Volkswagen has been eviscerated after the U.S. Environmental Protection Agency announced in September that VW had installed “defeat devices” to cheat on their emissions testing.

It turns out least 500,000 diesel cars made by VW were rigged with software that would reduce engine emissions to meet standards, but then turn off to achieve higher fuel mileage. When not in testing mode, the engines released nitrous oxide chemicals at levels up to 38x times greater than allowed by the Clean Air Act.

How It Was Discovered

In an ironic turn of events, the cheating was discovered by an environmental group working with West Virginia University to prove that diesel was in fact clean. In 2014, they conducted real world tests of VW cars that revealed far greater levels of emissions than what was certified by the E.P.A.

An investigation ensued to understand the discrepancy between lab and real-world results and repeated questioning by the EPA, which was preparing to certify new VW models, the company admitted to installing these devices on over half a million diesel cars sold in the US since 2009, and up to 11 million cars worldwide might be affected.

The Fallout

The stock fell over 40% when the scandal first broke in September 2015 and was still down 23% three months later, representing a $25 billion dollar loss in market cap. Martin Winterkorn, the global CEO was forced to resign, even as he still maintains he didn’t know about the cheating. Of course, they’ve been trying to blame the cheating on a small group of bad apples, and VW recently announced a negative quarterly profit, their first in 15 years.

The company has set aside $6.7 billion for recalls, repairs, and other customer service requirements. The U.S. Justice Department has begun investigating criminal fraud charges and has sued VW for $48 billion dollars. Even if they settle on a much smaller number, that’s nothing to sniff at. The company recently announced that they’d be making “massive cutbacks“, which probably will result in people who were not at all involved in the situation losing their jobs. Beyond the business ramifications are health ones: an MIT research study indicates that the additional emissions will cause 130 people to die premature deaths if the cars aren’t taken off the road by the end of 2016.

Why It Happened

As far as I can tell, there’s a number of factors that lead to this:

A culture of gaming the system. It appears VW is far from the only company that has significant discrepancies – in the past decade, the gap between lab tests and real world results in terms of pollutants has grown 50%. As far back as 1998, it was known that emissions tests and real world driving engage the engine in different ways and car companies have been exploiting that difference to pass tests but pollute more under normal conditions. And while the other companies may have been gaming the system legally, this culture of treating the tests as just something to pass and move on with is dangerous.

An overly competitive atmosphere. The car industry as a whole is well known for having low margins and having its leading brands (GM, Toyota, and now VW) suffer scandals around faulty parts. Some experts believe that in order to achieve the number one position, which former chief executive Martin Winterkorn was pushing the company very hard to do, car companies almost always have to cut corners which lead to major issues down the road.

A thorny product trade off. VW wanted to produce diesel cars that had great gas mileage, super clean-emitting and affordable. And they wanted it now. Instead of actually innovating or investing the money to do it right, they decided to cheat.

A culture of punishing mistakes and problems. This quote from a former VW executive from Reuters is telling:

“There was always a distance, a fear and a respect… If he would come and visit or you had to go to him, your pulse would go up. If you presented bad news, those were the moments that it could become quite unpleasant and loud and quite demeaning.”

When no one is willing to say “no” to leadership and bad news is punished, secrets emerge and people spend more time covering their ass than doing the right thing.

Takeaways

Engineers and individual contributors: Refuse to implement work that is unlawful or violates your sense of personal integrity. Forget the obvious reason (that’s just the right thing to do) but think about this: if it works and you don’t get caught, you’ll be asked to do it again. And it’ll be more egregious the second time, and eventually the cheating will get detected. And when it does, it will probably be really bad, and you will be thrown under the bus. The US chief executive of VW went up to Congress and seriously said that the defeat devices were the result of “a couple of software engineers who put this in for whatever reason.”

Product managers and group leads: Every product decision has trade offs and no solution is perfect optimal on every dimension. Most PM’s recognize this, but it’s important to acknowledge that fact within your own teams and communicate that upward to leadership.

Do not pressure your team into doing something you know is wrong because it will spiral out of control fast. Make sure you understand what is happening on a technical level with your product. If a trade off “magically” gets resolved, you should be suspicious.

Executives: Winning is awesome and every organization needs to hustle to get ahead, but balance your ambitions with a long-term approach. Don’t use fear or punishment to manage, don’t turn a blind eye to potentially sketchy behavior, and don’t reward teams who cut corners but get results. Cheating can get you to the top, but you will get caught and everyone else in your industry will love seeing you fall from grace.

Published by Jason