The Observer view on corporate cheats


“If only everything in life was as reliable as a Volkswagen” ran the slogan of one of VW’s most iconic ad campaigns. Last week’s revelations that VW deliberately and illegally cheated emissions tests will rightly do irreparable damage to a global brand that has traded off its reputation for quality and reliability.

The way this has played out on both sides of the Atlantic raises two critical and related questions about corporate accountability. First, VW is only the latest in a series of global corporates to be caught breaking the law, a sure sign that, even where regulations exist, they are often not fit for purpose. Second, VW’s law-breaking has highlighted the extent to which powerful industry lobbying has watered down European testing to the extent it can be manipulated without illegal action, and at terrible cost. Air pollution accounts for some a year in the UK – . But in the face of corporate lobbying, EU and government efforts to address it have been utterly inadequate.

“It was not an accident… a lot of work has gone into this,” was the verdict of John German of the International Council on Clean Transportation, the NGO that uncovered VW’s use of sophisticated software to flout US emissions tests. It’s a textbook case of predatory capitalism: a global business deliberately flouting regulations to harm the environment and cause unnecessary deaths in the name of profit.

The business community reacted with outrage when former Labour leader Ed Miliband condemned , accusing him of unfairly tarring the whole private sector with this brush. But each new corporate scandal makes this response more untenable. Scandals in banking, energy and food show that a serious misdemeanour at one global firm is often indicative of poor practice across a whole industry. Other car firms have already been found guilty of illegally manipulating tests, albeit not on the scale of VW.

The common lesson from these scandals is that capitalism is neither inherently good nor inherently evil. But unless they are rooted out, poor cultures that permit bad individual behaviour can and will develop in businesses. Companies such as VW employ the equivalent of a small city’s worth of people: in a company that size, there may well be employees with criminal tendencies. What’s critical is whether company cultures root out these bad apples, or whether they allow them to set in train a corporate race to the bottom. This is not an insight limited to business: the MP expenses scandal and widespread doping in athletics show what happens when people feel able to police themselves.

The financial crisis should have served as a warning of how imperfect our regulatory systems are at rooting out criminal practices within business. But the debate about reforms to corporate accountability has not been commensurate with the scale of the challenge. This is partly because there are no easy solutions. There is a consensus that regulators need to focus more on firm cultures, but little understanding about what an effective approach might look like. Greater personal liability undoubtedly has a role to play, but is no magic fix, as poor organisational cultures can encourage people to take risks regardless of the consequences.

The German system of corporate governance – often held up as an exemplar for its employee representation – has failed to prevent scandals afflicting such as Siemens, Deutsche Bank and Deutsche Telecom: a system designed to work for modestly sized, community-rooted businesses has not worked in holding global giants to account. But corporate governance is an imperfect lever through which to try to change corporate culture.

The VW case shows how a relatively small NGO running independent tests was eventually able to get US – if not European – regulators to take action. It demonstrates how independent civil society organisations can play an important role in holding corporates to account: but to do so, they need to be properly resourced.

This is particularly true given the way in which global companies have wielded their huge power to get regulations watered down, perhaps the most shocking aspect of how this has played out in .

Air quality is a serious killer. But addressing it is easier than other public health challenges because it relies more heavily on changing corporate than individual behaviour. It is much more localised than climate change policy: unlike with carbon emissions, action to improve air quality in the UK overwhelmingly benefits the UK. Yet the immense lobbying power of the German car industry has knocked air quality down the agenda both in Brussels and Westminster. As a result, are far laxer than in the US. There are even legal loopholes that allow car manufacturers to use the type of software that VW was found to be using in the US.

The European Commission and the government have both been warned about the implications: some diesel cars that have passed European laboratory tests have been found to be producing seven times the legal limit of nitrogen oxide emissions. But as reported by this paper today, the government has been seeking to block EU legislation to toughen up emissions tests. And it has ignored European legal limits for nitrogen dioxide levels altogether. It has taken a legal case by the NGO Client Earth to force Defra even to consult on proposals to reduce air pollution, proposals that experts believe fall far short of what’s needed. The scale of government inaction in the face of heavy industry lobbying is staggering even in relation to other public health challenges such as obesity and smoking.

As well as tougher European vehicle testing and a properly resourced plan from government to improve air quality, there needs to be a more holistic approach to environmental policy. Diesel has been promoted as a greener alternative to petrol as a result of its lower carbon emissions, but it performs much worse on air quality. There are similar issues with biomass. Yet climate change policy sits with the department of energy and climate change, while air quality is the responsibility of Defra.

VW’s behaviour has had terrible consequences for global human health. It is only the latest warning that business regulation remains unfit for purpose, and a powerful reminder that corporate lobbying has too often stopped governments taking action to prevent avoidable human suffering. It must not take another corporate scandal on this scale to get governments to act.