Volkswagen Company’s Emissions Fraud: Ethical Issues

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Ethics is an extremely important concept in business that applies to a variety of areas such as employee relationships, their rights and freedoms, transparency and sustainability, responsible production, workplace safety and security, brand image, and customer relationships, to name a few. Although this paper will focus primarily on the latter area, it will also include several of the others because the case under discussion is quite massive and has a series of significant impacts. Indeed, the Volkswagen scandal of 2015 was one of the loudest and most significant issues of business in recent history.

The scandal, otherwise known as the VW emissions fraud, occurred when the EPA (Environmental Protection Agency) carried out a series of tests on VW vehicles and discovered that the cars were not in compliance with emission regulations established by the Agency for car manufacturers who sell their vehicles in the United States and Europe. This breach of ethics is related to a variety of problems and has negatively affected many groups of stakeholders including VW consumers, employees, the company itself, its investors, and its dealers.

This paper provides an overview and analysis of the VW emissions fraud, its causes and consequences, and the responses of various groups of stakeholders and the company’s leaders. Further, it will focus on the solutions developed by VW leadership, as well as their perceived views of the most effective ways to recover their brand image and win back their customers.

All aspects of this case will be evaluated for business ethics; to be more precise, the paper will discuss the decision-making of those responsible for the creation of the flawed vehicles, the basis on which such a decision was made, the impact is created, and the way the company responded both immediately after the scandal and a year later. Also, the role of whistleblowers in the case and the effect of the employment-at-will concept on Volkswagen employees will be discussed.

Case Overview

Different kinds of vehicles are popular in the United States and Europe when it comes to the types of fuel by which they are powered. Vehicles that run on diesel fuel that is known to create carbon dioxide (CO2) emissions are found frequently in the countries of Europe; at the same time, American residents prefer cars that are powered by gasoline that produces nitrogen oxide (N2O). In terms of their effects on the health of people and animals, these two gases are equally harmful. However, carbon dioxide is also known to be one of the major contributors to the greenhouse effect and, accordingly, global warming. Due to this property of CO2, the use of diesel-powered vehicles is regulated in the United States and monitored constantly by the EPA.

Regardless of EPA regulations, the world-renowned car manufacturer Volkswagen had been successfully selling millions of their cars in both Europe and the United States (La Monica, 2015). However, the key to this success turned out to be based on an emissions-cheating scheme that soon was discovered by the EPA. As a result, Volkswagen’s desire to remain the top competitor in the car manufacturing industry—and its willingness to cheat to do so—drove the company off a cliff and left it with a heavily damaged brand image and fleeing consumers.

What happened was that VW failed in its attempts to create an engine with a combustion efficiency high enough to meet EPA regulations; instead, it produced a defeat device. Each of the newly manufactured vehicles was equipped with this device, which had specifically designed software whose function was to show false results every time the VW cars underwent emissions tests (Hakim, Kessler, & Ewing, 2015). As soon as information about VW’s cheating scheme appeared on the news all around the world, the company suffered massive damage to its brand reputation and income; as a result of the scandal, Volkswagen was obliged to rebuild all the cars, remove the defeat device, and reimburse customers (Farrell, 2015).

Causes

The cause of the unethical behavior of the VW team was the company’s desire to continue with a product line that did not fulfill the requirements of the EPA. In that way, VW’s product developers, leaders, and manufacturers faced a difficult choice: to risk their income by delaying the release of the new cars to build a new engine with more efficient combustion properties or to figure out a way to sell the noncompliant cars.

Delaying their release would result in a loss of revenue by the company and thus was a negative alternative. Because the cost of this choice was higher than its benefits, a secret decision was made to adjust the cars in a way that they could cheat during EPA emissions tests and pass as suitable to be sold in the United States. As a result, the company profited from the sales of the new line of vehicles and remained the top competitor in its industry.

Consequences

The primary consequence of the unethical behavior of Volkswagen was the scandal that quickly became known to VW consumers and other stakeholders all around the world. As a result of this exposure, the image of the company, as well as its brand image and reputation, were damaged immensely. Millions of VW buyers and dealers realized that the vehicles they owned or sold were compromised.

The scandal occurred as the consequence of the unethical behavior of those VW employees involved in the scheme who preferred a higher profit rate over sustainability practices and environmental awareness. Logically, brand equity became inconsistent because after the scandal erupted, the company could no longer be considered as one of the world’s leading car manufacturers. VW was expected to participate in the competition as a fair player and comply with environmental standards.

Instead, the company neglected ethics and consequently stopped being associated with high quality and integrity; VW instead became synonymous with lies and cheating that gained profit by making consumers and governments believe that their cars met the established environmental standards (Keller, 1993). Since brand reputation and equity are interrelated, both of these aspects suffered massive damage due to the emissions scandal and led to the loss of revenue and the decrease in sales of the company production (Ewing, 2015).

