Ask not why VW failed to measure upto, Ask why am I grappled with How To Measure? Resolve with one & the Only Corporate Management Operating System

Ask not why VW failed to measure upto, Ask why am I grappled with How ToMeasure? Resolve with one & the Only Corporate Management Operating System

Picture Courtesyi

I offer a measuring device for Management Operating System, hitherto not available elsewhere. Please do read the Volkswagen Fiasco that highlights what happens by not following the dictum What is Measured Gets Managed, identifying where the fault lines exist. Ask whether there are areas within your own structure, as the analysis pinpoints just as 378 global companies are grappled with, begging how to measure.

Have your say, of a Management Operating System.

Volkswagen

The tussle between Profit Motive and Ethical Motive is going on since 1976 when Lockheed shook the corporate world with a cosy financial scandal. Profit motive spurs corporate development andgrowth whereas lack of ethical motive disturbs social order. To many a corporate, ethical motive is just a name without a content. Business Ethics, Corporate Governance, Corporate Social Responsibility, Labour Rights, Human Rights, Environmental Rights, Anti-corruption are all a hindrance in their technological advancement, enhancing profits for self in order towards a selfless charity for the Public. Ethical Motive is the fundamental basis of creating a joint-stock company corporate insists and what and how the profits are created by any means is not the look-out for others, who are not matured to fathom the intricacies of freedom of enterprise, economic prosperity, innovation, technical and intellectual advancement.

Lockheed was the first major financial scandal that rocked the corporate world in 1976, when then Secretary of State Henry Kissinger said: "The implications for the stability of other countries could be extremely serious." Lockheed Aircraft Corp. admitted a payoff of US$22-$24 million during a Senate subcommittee meeting. Men in high places Prime Minister Tanaka of Japan, Prince Bernhard of Belgium, Columbian and Italian top brass were some of the major beneficiaries. Ashland Oil Inc. argued that securities laws do not require public disclosure of the recipients of questionable payments that the company says it has made in Nigeria, Gabon, Libya and the Dominican Republic. Lockheed went further. It stated that identifying its beneficiaries could hurt its $1.6 billion backlog of unfilled foreign orders, presumably by causing embarrassed foreign Governments to cancel contracts, and also damage prospects for future sales. Nor would Lockheed promise to make no more political payments. Such payments, it said, are a normal and necessary feature

IBCM© Research 2015 Volkswagen 2 of 13

of doing business in certain parts of the world, are essential to sales and "are consistent with practices engaged in by numerous other companies abroad."

2015? Rafale aircraft from France and Augusta Westland helicopter bribery scandals continue. Between politicians and Corporate Profit Motive is aligned to Ethical Motive, in a manner general public is yet to become matured to understand. It is a complicated business of financing, setting up industry, provide employment that Ireland found to its chagrin inviting DeLorean for a futuristic Automobile.

Jargons are floated around relentlessly. Billions of dollars spent on seminars for Corporate to understand what Ethical Motive is all about and how it could benefit the Public. Jargons became a symbol of Corporate class and style in management, an assurance it is different to be a leader in Corporate Governance. Independent organisations presented prestigious awards year-in and year-out. Volkswagen got the Best Corporate Governance for Automative for the year 2014 in Europe as adjudged by Ethical Boardroom, reminiscent to AAA ratings S&P, Moodys, Fitch handed over to companies like Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers before they collapsed, making billions for themselves. Collectively they all stoked the passions of greed, a slow and sure decay of morality and social order culminating in high unemployment and Occupy Wall Street movements.

In this context after the Volkswagen fiasco one has to look at when Hermes EOS, the stewardship division of Hermes Investment Management, calling for an overhaul of the management and corporate governance culture at Volkswagen.

What do you mean and to whom?

Knee-jerk reactions bring no real meaning and purpose to good intentions. FCPA was one and Sarbanes Oxley, UNCAC another are good examples of enacted laws put to act but turned out to be broken promises and wasteful expenditure.

