Not long ago I was driving with a friend through the English countryside. The car had power to speed along the roads, and was plenty nimble to take corners well. Then I asked my friend: “Does it bother you that your car is a Volkswagen with a diesel engine?”

I was expecting remorse, if not anger, at being duped by VW. Instead the response was: “Other automobile manufacturers have caused problems, including General Motors and Toyota, and their transgressions caused loss of life.” Other VW owners have said they don’t want emissions systems fixed if it will affect performance.

In the United States at least, that idea that excess emissions hasn’t cost lives is being challenged. Illegal emissions have been linked to respiratory and cardiovascular illnesses and premature deaths for those with asthma and chronic obstructive pulmonary disease. One report, using Environmental Protection Agency estimates, says the U.S. death toll from air pollutants could approach the 124 deaths (although it’s not entirely clear whether they’re referring only to VW’s illegal emissions). The point is that illegal emissions can be related to lost lives.

Regardless of reactions of VW drivers, the worldwide fallout of the cheating has been significant: About 40 percent of Volkswagen’s share value evaporated (with a partial rebound); penalties could reach $18 billion, with individual and class-action lawsuits raising the stakes much higher; CEO Martin Winterkorn resigned; a “substantial number of high-ranking managers” were suspended; investment in new vehicle development is being cut; and the company’s reputation is badly tarnished. In Germany, 8.5 million vehicles are being recalled, with more coming around the world; police have raided company offices; subpoenas served; investigations are under way on multiple continents; and tensions have formed in the normally close relationship between union and management.

And with VW touting the “greenness” of its diesel engines, we now see accusations that VW engaged in “outright lying [that is] likely to live on in infamy as the latest and perhaps most egregious example of ‘greenwashing’ ” ever. New CEO Matthias Müller says he is putting all planned investments under review, and “what isn’t essential will be scrapped or postponed”—and reportedly is worried about the company’s ongoing ability to compete globally.

How Could All This Have Happened?

Until we have reports from investigative bodies—including those from regulators and VW’s U.S.-based outside law firm—we won’t have a clear picture of what happened. But even at this early stage, using fragments of media reports, we can get a sense of what’s behind this scandal.

Communication flows that are normal within companies are seriously lacking at VW. Top management is said to have “hoarded power while discouraging discussion of problems.” So while directives flow downstream, apparently managers withheld key information that should have gone upwards, including to the board of directors.

‘Fool the regulator’ game. We know that cheating in the industry has been going on for decades. Ford, Honda, Volvo, and Renault all were fined for using devices to hide emissions problems. GM was fined and recalled nearly 500,000 cars with a chip that shut off emissions control systems when the air conditioning system was used. Truck engine manufacturers agreed to a nearly $1 billion settlement for optimizing diesel engine performance during lab testing. Volkswagen itself has been tricking regulators going back to 1973, when it was fined for installing a “defeat device” to cheat on emissions testing.

Why such disregard for emissions regulations? One German professor says, “There’s an attitude among the German public that it’s very unfair for the United States to target the auto industry over emissions.” A former VW executive says the company’s engineer-driven culture holds that politicians are hypocrites, especially in the United States where they’re pushing electric cars while power plants burn fossil fuels. “There’s an attitude of moral superiority [where] the engineers think they know best,” that person said. And VW engineers believe the stricter U.S. standards not only are unfair, but used to “keep diesel out.”

Regulators’ lack of initiative. U.S. auto manufacturers are allowed to test their own cars, although the EPA does random checking. With the VW emissions problems uncovered not by the EPA but by a small university lab, one wonders just how effective the testing system really is. And it appears the European testing regimen falls considerably shorter. In the European Union automakers are allowed to have cars tested in any member state, and hire private companies to do the testing. One firm markets itself as being able to provide “optimization of engine behavior to fulfill emissions and [fuel economy] targets.” While member states have regulatory jurisdiction, there’s little enforcement. One expert says, “Testing companies assist with the distortion of laboratory test results to produce artificially low results.”

