The Volkswagen Scandal

The Volkswagen Scandal

It is common knowledge that making a profit is one of the top priorities of many companies all around the world, big or small. However, this priority causes some companies to operate in a way that is socially irresponsible and goes against best practices in corporate governance. The Volkswagen Group emission scandal has shown that, making socially responsible decisions in the long run can actually outweigh the consequences of making decisions in pursuit of profitability.

In the year of 2015, Volkswagen Group was found to have installed ‘defeat’ software in their ‘clean’ diesel vehicles, in order to pass emission standards. Its diesel vehicles were actually emitting levels of a form of nitrogen, called NOx, up to forty times the emission limit in some countries it turns out (Smith, Parloff, Fortune: Hoaxwagen). The onslaught of litigation, recalls, and reputation damage have subjected the company to one of the worst crisis in its 79 year history. The cost of this situation totaled to nearly 18 billion euros by the end of June, 2015 (Şen, Shift p. 7). Apart from all this, Volkswagen Group has taught everyone that the management of stakeholders, engaging in ethical conduct, and corporate governance are all essential to long term profitability.

The Management of Stakeholders …

Just as the scandal was discovered by the Environmental Protection Agency, the acting CEO, Martin Winterkorn, who also served as a chairman of the board for the Audi silo of the Volkswagen Group, resigned. He aspired to sell more cars than any other company, and the diesel vehicle lines were essential to meeting that goal. Acting as both a principle, and an agent, a conflict of interest arises, known as the agency theory (MVH, Ch. 3: Lecture). He was also known as the protégé of Ferdinand Piëch, who was chairman of the supervisory board.

Volkswagen Stakeholder Management

The Volkswagen Group “does not have a single board of directors. Instead, it has a supervisory board that is meant to hold management to account” (Milne, Volkswagen: System failure). However, due to the emissions scandal, their system obviously does not work all that well. Half of the 20 seats of this supervisory board are German workers; this may seem strange, but companies in Germany who employ more than 2,000 people are required to do so (MVH, Ch. 3: Slides: Appendix B). To make matters worse, of these ten workers, four are “members of the Porsche and Piëch families” (Milne, Volkswagen: System failure). This adds another layer of agency theory, and frankly shows low cultural intelligence on the part of Volkswagen Group, as this creates conflict of interest, and does not work cross culturally.

Aside from ‘breaking the bank’ and losing the trust of many industry related stakeholders, they lost the trust of the most important stakeholder of all, the consumer. Not only did they lie to their consumers, who thought they were buying vehicles that were less harmful to the environment than vehicles with the traditional combustion engine, but they were harming some of them physically as well. The excess NOx released into the atmosphere by all of the 12 million vehicles with, ‘defeat’ software, caused a number of respiratory illnesses.

Ethical Conduct … or Misconduct …

The dictionary definition says that fraud is any “deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage”, (Dictionary) many are clearly represented in the Volkswagen Group crisis. The company cheated on emissions tests, lied to and harmed their consumers as well as the general public. Furthermore, CEO Martin Winterkorn, “was given a memo about emissions irregularities in 2014, though the company continued to install defeat devices in its cars” (Watkins, Gates, Ewing, Russel, The New York Times). The company had to know about this situation well before this, as they were installing ‘defeat’ software deliberately; but, what makes it worse is that they continued to install it even after they knew they had been caught. Since the scandal, the German government has gone after Martin Winterkorn.

Volkswagen Ethics

This ‘tone-at-the-top’ set by ex-CEO, Martin Winterkorn, seems to have trickled throughout different branches of the company. The rampant unethical behavior of upper executives was also present in other branches, like the engineering department. The decision to have installed the ‘defeat’ software may have been made at the top, but the engineers are probably the ones who came across it, and were definitely the ones who installed this software. This tells me that Volkswagen Group is working under the value approach in regards to control systems, this is because of the unethical behavior not being an isolated incident. In situations like this, you would think that compliance guidelines would be considered. However, in a company without a board of directors, but a board heavily influenced by management, it is not hard to see why this consideration got pushed aside.

