Volkswagen Company and Ethical Business

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Table of Contents

The Issue
Responsibility
Ethical Theories
Sources of Influence
Resolution
References

The Issue

In September 2015, the Environmental Protection Agency in the USA made its findings public, indicating that Volkswagen’s vehicles from the “clean diesel” generation violated the Clean Air Act. According to the Agency, many of those vehicles had specific software (also known as “defeat device”) that changed the performance of diesel engines to improve their results during testing (Hotten, 2015).

Volkswagen vehicles used specific software that allowed them “sense test scenarios by monitoring speed, engine operation, air pressure and even the position of the steering wheel” (Hotten, 2015, para. 5). During the laboratory tests, the software put the vehicle in a so-called safety mode, during which the engine’s performance lowered. However, engines did not use this mode during the testing on the road, and it led to the increased emissions that were 40 times above the standard rate of emissions allowed in the USA (Hotten, 2015).

The initial testing of the Volkswagen’s vehicles began in 2014 when International Council on Clean Transportation and researchers from the West Virginia University tested Volkswagen and BMW vehicles to evaluate whether the clean diesel in those cars actually corresponded with the existing benchmarks. The tested vehicles (manufactured by Volkswagen) exceeded the emission standards by 20 to 40 times.

Nevertheless, the Volkswagen stated in 2014 that these results could be linked to a software glitch in the vehicles of the company; a software patch was provided to eliminate the problem. The EPA tested vehicles with the fixed software and pointed out that there were no significant changes in the results of the tests (Gates, Ewing, Russel, & Watkins, 2017). In 2015, the company admitted that it deliberately installed the software into vehicles to change the results of the emissions tests. Approximately 11 million cars worldwide were affected, including AUDI and Porsche models that are also manufactured by the Volkswagen Company.

Responsibility

There were several persons in the company that took responsibility for the fraud. The company’s former chief executive, Martin Winterkorn, stated that he was accepting the responsibility for the fraud and resigned after the scandal (Hotten, 2015). However, some of the documents that The New York Times obtained indicate that the company’s executives, including the current CEO Matthias Müller, were aware of the fraud (Ewing, 2017). Despite the fact that the company denies any involvement of the current CEO in the diesel scandal, Ewing (2017) points out that the boardroom might be related to the scandal more closely than it appears.

At the same time, it is not the first case where Volkswagen’s ethics are compromised. As Milne (2015) notices, the scandal with the emissions is the third big scandal related to the group. The first scandal was in 1993 when the company was involved in corporate spying. In 2005, another scandal related to the executives that hired prostitutes and bought Viagra for employees from the workers’ council (Milne, 2015). As it can be seen, all three scandals were directly related to executives and the boardroom. As one of the employees had stated, all sensitive issues were discussed and resolved away from the boardroom and with no proper managerial oversight (Milne, 2015).

Thus, it is difficult to name one person that could be blamed for the emerged scandal with diesel engines because the corporate ethics and environment at Volkswagen remain the same for more than ten years and continue to result in scandals. As noted in the article by Milne (2015), under Winterkorn (the CEO responsible for the diesel scandal), the environment at Volkswagen turned to dictatorship, where no dissent was allowed. Therefore, it seems reasonable to assume that some of the employees and developers could be aware of the problem but were not ready to speak about it openly with the executives or were asked to make no comments about the software.

Although the new CEO of the company pointed out that he was interested in changing the corporate culture at Volkswagen after the recent scandal, he also noticed that his options were limited due to the fact that the company could not cut jobs at the factories located in Lower Saxony (Germany) (Milne, 2015). Müller (the new CEO, former chief executive of the Porsche branch) also caused concerns among American regulators who noticed that Porsche vehicles were also equipped with the illegal software. These concerns imply that the current CEO of Volkswagen could be aware of the fraud as well. Therefore, he cannot be responsible for changing corporate culture and restoring the customers’ loyalty and trust.

