the scandal, which erupted when it was found VW had used technology to mask the amount of emissions being caused by some of the cars when tested.
The most important question is could the chief executive or the supervisory board have prevented the claim, if they had paid more attention? If the answer is in affirmative, they may be held liable for the losses. Now all this could mean protracted legal battles and heavy costs. These could very well challenge the adequacy of insurance coverage, if any. In VW’s case the Euro 500 million cover may be grossly inadequate. Needless to mention that the product recall costs, for the million or so cars, given that it is not a ‘defective product’ will also further erode the company balance sheet rather than that of the insurers.
• Multinational Global Programmes:For the sake of uniformity, consistency and pricing efficiency, large global corporations resort to global insurance programmes. A nominated insurer carries the risk in tandem with its own network or those of partnering insurers. This is easier said than done, because the actual process involves ongoing fine-tuning. A significant amount of risk managers’ time and energy goes into this alignment process.
• Risk Management in the Hands of Bean Counters: Perhaps today’s real world is too complex and dynamic to be left alone at the mercy of spread sheets. It calls for an ever-stretching imagination.
• Corruption: Let’s accept the fact that stories do get coloured depending upon the countries they break out from. If VW were an emerging market brand, this would have been interpreted in light of ‘corrupt practices prevalent in the EMs’. Despite the Siemens bribery case, a few years ago, the VW incident is not slanted in that direction. Just that Siemens was more localised and VW has already opened up fronts from Australia to California. The greed of market share and related machinations has been underplayed.
Earlier it was perceived as a risk when emerging market providers were ‘supplying’ goods and services to developed markets. Then the producers and exporters themselves became the markets. This overlapped with what management guru Vijay Govindarajan calls ‘reverse innovation’. The emerging markets exported their unique propositions to the developed world. Today the developed world is experimenting with its own innovations in EMs.
This has been a longstanding concern for serious risk managers and also known to be a trigger for smart accounting practices. The auditors, investors and executives tend to get carried away by superior quarter to quarter performance.
The Dual Boards
Germany stands out in the world of governance for its unique board structure prescription. To adapt or not has been debated at all director forums the world over. Notwithstanding the two board structure, we have seen major slippages in German corporations.
The world has witnessed ‘Bad Pharma’, the VW case only makes the potential case for ‘Bad Auto’. Not only are global contours changing rapidly, but so are the domestic realities. With the enactment of Companies Act 2013, the tort age has truly arrived. Class actions are a possibility. Brand lives are shortening. Any Indian brand nurturing global ambitions must measure up to challenges on both these fronts and ought to be better equipped to deal with emerging risks than their global counterparts. It is getting harder to build trust but takes no time in losing it. Howsoever adequately insured one may be, the moment of truth is tested by the vigour and rigour in risk management. Volkswagen misadventure only demonstrates its not ‘horn okay please’ on the road ahead! (the article represents author's personal views)