Corporate Governance in Action …

The mix of C-level executives and positions on the supervisory board may be one of the leading factors that caused the scandal. However, keep in mind that this is not unique to Volkswagen Group, it is required by Germany in order for job security.

Corporate governance in Germany is viewed differently than in the United States, primarily in the way we structure our businesses. In Germany, the “emphasis’ is ‘on the preservation of jobs in contrast to’ the ‘U.S. model of shareholder returns” (MVH, Ch. 3: Slides: Appendix B). The combination of the pursuit of job preservation as well as management’s interest of leading sales in mind, has to have played a role in causing the crisis.

Volkswagen Crisis Management

While on the topic of corporate governance, one cannot forget about crisis management. The way in which a company responds to a crisis will help determine how the public will perceive them once the crisis has been disclosed. In the case of Volkswagen Group, many instances were handled poorly. One of which to be remembered, by current CEO, Matthias Müller, was that “it was a technical problem, we had not the right interpretation of the American law … We didn’t lie. We didn’t understand the question first” (Smith, Parloff, Hoaxwagen). Outrage was met with this attempt of an excuse for the company’s wrongdoings; furthermore, the company stopped allowing executives to be interviewed in response to said outrage. Before this though, the company had initially blamed a group of “rogue” engineers for the scandal (Smith, Parloff, Hoaxwagen). It not only shows unethical behavior throughout the organization, but it shows that executives are willing to blame their employees in order to secure their position in the company. This does not showcase great leadership capabilities, which one would expect from a company that has reached the size that Volkswagen Group has.

A ‘Shift’ …

            In conclusion, it is safe to say that the benefits of making socially responsible decisions in the long run do outweigh the consequences of making decisions in pursuit of short term profitability. While this may not always be the case, Volkswagen has endured the ramifications of not making socially responsible decisions. However, it may not be too late for the company.

Volkswagen has shifted many things around within the company since the scandal, but, the most important have to be their vision and corporate culture. A change in the way the company views civil society, the elimination of “fear of reprisal”, as well as third party experts getting involved in the supervisory board, are all things that need to happen (Rekowski, Shift p. 9). It now “aspires to help shape the transformation of manufacturing and mobility in the future” through establishing transparency in the organization, shifting from diesel to electric vehicle production, and also has started a number of health and environmental initiatives (Scholing-Darby, Shift p. 3). Only time will tell if these initiatives are enough to save the German giant in the long run.

References …

BA 400 Chapter 3 Lecture Slides. Michael Van Hemert. BA 400. W17 Semester.

Fraud. (n.d.). In Dictionary Online. Retrieved from

http://www.dictionary.com/browse/fraud?s=t

Milne, R. (2015, November 4). “Volkswagen: System failure.” Financial Times. Retrieved from

https://www.ft.com/content/47f233f0-816b-11e5-a01c-8650859a4767

Rekowski, M. (2016). Shift: The Volkswagen Sustainability Magazine. “Motor of Change.”                  Retrieved from https://www.volkswagenag.com/en/sustainability/shift.html

Scholing-Darby, M. (2016). Shift: The Volkswagen Sustainability Magazine. “Editorial.”     Retrieved from https://www.volkswagenag.com/en/sustainability/shift.html

Şen, S. (2016). Shift: The Volkswagen Sustainability Magazine. “A Year Marked by Crisis.”            Retrieved from https://www.volkswagenag.com/en/sustainability/shift.html

Smith, G. Parloff, R. (2016, March 7). “Hoaxwagen.” Fortune. Retrieved from

http://fortune.com/inside-volkswagen-emissions-scandal/

Watkins, D. Gates, G. Ewing, J. Russel, K. (2017, January 11). “How Volkswagen Has                    Grappled With Its Diesel Scandal.” The New York Times. Retrieved from              https://www.nytimes.com/interactive/2015/business/international/vw-diesel-emissions-scandal-explained.html?_r=5&register=facebook

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