Advertising

Volkswagen’s clean diesel commercials are now considered one of the most deceitful promotional campaigns in history. This series of commercials featured various scenarios that revolved around a very significant claim: that VW vehicles are powered by so-called “clean diesel.” The campaign was launched in the spring of 2015, just a few months before the emissions scandal revealed the truth about the VW engines: that they produced forty times the permitted standard of CO2 emissions (Hotten, 2015).

Practically, each one of the VW commercials focused on various evidence that the diesel engines were very efficient and produced almost no emissions. In other words, the commercials intended to openly mislead consumers by stating that the engines powered by diesel fuel should not be considered harmful or unsustainable. They positioned the dirtiness of diesel engines as an old-fashioned stereotype and promoted the idea that VW engines are very environmentally friendly which was a lie.

Stakeholders

Many stakeholders were directly affected by the VW emissions fraud scandal; the most significantly affected stakeholder groups were the consumers of the affected vehicles, the car dealers partnering with VW, the company employees, the company itself, and the environment. The subsections below will focus on each of these groups individually.

Consumers

The diesel emissions scandal is often recognized as a serious PR crisis for Volkswagen because the company’s relationship with its consumers was one of the spheres that suffered the most damage (Van Der Kley, 2015). Some of the outcomes that occurred after the scandal were the breach of trust of the buyers, a decrease in sales, returns of the compromised cars, and a multitude of lawsuits filed against the company.

Interestingly, before the fraud was revealed, Volkswagen had been known for its determination to maintain positive relationships with its consumers and keep their trust with the help of versatile strategies designed to attract new clients and retain existing ones (Volkswagen: Putting the Customer in the Front Seat, 2006).

The sales promotion was accomplished by applying innovative programs orientated toward customer satisfaction and the improvement of the customer experience. The latter was pursued using synchronization of after-sales service with the sales process, better campaign management, and more effective communication with clients (Volkswagen: Putting the Customer in the Front Seat, 2006).

The Environment

The issue of responsible production has been an important ethical question for many decades. Even though CO2 emissions do not produce any immediate harm to people’s health but rather are associated with long-term outcomes, the fact that EPA safety regulations were violated makes the choices and actions of VW unethical. Basically, from an ethical point of view, VW is responsible for two primary wrongdoings: polluting the air more than is permitted and lying about being sustainable (O’Dwyer, 2016).

While the former claim only applies in the United States where the emission regulations are much stricter than in the EU, the second holds everywhere because VW made the words “reliability and sustainability” a significant part of their brand image and thus willfully misled its stakeholders. O’Dwyer (2016) proposes viewing the situation from the utilitarian perspective, which justifies the company’s actions because they made the majority (those who successfully bought and used the cars) happy as opposed to the minority of people who could potentially be affected by respiratory diseases caused by higher air pollution.

Dealers

Another stakeholder group heavily affected by the scandal was the dealers of VW vehicles. First of all, these stakeholders are financially dependent on the brand image of VW. Indeed, the drop in VW sales affected the dealer’s commissions and salaries directly and forced them to search for alternatives to find profit. For some, the only alternative was to find another job or to engage in unethical sales practices to sell compromised cars.

Besides, those dealers who had already sold the affected VW cars by the time the scandal erupted became associated with the unethical actions of the company and experienced consumers’ dissatisfaction (Durbin, 2015). In this way, VW’s damaged brand reputation destroyed the reputations of all the salespeople who partnered with VW as dealers. Also, the dealers found themselves at the core of the emissions scandal as they were forced either to protect the manufacturer by taking responsibility for selling the flawed vehicles themselves or to confirm that VW had betrayed their trust as well. In both cases, the dealers were put in a very complex situation.

Employees

VW employees were another group of stakeholders at the very epicenter of the scandal because the initial claims of the VW leaders were based on the fact that a limited number of workers had conspired to put the scamming plan into practice (Ewing, 2015). Accordingly, some VW officials and engineers were fired, and each of the terminations was heavily covered by the media (Boston & Houston-Waesch, 2015). In this way, many of the people involved in the scandal were simply fired for the show, became victims of public judgment, and received a great deal of negative attention as unethical individuals and professionals.

The Company

Even though VW leaders accused a small group of engineers of planning and carrying out the installation of the defeat device, it seems very likely that such a massive plan could not have been put into practice secretly without the authorities’ participation. Indeed, the conspiracy may have been dwelling quite high up in Volkswagen’s corporate structure.

VW’s first response to the crisis was admitting to the fraud, which was an ethical and honest decision in itself. Also, the company stated that the individuals who had purchased the compromised vehicles should be the ones to decide whether they wanted to claim remedies for the cars (Boston & Houston-Waesch, 2015). However, the proposed remedies were rather small—only a thousand dollars to each American consumer; for consumers in the EU, the company’s response to their dissatisfaction was to offer to remove the defeat device for free since the cars did not break any environmental laws there (O’Dwyer, 2016).

