Cutting Corners, or Breaking the Law?

Over the past few decades government regulation has become much more sophisticated. With the increase in technology available, just about every sector is now watched under a much less fogged regulatory magnifying glass. Whereas in the late nineties SEC officials were not familiar with the term “blackbox trading,” now federal agents employ algorithms that can bring back electronic trades from years past to help catch potential inside traders; such data analytics have brought down the likes of Raj Rajaratnam and Michael Steinberg.

One industry that has seen the clashing of increased regulation and the yearning for profits is the automobile industry. Due to the increasing complexity of cars and scientists’ better understanding of pollution, there have been hundreds of new regulations created over the last two decades that automobile manufacturers must abide by. Following these laws, however, may add to car companies’ manufacturing overhead costs. This leaves management with a choice to either try to cut the corners of regulation with hopes for higher operating margins, or to play by the rules.

Earlier this month it became known that Volkswagen (Amsterdam: VWA) had not only broken EPA guidelines by manufacturing vehicles that do not pass air quality guidelines, but also lied to federal agents about it. Chief Executive Martin Winterkorn in his apology admitted that his company had used technology that would fool regulators by improving the air quality of the cars when they were being tested, however, not when these same vehicles were out on the road. In his startling admission, the CEO also said he was “so sorry” for what had transpired under his watch. This apology seems quite similar to the apology General Motors (NYSE: GM) CEO Marra Barra gave earlier this month where she stated “people died in our cars.” GM was forced to pay $900,000,000 to settle its criminal charges (CNNMoney).

Volkswagen stock plummeted by about twenty percent Monday morning due to these facts coming to light. Obviously there will be government penalties and class action suits filed against Volkswagen in the coming months and there are mechanisms in place to punish companies that break the law; however, what should draw more attention is how such a decision was made in the first place. It is one thing to break regulation, it is another to maliciously plot to dupe not only regulators, but the American public. Executives must go back to the drawing board and take a more stakeholder approach to management in order to prevent such practices from continuing and to ensure that corporations can better align their interests with those of regulators and the American public.

-Adam Lifshitz