Joseph Murphy observed in an OECD Review of antibribery instruments that Governance is not compliance and ethics, and disputes OECD's conclusion that large multinational companies generally have adequate internal compliance controls. He continues in the same breath: One need only look at the record at Siemens (whose code of conduct was described as the ―read, laughed and


filed code), or the long, legalistic (and ineffective) code that existed at Enron to see the great danger in such sweeping conclusions.ii

Volkswagen fiasco:

The Economistiii wonders whether the systematic fraud by the world’s biggest carmaker threatens to engulf the entire industry and possibly reshape it. Volkswagen struggle was to dominate the industry globally with technical superiority and at the same time promoting Diesel as clean and green to US, the major market. The crux of promoting Diesel lies in better fuel efficiency, reduced costs and lesser carbon-dioxide emissions. As Merck found out with Viox an anti-inflammatory drug that had to be withdrawn from the market Volkswagen found to its annoyance its Diesel cars had the side effect of turning more of various oxides of nitrogen, known as NOx, in the air. Although NOx is not so obnoxious as carbon-dioxide emission it has far worse local effects, generating smogs and damaging plants and lungs, as The Economist points out.

Just like drug companies investing in R&D, it is a long-drawn out tug-of-war between product acceptance and product liability, a costly affair for automative industry very difficult to switch gear once the throttle is accelerated. It is a constant struggle between Corporate and pressure group to highlight the ill-effect of chemicals such as carcinogen found in Pepsi and Coca-Cola. Companies go back to the lab and reformulate its sodas. As Harold James puts itiv, for every regulation, there is a proportionate proliferation of innovations to circumvent it. What Volkswagen had resorted to was to circumvent the data emission test results with a 'cheating device' software that turned off exhaust-gas recirculation when regulators were not looking.

What is difficult to arrive at the pros and cons of material events that determine cause and effect of corporate decisions? Let us put it this way what Volkswagen had resorted to, if not stopped in time, would directly increase the health hazards of people in metro cities. However, it is also an opportunity for drug companies enhancing their drugs usage in a large scale, some of them priced indeed very high, like anti-cancer applications. Pharma industry profits are bound to shoot up. While regulatory authorities try reduce NOx emissions pharma looks at it as a good opportunity, possibly lobbying to prevent steps being considered in London and Paris to ban diesel cars altogether.

Will the Houdini act continue?


Corporate tries to rule its conduct by means internal to itself, by technique not self-control. Profits not morality dominate corporate objectives and power to operate them. Technique changes from one individual to another but modern corporate managers are driven by passion set by their leader. Technique fails in several cases resulting in untoward corporate disasters. Lessons are left for case-studies and 'read, laughed and filed code' syndrome continues.

What Gets Measured Gets Managed

In a survey of 378 global companiesv on Corporate Sustainability - A Progress Report by KPMG International in cooperation with Economist Intelligence Unit on Corporate Sustainability - KPMG – EIU a Progress report12 – there is a stunning statement – Many firms are grappling with the problem of deciding exactly what and how to measure - page 16; Deciding how to measure is more difficult than deciding what to measure. page 29- (EIU report findings):vi The important point the report emphasises is 'what gets measured gets managed'.

Nothing wrong in Volkswagen in promoting diesel cars world over. It is a business risk that could turn out to be a stroke of a genius as well as it could be a disaster. That's part of business where short-term and long-term investment plans are discussed, debated and strategy evolves to go ahead.

Volkswagen failed in deploying a 'cheat device' that post-facto triggers a nuremberg syndrome, necessitating the CEO throwing in the towel. But the culture remains, 'read, laughed and filed code' syndrome, that never gets measured, would continue.

How to measure 'read, laughed and filed code' syndrome?

Deciding how to measure is more difficult than deciding what to measure.


The fault lines - Volkswagen:

Spreadsheet Corporate Structure

Corporate Structure is based on what is convenient and measurable. The need arose when a business starts that would suffice a petty clerk keeping a single-entry book-keeping. Then transactions multiplied that necessitated a double-entry book-keeping. Then business grew to accommodate several departments and branch accounting. Keeping tack of transactions several columns arose ensuring a trial balance is created for every debit and credit.

Corporate structure grew in the same manner. Then it stopped. Non-financial material events were not part of a measuring device and there was never a need that existed. Material events were noted but never was measured. Several committees were formed mandatory or ad hoc but was not measured.

