We have made provisions…..
To date, the usual modus operandi when prosecuting authorities deal with major corporate misbehavior is that they go after the company as a whole. The company pays the fines of the erring managers in the tens or hundreds of millions, in some cases billions, and the real perpetrators, the company executives usually go on with business as usual.
In effect the Shareholders are left out of pocket.
In a study by Professor Brandon Garrett of the University of Virginia law school, only 26 CEOs faced prosecution in 306 cases. “The corporation appears to be a kind of scapegoat . . . capable of receiving the brunt of blame and punishment while the individual culprits go free,” Professor Garrett wrote.
Times seem to be changing, and now the US has laid criminal charges against Martin Winterkorn (Volkswagens former chief executive) personally, over his role in the diesel emissions scandal.
"Frankfurter Allgemeine Sonntagszeitung" has reported that the charges against him (for conspiracy and fraud), if successful could cost Martin Winterkorn up to one billion euros – in effect wipe out all of his assets. This would certainly send a clear message!
Prosecutions did not happen to the heads of big Wall Street banks after the mortgage securities debacle that led to the 2008 financial crisis; nor to Tony Hayward, former chief executive of BP, over the 2010 Deepwater Horizon oil spill.
Last year VW itself pleaded guilty to the US criminal charges and has set aside €25bn to cover criminal and civil fines and compensation. VW has moved mountains to distance itself from Mr Winterkorn, and perhaps lay a lot of blame on his doorstep, from reversing Mr Winterkorn’s autocratic culture inside the company — once described by Der Spiegel as “North Korea without the labour camps”.
Herbert Diess, the new CEO, has stated that VW needs to become “more honest, more open and more truthful”. The company has indeed staged a remarkable financial turnround since Mr Winterkorn resigned in September 2015, with sales growing and its balance sheet restored.
Mr Winterkorn along with five other former VW executives is facing allegations in the USA of “knowingly, intentionally and wilfully, combining to conspire and confederate” to falsify VW’s emissions data.
Mr Winterkorn is accused of helping to cover up how VW’s “defeat device” technology worked after being told of irregularities in 2014. The US clearly hopes to send the message that CEOs will be much warier in future of taking the side of their own executives if they hear about potential illegalities.
Meanwhile in Germany, even if Winterkorn were not even shown to have had any knowledge of the fraud, according to German law, managers are not only liable if they harm a company purposefully, but also if they were negligent with the control mechanisms. The more than 100 million euros Mr Winterkorn earned over the course of his decades-long career at VW as well as his 30 million euros of pension may be about to be siezed and forfeited, and who knows what other assets he has?
According to the prosecutors in Braunschweig, the German investigation against Winterkorn and 38 other defendants for the manipulation of diesel vehicles are almost complete.
VW is probably happy that some of the heat is been taken off the company and focused on Mr Winterkorn.
Making delinquent managers pay for losses they have forced on their company through their own misbehavior is the right way to go.
