by Tracey Lindeman
Published in the Financial Post on Nov. 4, 2015
Dealing with corporate crises can be challenging and more and more chief financial officers, such as Volkswagen AG’s Hans Dieter Pötsch, are being asked to steer companies back on course.
When the emissions cheating scandal first hit VW it took the giant automaker about 20 days to announce that CFO Pötsch would become chairman and help direct the company. The move came after shares plunged and then-chief executive officer Martin Winterkorn apologized and subsequently resigned.
With VW, the perceived lack of individual consequences at first made it easy for the German manufacturer to drag its heels, said Dilip Soman, a professor of marketing at the University of Toronto’s Rotman School of Management and an expert in communications strategy.
“That’s where it’s kind of tempting for companies to not be completely open,” said Soman, who specialises in behavioural economics.
It’s now up to VW’s Pötsch to figure out how the company will pay for an 11-million car recall, up to $18 billion in fines from the U.S. alone and any further fallout as the crisis deepens amid revelations it misrepresented the performance of its vehicles.
“In the good old days, the CFO was more of a tracking function,” said Soman. “But now it’s about being accountable, being responsible for errors. The buck really stops with the CFO.”
The responsibility of picking up the pieces after a company meltdown has shifted to CFOs largely because the position is inward-facing, he said — and it’s the internal processes of accountability and rectifying errors that the public focuses its attention on in the aftermath of a crisis.
Company alignment
On top of regulatory and financial reporting duties, CFOs also have to make sure companies follow their own rules, said Bruce Waterman, a former CFO, who is currently a board director with natural gas company Encana, a member of Financial Executives International Canada and on the selection committee for Canada’s CFO of the Year.
Waterman said alignment on a company’s mandate, mission and values could have helped VW’s corporate chaos by giving people a framework to make decisions.
“It’s an incredibly powerful situation to be in when everyone’s aligned,” he said. “You can walk down the halls of an organization and you can feel it.”
“It’s an incredibly powerful situation to be in when everyone’s aligned. You can walk down the halls of an organization and you can feel it.”
Alignment allows an organization to move quickly and cohesively when faced with a crisis, Waterman said, pointing to how quickly Johnson & Johnson recovered in 1982 when seven people died from taking Tylenol laced with cyanide. The company issued a then unheard of recall and brought in tamper-proof packaging, for which it was heralded a “hero” in the New York Times.
Alignment also helped Maple Leaf Foods bounce back after the 2008 listeria outbreak, he said. Although 22 people died and several dozen others fell sick, CEO Michael McCain’s apology and the widespread recall made the company shining example of how manage a crisis.
The art of the apology
The day before VW’s Winterkorn stepped down on Sept. 23, Michael Horn, the CEO of the automaker’s U.S. group, spoke at a Volkswagen Passat launch event in New York and said: “Our company was dishonest… we’ve totally screwed up.”
U of T’s Soman said the full apology is one of three possibilities, the others being a hindsight-is-20/20 type of reaction, or the complete denial. Knowing which one to use depends on how extensive the damage is and how vivid the outcome is for people.
For example, the Volkswagen scandal is worse on a global scale, but the Maple Leaf listeria affair hit home harder, he said, noting that’s called the vividness trap.
“Any outcomes that are vivid have way more impact than pallid ones. If I physically fall sick, that’s a very literal, visceral reaction to what you’ve done.”
Once a company has acknowledged a problem it should be transparent and take action, Soman advised.
He pointed to Jeff Jarvis vs. Dell, the 2005 case in which a citizen journalist complained in a blog about poor customer service after buying a lemon of a computer.
“After the whole thing, Dell went back and completely retooled the way they listened to their customers,” Soman said.
Rebuilding trust
Kemal Büyükkurt, a marketing professor at Concordia University’s John Molson School of Business, agreed that taking action is an important step and pointed to the Tylenol scare.
“All Tylenols were withdrawn from the shelves of drugstores [almost immediately] and the company showed that it was acting with goodwill, caring for the consumers in a responsible manner,” he said, noting that didn’t happen with VW.
Winterkorn apologized in a video statement on the automaker’s YouTube channel on Sept. 22, and said: “That is why we are asking for trust as we move forward: We will get to the bottom of this… I give you my word: we will do all of this with the greatest possible openness and transparency.”
But it might not be easy for the company to regain consumers’ trust, Büyükkurt said, adding the public believed VW’s claims its cars met emissions standards for years before the scandal hit.
That failure to act quickly could be perceived as a lack of caring — something consumers will likely remember the next time they shop around for cars.
“Brand identity cannot be cultivated or rebuilt after the breach of trust,” Büyükkurt said. “In some cases, if trust is broken, it may not be possible to fix it.”
But when crises hit companies a clear, quick response can be critical to survival.
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