By Mengqi Sun and Jack Hagel 

Volkswagen AG is betting that a reformed compliance culture and an expanded whistleblower program that helped the German car maker clear a critical U.S. regulatory milestone this month will also help prevent another scandal and go a long way in restoring its reputation.

The car maker has spent the past few years trying to resolve issues related to its 2015 admission that it rigged about 11 million of its diesel vehicles world-wide with software to dodge government emissions tests, a revelation that came after U.S. regulators alleged that Volkswagen installed software to make cars appear to run cleaner.

The company says its yearslong, multipronged transformation and ongoing surveillance are essential to its survival. Getting that point across to employees is easier when you can put a price tag on noncompliance: EUR32 billion ($37.56 billion) in fines, penalties and compensation to customers, said Hiltrud D. Werner, the member of Volkswagen's board of management in charge of compliance, risk management and legal affairs.

"Then you can explain, 'Look, we don't want another scandal. We cannot survive another scandal,' " she said in an interview.

Some investors and analysts say they remain cautious about whether the kind of cultural transformation described by the company can be fully realized in a global enterprise with more than 600,000 people.

"You can't guarantee a change of culture," said Philippe Houchois, an analyst at Jefferies Financial Group Inc. "It's not up to the regulators to change the aspect of governance; it's up to shareholders to decide if they are happy with the governance or not."

For Volkswagen, it has been a long journey from when the emissions scandal first surfaced. At that time, it took the German car maker months to provide a clear explanation of how the cheating happened and identify those in the company responsible for it. It called on employees to come forward and volunteer information for its internal investigation.

A "culture of tolerance" for rule-breaking internally allowed the deception to continue for a decade, Hans Dieter Pötsch, chairman of the Supervisory Board of Volkswagen, said at the time.

Volkswagen settled with the U.S. Justice Department in 2017 in connection with the emissions-cheating scandal, pleading guilty to criminal charges and agreeing to pay billions of dollars in penalties. An independent corporate compliance monitor was appointed by U.S. authorities to oversee Volkswagen's compliance overhaul, according to the settlement agreement. The monitor, Larry D. Thompson, a lawyer at Finch McCranie LLP and a former U.S. deputy attorney general, certified earlier this month that Volkswagen has completed the three-year monitorship.

The company said that under the monitorship it improved its workplace culture, focused on improving its whistleblower program and set up a network of compliance officers within each business section.

"There was an area where we had a shared goal, which is to make Volkswagen a better company," said Scott Marrah, a partner at Kilpatrick Townsend & Stockton LLP who acted as the deputy monitor for antifraud, ethics and compliance in Volkswagen's monitorship. "We're focusing on long-term, sustainable change."

Volkswagen's chief executive, Herbert Diess, is expected to make mention of the end of the monitorship during the company's shareholder meeting Wednesday.

A spokesman for the U.S. Justice Department confirmed the completion of the monitorship but declined to comment further.

The company's revamped whistleblower program, designed for reporting serious violations of policies and law, was central to the compliance turnaround, executives said.

Volkswagen had a channel for reporting such violations before the emissions scandal. But the whistleblower program wasn't very employee-friendly, said Ms. Werner, the Volkswagen board member. It accommodated two main languages -- German and English -- and employees often had to wait 20 minutes to leave a tip. "People did not feel that such technical issues or violations of the regulatory framework was an issue that the whistleblower hotline would deal with," Ms. Werner said.

The company has made the hotline a 24-hour-a-day, seven-day-a-week operation that now accommodates 19 languages, enabling more than 90% of the company's 670,000 employees to report tips in their native language, Ms. Werner said.

Getting employees to trust the program, however -- particularly in Germany -- presented a cultural hurdle. There was skepticism of anonymous reporting, a possible holdover from when secret police operated in the country, said Kurt Michels, Volkswagen's chief compliance officer who joined the car maker in April 2017. In general, there can be unease with whistleblower systems, he said. "But with the German history, it's an even more sensitive topic," he said.

Volkswagen has sought to build employee trust by making the system more transparent, holding question-and-answer sessions and roadshow presentations, increasing training and improving access to information about the program on the company website. Volkswagen has sought to demystify its investigative process for employees and it has shared lessons from internal probes, executives said.

Already, the whistleblower program is seeing an increase in tips over the past few years, Mr. Michels said. About 80% of whistleblowers attached their names and contact information to tips in 2019, up from 15% in 2017, according to the company.

Investors and analysts are encouraged by the changes.

It is promising to see the steps Volkswagen has taken, said Richard Hilgert, a senior equity analyst for automotive at Morningstar Inc. But he still held some concerns: "It's extremely difficult for a massive empire like Volkswagen to ensure compliance from every person that works for the organization."

The conclusion of the monitorship isn't the end of the company's efforts to improve compliance, executives said.

Volkswagen still has open legal issues around the world related to the diesel scandal, including in the U.K. and Austria. And there are cases tied to individuals that are unresolved. The company's former CEO Martin Winterkorn was ordered this month in a German court to face trial on charges of defrauding customers.

Volkswagen is also turning its attention to ethical, legal and regulatory issues related to technologies such as autonomous vehicles and artificial intelligence. The company will continue to monitor and change its compliance programs based on evolving risks, Mr. Michels said.

"The compliance work in the company is never finished," he said.

Write to Mengqi Sun at mengqi.sun@wsj.com and Jack Hagel at jack.hagel@wsj.com

 

(END) Dow Jones Newswires

September 29, 2020 20:39 ET (00:39 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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