What Is a Balanced Scorecard?

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Dull but Important

What Is a Balanced Scorecard? That is not an exciting question. So let me try and give you a compelling answer.

A Small Problem With the Exhaust

In December 2017, Oliver Schmidt, a General Manager for Volkswagen, was sentenced to seven years in prison and fined $400,000. He had been on holiday and was flying back to his home in Germany when federal agents arrested him in the men’s room at Florida airport.

Schmidt had been the senior executive at Volkswagen’s engineering and environmental office in Michigan, where he was responsible for the VWs emissions programme. He was found guilty of concealing software in nearly 60,000 diesel vehicles sold in the United States.

Sean Cox, the Detroit judge who sentenced Schmidt, said:

“It is my opinion that you are a key conspirator in this scheme to defraud the United States … You saw this as your opportunity to shine … and climb the corporate ladder at VW.”

Schmidt was the most senior Volkswagen executive to be prosecuted for their role in the “Diesel Dupe” affair; his bosses had the sense not to travel to the U.S. for fear of being arrested. However, the scandal recked havoc in Volkswagen Audi’s corporate headquarters. Martin Winterkorn, the group’s chief executive at the time, resigned after admitting that Volkswagen had:

“Broken the trust of our customers and the public.”

Why all the Anguish?

The cause of all the angst and drama was a decision by Volkswagen to develop a software solution that helped them meet stringent nitrous oxide (or NOx) emissions levels that the U.S. Environmental Protection Agency had placed upon diesel cars.

The proven way to hit these tight emission standards was to utilise a system that Mercedes had developed called Blue Tec that added a urea compound into the exhaust system to reduce harmful gases. Engineers at VW thought the system was bulky, expensive and high maintenance, so they developed the “lean NOx trap” instead. Unfortunately, the system didn’t work well enough, so the engineers applied a software solution to the engine management system.

Nitrous Oxide testing in the U.S. was the most stringent in the world but not sophisticated. Cars were put on rollers in a test centre and then ran at a certain speed for a specific time. Volkswagen programmed their cars to recognise these conditions and then alter how the engine ran to minimise emissions. Under normal road conditions, these settings would have compromised the car’s driveability, but as no one was driving, no one noticed. Volkswagen cheated to beat the test.

Caught Out

The wheel fell off (excuse the pun) when a group of scientists (the International Council on Clean Transportation) decided to perform some independent on-road tests. They tried three cars, a BMW X5, a VW Passat and a VW Jetta. The BMW passed the test with flying colours, yet the two Volkswagens emitted up to 40 times more NOx than permitted.

When inspectors from the EPA finally located the piece of code allowing the engine to meet the target, they discovered that the software engineers had helpfully labelled it “acoustic condition”, though nobody explained why satisfactorily.

The Cost of the Scandal

Volkswagen used the software between 2009 and 2015, during which time they had sold 11 million cars worldwide and half a million in the United States. We will never know the total cost of the scandal; I suspect even German accountants, with their undoubted precision, have given up trying to count it all. Reuters estimated that diesel cheating cost Volkswagen €31.3 billion once all the fines and settlements have been paid.

So What is a Balanced Scorecard?

That was an exciting story of corporate corruption and greed, but what has it got to do with balanced scorecards?

Simply that Volkswagen was only focused on profit. If they had taken a more balanced approach and included environmental emissions, customer perception and legal risk, they would not have opened themselves up to scandal in the first place.

This is from Germany, a country that loves its cars and the environment.

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