The company’s inefficiency was also pointed out by some of the observers who noticed that despite the almost identical output of Volkswagen and Toyota, the latter has fewer workers than the former: approximately 500.000 vs. 300.000 (Milne, 2015). The causes of such inefficiency are the unions and the government of Lower Saxony that resist any job cuts because their main aim is to protect employees and their jobs (Milne, 2015). Thus, as one of the senior managers at Volkswagen argues, the company culture can be changed only if it does not significantly influence the Volkswagen system in general (Milne, 2015). Therefore, it is possible to assume that the next scandals can emerge due to the managerial system and skewed cooperation that currently exists at Volkswagen.

Ethical Theories

It is evident that the organizational influence was one of the major causes of the scandal; if employees were aware of the previous behaviors of the executives and if the former CEO was indeed a dictator, there was very little chance of any employee willing to speak about the problem with emissions. The developers of the software faced the classic “obedience to authority” described in the Milgram Experiment, whereas they were not capable of resisting to an illegal act since it was approved by the executive of the company.

The issue also raises the problem of whistleblowing in corporate ethics, since it remains unclear whether the whistleblower would be taken seriously by other stakeholders and what consequences there would be from the disclosure of the information about the fraud. It also remains unclear whether ethics officers that were responsible for the ethics program at Volkswagen were unable to detect the violation or acted in the best interests of the violator. If the latter is true, then the company has to hire new ethics officers and review its ethics audit as well.

Two ethical theories can be applied to the issue: utilitarianism and care ethics. It appears that the company implemented utilitarianism (altering the software to maximize the profits in Europe and the USA) with no regards to the rights of the others (emission rates and their influence on the health of consumers) and fairness of the act (the negative impact on stake- and shareholders was not considered). The main interests that were considered by the company were its own (the number of sales and the resulting profits), whereas the consequences of the fraud and their impact on consumers and other stakeholders who were not directly related to the company were not considered.

At the same time, as it can be seen, the company also supported its employees by resisting to any job cuts (the possible greatest good for all involved stakeholders), although such action resulted in relative inefficiency (Milne, 2015). If the company considered care ethics as a possible approach to the issue, it would also address the impact of emissions on consumers’ health, for example, the additional 526 ktonnes of NOx emitted by the Volkswagen vehicles with the illegal software (Oldenkamp, van Zelm, & Huijbregts, 2016).

European citizens experienced more damage compared to USA citizens because the overall damage resulted in 38 billion US dollars in Europe compared to 450 million dollars in the USA (Oldenkamp et al., 2016). If stakeholders’ welfare was emphasized by the company, the fraud was more likely to be addressed in time, and the damage it had brought could be decreased. The relationships with stakeholders were negatively influenced by the fraud as well, since customer loyalty’s rates fell, and shareholders filed multiple lawsuits against the company.

The corporate response to the crisis should also be taken into consideration. Although the company eventually addressed and apologized for the issue, its first reaction back in 2014 was denial. Only in 2016, the company agreed that the event was severe, and the former CEO accepted the responsibility. The company failed to address the issue as early as possible and undermined its credibility in the eyes of stakeholders (customers, shareholders, employees, etc.). Its actions were not honest from the beginning, and sensitivity to the human side of the story was not displayed too. At the same time, the company ensured that the responsibility was taken by one of the executives, although other perpetrators responsible for the issue were not identified (Gates et al., 2017).

Sources of Influence

The organizational culture at Volkswagen was the primary source of influence on ethical behavior (negative influence, in this case). As Zhou (2016) points out, it is difficult to believe that only five or six people (the CEO, the top US executive, the R&D head, etc.) who were suspended after the scandal were responsible for such a global fraud. The problem lies in the inability of regulators to provide a better solution to the fraud, e.g. to test vehicles on the road and not in the laboratories. Although such a solution had been already suggested, it remained neglected until the Volkswagen scandal (Zhou, 2016).