Corporate structure stops with that, merely a spreadsheet corporate structure.

KPMG-EIU survey mentions about - what gets measured gets managed - Many companies are finding that their largest challenges stem from a lack of credible information, metrics and standards related to sustainability. This hampers progress in several ways.

The spreadsheet structure is limited to transactions and crucial material events do not get measured. Volkswagen needs to establish a corporate structure encompassing wide area of policy making to practices to covering mandatory regulatory requirements to non-mandatory initiatives. Balance Sheet is just one of those instruments like stock accounting and this cannot be the basis for a corporate structure. Volkswagen should consider establishing an effective corporate structure as proposed herein lest 'read, laughed and filed code' syndrome is back.

Secondly, current corporate structure is entirely Object oriented. Volkswagen structure is not designed to deliver and measure what the Subject does or doesn't do. Risk appetite is high with a 'cheat device' trickery encouraged by the top echelon of the company, risk culture is absent that operation force complies to the pressure meekly.

The Subject therefore has to be the denominator in the corporate structure.


Upgrade Corporate Structure

Whereas Fiscal Responsibility is left at the hands of a Balance Sheet for a company being measured, Ethical Responsibility has no platform for measurement. In Volkswagen a few losing the jobs, promised change of corporate culture, ready to pay compensation and enormous fines act as an incentive to get their Corporate Governance, Risk Management, Earnings, Accounting Quality and Management Quality [CREAM] in place. Volkswagen Corporate Structure is to be fashioned reflecting CREAM requirements at its best. Volkswagen must have realised the futility of receiving the Best Corporate Governance award in 2014.

In CREAM barring E Earnings for which a spreadsheet structure is readily available, the rest needs a platform for measuring how Volkswagen is doing.

Whereas Corporate Governance and Risk Management are part of operational excellence in Practices, Accounting Quality and Management Quality relate to Qualitative aspects of management that rests with Policies. There is a distinct area of expertise and management oversee.

The third factor and the most crucial aspect of management is the silent influence public enforces issues to be taken cognisance of by the company, Volkswagen. The 'cheat device' would not have come to light but for the regulatory initiatives that have come by, to be taken note of.

The three factors, Policies, Practices and the Public make up the essence of management that the Corporate Structure should have. These three factors should be measurable.

Taking the cue from the dictum set by Galileo Galilei: “Measure what is measurable, and make measurable what is not so.”, Volkswagen should make feasible to create a structure enabling the three P factors.


Corporate Atomic Structure

Hence a robust platform is a must. Learning from Nature we have atomic structure well defined made up of Protons, Electrons and Neutrons, whereas Corporate Atomic Structure is created in the same pattern of Policies, Practices and the Public respectively. Every corporate process block consists of three elementary particles - Policies, which has a positive charge; Practices which has a negative charge and the Public which has no charge.

Policies and the Public are packed into the nucleus, in the same pattern as Protons and Neutrons, whereas Practices spin around outside the nucleus. The nucleus is by far the most significant factor in corporate management. the Public like neutron does not influence the identity of the company but adds mass to it. Regulatory framework, mandatory policies, human rights, labor rights, environmental rights, anti-corruption have let the company move on with a freedom of enterprise but add mass to the Company by compliance interventions. A CREAM report for each process block ensures the corporate atomic nucleus is well respected by the Executive wing of the corporate structure, manning Practices.

Each process block consists of the three Ps of Corporate Structure - Policies, Practices and the Public. what gets measured gets managed, says KPMG-EIU Progress report, so Volkswagen shall institute measuring of its corporate structure.

How to measure?

Kant raises the question whether a science of metaphysics with a logical structure like that of the well-established mathematical and natural sciences is possible.

Deciding how to measure is more difficult than deciding what to measure as KPMG-EIU Progress Report reveals.

