Monday, August 7, 2017

The U.S. Goes after Executives at Volkswagen: A Deterrent?

Oliver Schmidt, a Volkswagen executive who had been head of the company’s environmental and engineering center in Michigan, pleaded guilty on August 4, 2017 to two federal charges in the United States: conspiracy to defraud the federal government and violating the Clean Air Act. He “admitted conspiring with other Volkswagen employees to mislead and defraud the United States in 2015 by failing to disclose that thousands of diesel cars were rigged to evade detection of excess emissions levels. He also admitted filing fraudulent emissions reports to regulators.”[1] He faced possible fines and time in prison. James Liang, another of the company’s executives who had been charged, had already pleaded guilty to charges of conspiracy and violating the Clean Air Act. The other executives charged were in the E.U. state of Germany, which does not extradite its residents. Given the power of the auto industry in that state, such accountability applied to executives for the same fraud in the E.U. may have been too difficult to achieve. Nevertheless, for the sake of business ethics alone, prosecuting executives personally rather than just companies is in general important as a deterrent.
Prior to Schmidt’s admission of guilt, Volkswagen had agreed to pay $4.3 billion in civil and criminal penalties, which in turn were part of $22 billion in settlements and fines in connection with “the cheating scandal and the sale of vehicles that emit harmful levels of pollution.”[2] Yet with revenues of $228.5 billion in 2016, the question of whether 10% of one year’s revenues for a company that had nearly $431 billion in assets at the end of that year could reasonably be expected to act as a deterrent.[3] I submit that prison time for executives is the way to get not only their attention, but that of the company itself, including its current and future management personnel. As wealthy as executives typically are, not even fining them would be of a sufficient deterrent; their quality of life must be significantly thwarted for a significant amount of time for the message to get through. Given the massive lapses in holding Wall Street executives accountable for their role in producing and/or selling sub-prime mortgage-based bonds and the high probability that resumed excessive risk-taking held secret even from clients and stockholders could trigger yet another financial crisis, the U.S. Justice Department was on a prudent path in going after the executives at Volkswagen rather than only the legal person (i.e., the company itself). Yet a pattern of prosecuting executives, even of financial institutions based in the U.S., would be necessary for the deterrent to work going forward.

[1] Bill Vlasic, “Volkswagen Executive Pleads Guilty in Diesel Emissions Case,” The New York Times, August 4, 2017.
[2] Ibid.
[3] Volkswagen’s 2016 financial statements