The Volkswagen Scandal: Another Symptom of Executives With No Skin in the Game

In antiquity, leaders found themselves on the front lines of battles that they initiated -- not in an office thousands of miles away.

But today, it's a different story altogether. Winterkorn is getting -- at least -- a $32 million pension. But he's not alone:

  • Angelo Mozilo, former CEO of Countrywide Financial, was at the center of the subprime lending fiasco, but received $44 million after his outfit was bought out.
  • Hewlett-Packard floundered under Carly Fiorina's tenure, and had a largely unsuccessful merger with Compaq. But she left with a package of about $40 million in severance.
  • Citigroup 's former CEO, Charles Prince, resigned in 2007 as the mortgage crisis was just emerging. He left with compensation of nearly $100 million.
  • Joining Prince was Merrill Lynch's former CEO, Stanley O'Neal, who left the company at about the same time, and with the same toxic assets coming home to roost, with a $160 million golden parachute.

The names of the CEOs and companies may differ, but the lesson is the same: When not exposed to the downside, executives have little reason to avoid unnecessary risks if the payoff seems big enough.

Squashing the naysayers

Of course, many may come to Winterkorn's defense. He claims to have known nothing at all about the emissions scandal. No information has surfaced to dispute this claim. If he truly didn't know about these problems, how can we possibly hold him responsible?

For those unfamiliar, this was largely the argument that many of the executives at the center of the Great Recession used. The subprime mortgage business became so complex and convoluted that even they didn't truly understand the risks they were taking.

There's an easy rebuttal to these protestations: If executives had had significant downside risks, they would have never let it get that far.

If Winterkorn knew he'd lose everything -- and I mean all of the pension he'd accumulated -- and that he would be leaving under such a dark cloud, I highly doubt we'd find ourselves where we are. Had the subprime culprits known that they would lose everything, they would never have let everything get so convoluted.

As long as downside risks are borne by shareholders, employees, and the general public -- while executives are largely only exposed to upside -- we will continue to see "Black Swans" like the Volkswagen scandal pop up.

We can't say we weren't warned.

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