As much as the Public has no influence over the corporate identity, corporate has no influence in the Public's initiatives ending up as mandatory regulations. It is not easy for the Public however as it takes years to get the governments listen to their pleas whereas Corporate lobby has a permanent presence to thwart any attempts by the Public to disrupt normal flow of operations. Public therefore has a say, being part of the nucleus with the Policies, and to that


extent their representation within the Corporate Atomic Structure must be taken note of. Volkswagen should have known the impact 'cheat device' would trigger from the public outcry. That leaves only two in the Corporate Atomic Structure for direct oversee - Policies and Practices.

Policies are the end product of a creative process and Practices the starting point of the action process unique to its set policy.

Hence entire gamut of Corporate Structure is either part of a Creative process or Action Process. There are only these two processes for any corporate. The end product of the creative process is a tangible substance, be it an IPR, Policy Statement, or a strategy paper - man-made or Natural substance. The creative process is identical to all. It starts with 1. nothing and has linear expansion step by step - 2. conceptualisation, 3. communication, 4. formation, 5. formulation and then declared as 6. a substance. The six stages are inevitable for Natural or man-made substances. When Volkswagen decides to overcome the negative impact of 'cheat software' the strategy paper that finally emerges would have gone through the six stages of creative process. These steps are same for all including R&D or IPRs. The six stages being known, the status of any of the prospective substance can be located, identified and measured - within one of the six stages - 0 to 5.

Once the substance is ready it goes through to the next stage of Action Process. When Volkswagen is ready with a strategy paper to counter the ill effects of the scandal, the Action Process takes over. Again the number of stages remain the same - 0, starting from 0 which is at the stage of insentience. For example, UNCAC once ratified but not implemented by member countries it is said to be in a limbo - state of insentience attracting a value of 0. No action taken on an existing policy or in other words, in 'read, laughed and filed code' syndrome. Action process is unique to the Quality of the substance it represents.

Action Process is a series of task accomplishments in infinite succession of finite purposes unique to the Quality of the Substance it acts upon. dT/dT - series of Tasks accomplished in respective Time gets measured accordingly. If Volkswagen decides to replace the 'cheat software' for 11 million diesel vehicles, can set the daily target and scale it in six performance tasks of 0 to 100%. The rating would be when more than 100% a rating of 5 while below 0% a rating of 0. This would be the same for all tasks including sales targets.

What it means, Creative Process and Action Process flow smoothly with a measured performance. Project or Strategy Management is at peak when


dT/dT is optimised at 5. The entire process blocks are rated to a single rating between 0 - 5, daily. In the morning starting time it could be 2 and at the end of the day it could be 3 or 4 depending on the daily task targets and accomplishments.

Return on Intangible be the yardstick of Corporate Performance

Return on Intangible defined:

1. Intangible is an effort, 2. Initiated for a specific task, creative as well as action, 3. Having an identifiable goal, 4. Enabled by the factors for the task accomplishment, and 5. Measured by defined performance criteria.

• The cause is self for every individual whatever the effort one puts in or does not put in, with the denominator being Intangible with a unitary value of 1 and the numerator Action or Inaction with a unitary value of 1 or 0 respectively. The return on Intangible therefore is a binary value of 1 or 0.

• Each task owned by a team of 5 members, one representing Ethical Responsibility and the 4 from Fiscal Responsibility represented by 1. Managerial, 2. Operational, 3. Technology and 4. Finance ensure the tasks assigned are accomplished. Though yoked together each has independent responsibility resulting in a rating for the task on the weakest link.

• Each process block is measured and number of blocks can be combined to arrive at a single rating for the corporate as a whole.

• Volkswagen should adopt Return on Intangible for a rapid recovery from the current status. The number of process blocks could be many and each with a sub-system of blocks the total number of blocks could run into thousands. Each is identified and noted for both the processes. Wherever policies are in short-supply they are to be created. Collectively get the current rating and move forward to an optimised level of 5.

• If current rating is 1 and targeted is 5, the Return on Intangible throws out the area of Inactivity.


Index of Inactivity

• Create an Index of Inactivity for each block by each team member. If the current rating is 1 for a block the index of Inactivity is 4/5 i.e., 80% broken down to each member. Even if one out of 5 has reached the level of 5 and the rest have not, then management oversee shall pull the ones in a state of insentience to reach the optimised level. Without each one in the team accomplishes the given task the block would be in a limbo. Accountability by each is tracked.

