Friday, 25 September 2015

Power Corruption and Lies: Volkswagen compliance

The Volkwagen cheating on emissions testing scandal is not on the face of it a Procurement issue, though it is rather similar to an old Procurement problem: lying about compliance.

Suppliers can and do fake certificates of compliance.  Part of the job of Procurement is working out when it is worth doing our own investigations into compliance.  Sometimes it is, and sometimes it is not.  Sometimes the non-compliance is just cutting corners...

This is not.  This is a deliberate and calculated fraud.  VW has already allocated $billions to the anticipated fines and law suits.  Is this enough?

In Procurement we would find a deliberate fraud a good reason for blacklisting the supplier (if such a thing is allowed, and let's be clear probably even it if is not).   Who could trust such as supplier ever again?

Standards and certification are sometimes seen as job killing and industry damaging.  Surely the market will deter bad behaviour?  In reality they are there to protect us all and prevent a race to the bottom in a (generally positive) drive for profit.  And so wrong doers are fined.

However the fines are not enough.  For a business they are a cost of doing business, and can be set against the profit and loss account.  They are, in short, a calculated gamble.  If it pays off and you don't get caught great - if you get caught, pay the fine (or in the case of Goldman Sachs agree to pay a fine without ever actually admitting to wrong doing).  That is not enough to deter fraudsters.  Not nearly enough.

We look at some of the great business scandals (Enron, Lehman, Libor, VW, Goldman Sachs, RBS) and can ask how many people went to jail?  Not many.  Literally on the fingers of one hand (mostly from Enron).  With those odds we are not detering wrong doing - the balance of risk and reward is too strongly weighted to doing whatever it takes.  Handing back your knighthood is not a risk of consequence.

If we want to change the risk balance we need to ensure that more corporate fraud is dealt with by jail time.  A nice cozy jail no doubt, but still jail time.  Nothing else will make managers think twice (and it will not make all of them do so either).  This needs to be a regular result too, not just a one off. 

We have to make managers aware that there are real personal consequences - not just corporate ones.

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