Management’s goal of being No. 1. A few years ago Winterkorn gave VW a bold goal: to overtake Toyota and become the world’s largest auto manufacturer. His plan did not involve developing efficient hybrid-electric cars, but rather pushing forward with diesel, promising high mileage and performance with low emissions. VW decided not to embrace emissions control technology used by other manufacturers, but to develop its own new technology. According to individuals close to VW’s internal investigation, when it became clear in 2008 that the costly new engine couldn’t meet pollution control and performance standards, VW decided to cheat.

VW’s goal of being the biggest wasn’t set in terms of quality or customer satisfaction, but rather revenue. Winterkorn reportedly created a high-pressure culture where beating Toyota was more important than complying with the law, had a reputation of dealing harshly with subordinates failing to meet their targets.

VW is reported to have a tight management structure with centralized authority. A colleague of mine, an automotive industry consultant now turned business professor, spent time with Winterkorn and describes him as “very detail-oriented, exhibiting command and control leadership and derisive of alternative points of view.” So could a few engineers really have launched this scheme, without awareness or even approval from above? At a recent U.S. congressional hearing, even VW’s chief in the United States, Michael Horn, called that scenario “very hard to believe.”

The manager suspensions may be telling. They include the heads of development of all VW group brands, the VW brand, and engines and transmissions for all VW brands, as well as head of a components factory who previously ran VW’s diesel-engine development. And the list grows; now that the top quality control executive who worked closely with Winterkorn is suspended. One observer says, “The notion that rogue employees slipped a major component of the engine’s software past all the company’s engineers … does sound like quite a stretch. Designing a new automobile is a multibillion-dollar endeavor, with constant testing to ensure it meets engineering and regulatory standards.”

Withholding critical information. Communication flows that are normal within companies are seriously lacking at VW. Top management is said to have “hoarded power while discouraging discussion of problems.” So while directives flow downstream, apparently managers withheld key information that should have gone upwards, including to the board of directors. At least three board members said they were not informed of the emissions scandal for two weeks after senior managers admitted the emissions cheating to American regulators, finally learning about it in the media!

Inattentive or uncaring board of directors. Yes, it’s difficult for a board to operate effectively when management withholds important information. Yet the problems with the board go deeper. The oversight provided by the supervisory board has come under scrutiny, with one observer saying the governance of Volkswagen “was a breeding ground for scandal … an accident waiting to happen.” Another compared VW’s governance to that of North Korea, saying its “autocratic leadership style has long been out-of-date … [and] a functioning corporate governance is missing.” Another said outside views rarely penetrate, with the board being an “echo chamber.”

Why?

We’ll know more as the investigations unfold, but at this point the answers seem rather straight forward. They begin with greed—the goal of being number one, at any cost. Add to that the centralized control and high-pressure management system, an attitude that the rules don’t matter, and a skewed supervisory board of directors, all overseen by a less than effective regulatory system. Together that forms a solid foundation for wrongdoing.

We know that when a chief executive says “make the numbers,” managers and staff too often interpret to mean it doesn’t matter how. If one has to cut corners, so be it. That slippery slope usually results in a crash as the bottom. VW and outside investigators are now sifting through the wreckage.

Changes are happening. New CEO Matthias Müller vows to decentralize decision making and give divisions more autonomy. No doubt more will come, in fallout from the crisis and VW’s addressing of it. Perhaps most telling will be the scandal’s effect on the car-buying public. If the result mirrors what occurred following the Toyota, Honda, and GM scandals, long-term car sales might not be greatly harmed. The public seems to have short memories, or focuses more on the quality and features of the products they see on showroom floors. VW faces huge costs associated with the scandal, but the long-term effect might relate more to whether the cuts to R&D will jeopardize its ability to produce desirable, leading-edge vehicles going forward.

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