Conclusion

1. Perfection

• There is perfection in the Universe: For the universe to exist as it does requires that hydrogen be converted to helium in a precise but comparatively stately manner - specifically, in a way that converts seven one-thousandths of its mass to energy. Cosmologists in their lighter moments sometimes call this the 'Goldilocks effect' - that everything is just right. Lower that value very slightly - from 0.007 per cent to 0.006 per cent, say - and no transformation can take place: the universe would consist of hydrogen and nothing else. Raise the value very slightly - to 0.008 per cent – and bonding would be so wildly prolific that the hydrogen would long since have been exhausted. In either case, with the slightest tweaking of the numbers the universe as we know and need it would not be here. [Martin Rees]

◦ There is a perfection in the Universe and we are in it, why not follow what Nature does?

◦ Volkswagen should engage seriously in establishing a Corporate Atomic Structure, for Stock Accounting and Financial Accounting do not and will not make up for an Organisation Structure.

◦ Note, HP writing off $8.8 billion on acquisition of Autonomy is not cheating, but pure ignorance of measuring another company, of Ethical Responsibility.

2. Public Reporting

• UNCAC is a Quality document and Article 10 Public Reporting shall be adopted by Volkswagen. The effort put in shall be publicised indicating the current status of Rating of CREAM Report as per Return on Intangible followed by a daily rating


update. Governance is a dynamic function and Return on Intangible is the tracking device of dynamic governance. Index of Inactivity will make every individual within the company alert.

◦ Siemens 'read, laughed and filed code' should have been tracked by Article 10 UNCAC as to how the corrective action was carried out by the company and what is the position as on today. This is the singular disadvantage of post-scandals scenario where the perpetrating company goes scot-free, without recourse to know what happens after the deluge.

◦ Hermes call for Volkswagen management and corporate governance culture overhaul should focus on establishing an effective corporate atomic structure, lest Volkswagen becomes another Siemens. The nucleus of the suggested corporate atomic structure enhances the value system of Volkswagen. Hermes could also take up with Ethical Boardroom how they measure Corporate Governance.

3. Management by Creative Process and Action Process is a simple but Natural process with the Subject-Object distinction of Qualitative and Quantitative elements of management put in its proper perspective.

• What is truly amazing is the chasing of data as outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities that leads to nothing, none wiser, when Subject is not brought as the denominator.

4. Correcting the fault lines apparent in Volkswagen needs fundamental change of corporate restructuring. It is true for almost all companies.

• Ethics is subtler than the subtle that aligning Fiscal Responsibility to Ethical Responsibility is a challenge only a few companies are structured to undertake. Spreadsheet structure is an anomaly.

• Let us watch how Volkswagen takes it?

Jayaraman Rajah IyerKodaikanal, [email protected] October 2015


i "Wolfsburg VWHochhaus und Kraftwerk" by Vanellus Foto - Own work. Licensed under CC BY-SA 3.0 via Commons - https://commons.wikimedia.org/wiki/File:Wolfsburg_VWHochhaus_und_Kraftwerk.JPG#/media/File:Wolfsburg_V WHochhaus_und_Kraftwerk.JPGii Mr. Joseph E. Murphy (Corporate Compliance and Ethics Professional): Review of the OECD antibribery instruments: compilation of responses to consultation paper: 31 March, 2008.iii http://www.economist.com/news/briefing/21667918-systematic-fraud-worlds-biggest-carmaker-threatens-engulf-

entire-industry-andiv http://www.project-syndicate.org/commentary/volkswagen-emissions-regulatory-scandals-by-harold-james-2015-

09v A global survey of 378 senior executives, encompassing a range of industries, and evenly split among North

America (US and Canada), Asia Pacific and Europe, with a smaller representation from the Middle East, Africa, and Latin America. Organizations of all sizes were represented:

vi EIU report_v2_A4_Apr14. dated 15th April 2011, KPMG International in cooperation with EIU on Corporate Sustainability - A Progress Report - (page29)

Leadership & Management

Ask not why VW failed to measure upto, Ask why am I grappled with How To Measure? Resolve with one & the Only Corporate Management Operating System