The stakeholder management and responsibility was also not satisfactory, because both customers, shareholders, and, possibly, the majority of employees were not aware of the existing problem, and the company refused to acknowledge it until 2016, which lead to lawsuits, losses, and the recall of all vehicles with the illegal software (Zhou, 2016). A €3.3 billion lawsuit and criminal prosecutions, as well as a serious penalty from the American authorities, were among the problems Volkswagen had to face. Due to the fraud, the company’s share prices fell by a third in 2016, which negatively influenced its shareholders (Zhou, 2016). The company’s customers also had to cope with dissatisfaction and the loss of trust due to the scandal; furthermore, not all vehicles were fixed and recalled, which implies that some of them continue to pollute the environment and negatively influence customers’ welfare.

The close ties between the European car industry and the national governments lead to the latter’s reluctance to provide any global changes in the industry, as well as ensure severe penalties for the perpetrators. This state of affairs could also influence the company’s actions; it is possible that Volkswagen’s strategy was reinforced by the fact that the authorities would not be interested in investigating the issue deeply because it could adversely affect the national economy (Zhou, 2016). The lack of transparent, honest, and tested organizational culture led to the unethical decisions at almost all organizational levels that could remain undetected if there was not any involvement from an independent NGO.

Therefore, one can see that the discussed issue emerged due to the existing systems of regulations that prefer to maintain the stability of the automobile industry to avoid any disruptions in the national economy and job market. Despite the fact that the German authorities conducted a full-scale investigation of the company and the officials of the EU states discussed possible solutions to the problem, no alternative to the existing tests were provided, and no approach to address the problem in all vehicles with the illegal software was suggested (Zhou, 2016). No clear changes in the outlines that could reduce information asymmetry were proposed as well, which means that the authorities were unable to address the failures related to transparency.

Resolution

The resolution provided by Volkswagen was to buy back or fix all affected vehicles, as well as ensure that owners of the affected cars would be compensated for the fraud (Gates et al., 2017). Approximately 475.000 vehicles (Volkswagen and AUDI) would be bought back, whereas the company would spend $10 billion on the buy-back. Furthermore, 80.000 vehicles with 3-liter engines were also to be bought back from the owners to fix them, although some of the owners were suggested a buyback option outright (Gates et al., 2017). Any owner who wanted to sell his or her vehicle back to Volkswagen could register on a special website to do it; the company agreed to purchase or fix the affected vehicles by December 2018.

As to European market, the company provided a particular tubular part that could be installed in the engines to decrease the emissions and align those with the current clean-air standards (Gates et al., 2017). Still, this part cannot be used in the USA since it cannot ensure that the emissions would be lowered enough to comply with the American standards.

Therefore, the only option for Volkswagen in the USA is to purchase all affected vehicles back and provide refunds, as well as compensations, to the owners of those vehicles. Nevertheless, approximately 11 million cars worldwide were affected, and only several hundred thousands were purchased back or fixed by the company. It remains unclear how the company aims to address the problem in other vehicles, especially if not all owners of such vehicles might be aware of the problem. One should also bear in mind that emissions produced by the affected vehicles from 2005 to 2015 had already polluted the environment, and the global consequences of such pollutions are unlikely to be fixed by the company in the nearest future.

References

Ewing, J. (2017). VW engineers wanted O.K. from the top for emissions fraud, documents show.

Gates, G., Ewing, J., Russell, K, & Watkins, D. (2017). How Volkswagen’s ‘defeat devices’ worked.

Hotten, R. (2015). Volkswagen: The scandal explained.

Milne, R. (2015). Volkswagen: System failure.

Oldenkamp, R., van Zelm, R., & Huijbregts, M. A. (2016). Valuing the human health damage caused by the fraud of Volkswagen. Environmental Pollution, 212(2), 121-127.

Zhou, A. (2016). Analysis of the Volkswagen scandal possible solutions for recovery.

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