Whistleblowing

Whistleblowing played an important role in the VW scandal. A year after the fraud first was reported by the EPA, news about whistleblowers being illegally fired from the company continued to appear. However, the initial announcement from the company leaders included a request for the whistleblowers to come forward and participate in the fraud investigation; moreover, the leaders stated that the whistleblowers should not worry about their jobs because none of them would be fired for whistleblowing (Boston & Houston-Waesch, 2015).

At the same time, this public statement did not match reality; there were several reported cases of whistleblowers who were terminated from the company for assisting in the fraud investigation or attempting to prevent other employees from destroying evidence or important data about the fraud planning and implementation. Practically, the dilemma with the whistleblowing is based on the vagueness of the definition of this concept. Whistleblowers are those who make public announcements of unlawful or unethical business actions or who report the information in a secret manner (Rashty, 2015).

Because coming forward publically automatically identifies one as a whistleblower, this individual immediately exposes him or herself to the risk of social consequences including alienation, loss of trust, hostile attitudes, and bullying at work, to name a few. On the other hand, a person who reports the information secretly is safer from the potential outcomes of whistleblowing, but he or she could fall victim to termination and be unable to claim the protections granted to whistleblowers in the United States (Rashty, 2015).

Employment at Will

Alongside the issue of whistleblower protection, there is the question of employment at will, which states that a business has the right to hire and fire employees without naming a reason (Harcourt, Hannay, & Lam, 2013). In terms of the VW scandal, this issue backfired due to the actions of the whistleblowers. As the company faced a loss of revenue, a drop in sales, and multiple lawsuits and financial obligations, it had to find additional resources to cover the cost of operations and solutions required to address the crisis. Logically, this led to the company’s decision to cut some jobs to save costs.

As a result, the actions of the whistleblowers, which were intended to be ethical and good, could in the long term lead to the termination of people who were not involved in the fraud and who were not whistleblowers. In this case, the question is whether or not the actions of the whistleblowers should be considered as right and ethical when they helped expose the fraud and prevented unlawful emissions but also led to many of their peers and coworkers losing their jobs for no reason. From the utilitarian perspective, it is rather difficult to make precise calculations of the relative good and evil in both outcomes and determine which of them produced a more significant positive effect (Arnold, Beauchamp, & Gordon, 2012).

Conclusion

The Volkswagen emissions scandal was one of the biggest events of 2015 in regards to business ethics. It will go down in business ethics history alongside other major scandals such as the Enron bankruptcy or the case of the Ford Pinto. The VW scandal was based on a massive fraud willfully committed by one of the world’s largest and most well-known car manufacturing companies.

The scandal involved several groups of stakeholders and had a variety of effects, consequences, and implications. From an ethical perspective, the actions of Volkswagen’s decision-makers and engineers were unethical and wrong; they were caused by the company’s selfish desire to obtain more revenue and earn a stronger position in the industry, and this desire overpowered the need to remain responsible as a manufacturer and maintain a sustainable business.

The actions of the company caused no immediate damage to public health and were illegal only in the United States; however, their intentionally deceptive decision-making characterizes their behavior as unethical, resulting in severe damage to the brand reputation, a drop in sales and revenue, and a loss of consumer trust worldwide.

References

Arnold, D. G., Beauchamp, T. L., & Bowie, N. L. (2012). Ethical theory and business (9th ed.). Upper Saddle River, NJ: Pearson.

Boston, W., & Houston-Waesch, M. (2015). Volkswagen suspends another top engineer; Berlin orders recall; transport minister says recall of tainted diesel cars is mandatory.

Durbin, D. (2015). Diesel scandal keeps Volkswagen’s US sales forecast flat.

Ewing, J. (2015). Diesel scandal at VW spreads to core market.

Farrell, S. (2015). Volkswagen loses sales top spot to Toyota after emissions scandal.

Hakim, D., Kessler, A. M., & Ewing, J. (2015). As VW pushed to be no. 1, ambitions fueled a scandal.

Harcourt, M., Hannay, M. & Lam, H. J. (2013). Distributive Justice, Employment-at-Will and Just-Cause Dismissal. Journal of Business Ethics, 115(2), 311–325.

Hotten, R. (2016). Volkswagen: The scandal explained.

La Monica, P. R. (2015). Volkswagen has plunged 50%. will it ever recover?

O’Dwyer, K. (2016). Utilitarianism: a protection for Volkswagen’s immoral, but legal, emissions cheat?

Rashty, J. (2015). Corporate Ethics and the Rights of Whistleblowers. The CPA Journal, 48-50.

Van Der Kley, L. (2015). Crisis management: How to come back from a PR scandal.

Volkswagen: Putting the Customer in the Front Seat. (2006).

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