New Volkswagen CEO's past may haunt him

Volkswagen (VLKAY) could rue the day it picked an insider to lead the company in the wake of the emissions-cheating scandal that threatens to cripple Germany's largest corporation.

It would seem to be a "systemic issue with the management at Volkswagen for something to go on for so long," said Karl Stephan, a professor at the Ingram School of Engineering at Texas State University who writes a blog about ethical issues in engineering.

This week, the company disclosed it understated the amount of carbon-dioxide emissions from vehicles including gasoline-powered cars in providing information to regulators. At the same time, Volkswagen denied emissions-cheating allegations involving Porsche, the elite brand that up until recently was run by Matthias Müller, its current CEO.

"It's more than obvious that 'cultural change' is overdue at VW," Arndt Ellinghorst, head of global automotive research at Evercore ISI, wrote in a research note. "The new CO2 issues are completely different to the hitherto existing diesel manipulations. VW's latest confessions imply falsely declared CO2 emissions. In colloquial language lying to the consumer, registration bodies, etc."

The developments furthered speculation concerning what Müller might have known about engines at Porsche, where he was president and CEO for five years before stepping into the top spot at Volkswagen after Martin Winterkorn's abrupt resignation in late September. At VW since 1977, Müller studied machine-tool making and later information technology, and worked mostly in the company's Audi unit.

"It's really difficult to say whose heads and how many wind up rolling, but there will be more," Richard Hilgert, senior equity analyst at Morningstar, said. "If there is any implication that he (Müller) did have knowledge, then of course his position would be suspect. My thinking is that he probably wasn't aware, and Winterkorn wasn't aware, but look what happened to him."

On Monday, regulators said Volkswagen had resorted to the same tactic with six-cylinder diesel engines as it admitted using in about 11 million four-cylinder diesels worldwide -- software intentionally designed to cheat pollution controls. This go-round, however, VW denied the first such allegations by the U.S. Environmental Protection Agency and California regulators involving Porsche. But its U.S. business said it would stop selling its Cayenne diesel in the U.S. in light of "the unexpected U.S. EPA notice."

The so-called defeat device used to cheat emissions tests "affects the whole engine, pollution control and the mileage, so a lot of people have something to do with that," Texas State's Stephan said. "It is unlikely in my opinion that one guy or two guys could have done something that would have affected so many aspects of the system."

Yotam Lurie, a senior lecturer of business ethics at Israel's Ben-Gurion University of the Negev, said it'll be up to a criminal court to determine whether Müller was aware, but ethically speaking, he's culpable.

"If management did not instill a corporate culture that is absolutely nonforgiving to such shortcuts and deceptions, then he bears full responsibility," said Lurie. "Software development in the auto industry has to rise to a higher standard and cannot be an internal company matter."

Morningstar's Hilgert likens the Volkswagen debacle to last year's faulty ignition switch recall and scandal at General Motors (GM). "In both cases, it seems as though corporate policies and management's driving of the engineering group was really to blame for the actions of these individuals. They couldn't come up with the solution that management wanted, and management would not take no for an answer."

GM CEO Mary Barra handled the scandal about as well as it could be handled, in Stephan's view. "A lot of particulars were accessible right away -- they were letting their dirty laundry out for everyone to see. Volkswagen seems to be more in the circling-the-wagons mode."

Stanley Young, communications director at the California Air Resources Board (CARB), said regulators would be meeting in coming days with Volkswagen about the latest allegations involving about 10,000 six-cylinder diesel Audi and Porsche vehicles sold nationwide.

Separately, Volkswagen faces a Nov. 20 deadline to submit its plan to resolve issues with U.S. cars.

Regulators will be examining how the company's proposed repairs affect how the cars drive, "gas consumption and emissions," Young said. "We need to be certain that this is a fix that works."

The ultimate resolution will involve a trade- off that's likely to leave owners of the vehicles unhappy, predicted Stephan. "There are physical limits to what engines can do. You can't do both: It can pollute less, or it can save you fuel economy."

Getting that right is just one of the many things sure to keep bedeviling CEO Müller -- at least for as long as he remains CEO.