We have written before in this blog about Europe’s fundamental problem of not being able to adequately enforce its laws. “Europe’s the sick man” said Jamie Dimon of JP Morgan when talking about European enforcement. We are good at producing complex laws that look very nice on paper, but we fail to ensure adequate enforcement.
Could the financial crisis have been avoided if we had more stringent laws regulating the financial sector? Probably not. More stringent capital adequacy ratios could have helped, but more regulation would not necessarily have led to more risk awareness or ethical behavior on the part of market players. We had the necessary laws in place, but regulators did not do enough to enforce them.
Our regulators were far too close to market participants, had become complacent about fundamental risks and had neglected critical market signals
More or less the same can be said about the Volkswagen emissions scandal.
By 2015 Europe’s regulations with regard to emissions caused by diesel engines had caught up with America’s, but authorities failed to install effective monitoring programs. Much like their colleagues at financial market watchdogs, environmental authorities ignored critical messages voiced by activists and experts.
Who are the victims
Among the possible victims of the Volkswagen scandal are states (for the environmental damage caused and missed taxes), consumers, but also investors who bought shares of Volkswagen at inflated prices before the scandal broke. The first consumer and investor claims have already been launched.
Politicians and business leaders say they do not want a “U.S. style litigation culture” in Europe. But when regulators fail, the only remedy left for victims is to go to court. Stakeholders will step in to fill the void left by authorities.
Lesson to be draw
One lesson we could draw from the financial crisis is not to spare the responsible individuals. Yes, like many banks in the aftermath of the financial crisis, Volkswagen will be fined and its current shareholders will bear most of the cost.
However, when managers are left of the hook, the next scandal in the automotive industry may already be looming
Accountability is a cornerstone of good governance. When it cannot be achieved through laws, codes and regulatory action, it will need to be enforced through court action. Bob Monks, a famous U.S. corporate governance guru, once called it “governance by gunpoint”. Not only authorities, but all stakeholders (in the first place shareholders) have a role to play in this.
