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Volkswagen is close to finalizing a settlement with the U.S. Government over its practice of installing technology in its diesel cars to cheat on emissions testing. The technology allowed diesel Volkswagen cars to detect an emissions test and calibrate the engine for low emissions during the test, while delivering higher performance and higher emissions (higher than those allowed in the U.S.) when not being tested. The settlement to VW owners may be as much as $5,000 and the cost to VW itself as much at 25 billion euros.

The investigators at VW have been stymied by the use of internal code words to refer to the emissions test defeating technology and because the effort dates back at least to the late '90s such that much of the evidence is locked in outdated computer systems. But if the internal investigation does not clear up the issue, U.S. and European investigators and courts may weigh in with more vigor.

All of this points to the need for Volkswagen's board, and all boards, to have a rigorous and thorough investigative ability. Clearly, Volkswagen's board knew, or should have known, that Volkswagen's diesel cars were being sold in the U.S. and elsewhere without the costly emissions cleaning technology used by Mercedes and others. Volkswagen claimed to have developed a low cost version, which actually turned out not to exist, and the results were due to the cheating emissions control software. The kind of technical low cost advantage is typically fleeting in the auto industry where the underlying technologies, like diesel engines, have been well understood for more than a century and where the entire industry is focused on squeezing cost out of the supply chain.

Given that Mercedes and others were never able to deliver similar technology to VW's, VW's board should have at the very least been asking questions about the source of that unusual competitive advantage if only to try and replicate that "success". And had VW's board been able to investigate and understand the nature of the fraud, the company would likely not be facing settlements in the range of 25 billion euros today.

This kind of vigilance is not an easy task, but it is the task that boards have to master in order to be effective stewards of their organizations. To master it, boards need to have a strong sense of independence, experienced members, and an ability to get good, privileged, legal advice. That last requirement also means that boards need an effective board portal, like iBoardrooms, to ensure that their communication stays confidential, and privileged communication stays privileged.

Apr 21, 2016 5:06 am EDT