Tuesday, September 22, 2015

The Volkswagen diesel deception - 5 key questions


News about Volkswagen's (VW) emerging emissions test rigging scandal makes one wonder if there is ever a story in business ethics too preposterous to be true. But it certainly raises some interesting and important questions about the nature of corporate responsibility that demand some pretty quick answers.

In some ways, it is not a complicated story, and even the CEO Martin Winterkorn today admitted to the firms culpability and apologized. "We totally screwed up" the carmaker's US chief was also reported as saying. So, VW deliberately manipulated the software that manages their diesel engines so that the emission data in test mode appeared significantly lower (up to 40%) than in reality. And this is not just pretending the cars are more fuel efficient than they really are. The EPA clearly states that the substances whose level of emissions were concealed:
"penetrate deeply into sensitive parts of the lungs and can cause or worsen respiratory disease, such as emphysema and bronchitis, and can aggravate existing heart disease, leading to increased hospital admissions and premature death."
That wording alone should strike considerable fear into VW board. The company might face criminal investigations and court proceedings that might even compare the tobacco industry or the financial sector's travails. Already the company could be faced with fines up to $18bn and a massive recall with 11m cars thought to be affected.

From the perspective of corporate responsibility then the fascinating time has just started - how on earth could that happen? Here are a few questions to consider over the next few days and weeks as the scandal unfolds.

1. Embedding corporate responsibility and sustainability
Volkswagen is one of the European companies that really seemed to embrace 'Sustainability and Responsibility' from quite early on - and much ahead of many of its German rivals who relied on the social responsibilities of business being part of the traditional tightly regulated, corporatist consensus governing the national economy. How is it possible that a company committed to some of the core values of corporate responsibility could so blatantly cross the line into not only unethical but clearly illegal practice in a key area of its responsibilities? Is this just another greenwash case to fuel further cynicism about the CSR commitment of corporations?

2. Is it an industry phenomenon, or just one bad apple?
The debate about companies providing overly optimistic fuel consumption data is an old one, and a number of other companies have faced problems with overstating the frugality of their cars. VW's rigging of the tests takes the game to a whole new level, but does this mean it is an outlier or just the first one to get caught taking things too far?

3. What was VW thinking in terms of not getting caught?
It would be interesting to find out what the discussions within the company looked like when the software used to rig the tests were devised and implemented. VW must have been convinced they would not get discovered. What does this say about regulation of the auto motives industry, especially when they were eventually rumbled by a relatively unknown clean air group that was actually hoping to show that diesel cars were clean. Why did nobody within the company conceive that in a highly scrutinized industry, such as the global automotives industry, these practices would not get examined?

4. How far up the hierarchy did knowledge about these practices go?
When Amazon got into the headlines recently, Jeff Besos issued an immediate statement that he had non knowledge of the practices and did not approve of them. So how much did VW senior executives know? It is hard to imagine that this was just the work of some 'rogue engineers', but at the same time it is curious that VW has tried to protest its innocence for more than year since the falsified tests were uncovered, blaming a software malfunction - only eventually coming clean when the EPA threatened not to issue them with environmental certifications for their 2016 models. As one reporter noted, the VW CEO is a detail-oriented engineer himself: "It's difficult to imagine that a man who fixates on such minute details as the noise a steering column adjuster makes would know nothing about active manipulation of diesel emissions while he was in charge." So what does the scandal say about the corporate culture at VW and the role of its leaders in setting the ethical tone?

5. How can this happen in a quasi-public institution such as Volkswagen?
VW, from the outset, had a rather broad social mission. The company's mission has been from the outset to provide Germans with mobility. Even today, the social mission lives on: the company claims to "aspire to shape the mobility of the future – making it responsible, environmentally compatible and beneficial for everyone." It is even part-owned by the government of Lower Saxony, which still owns a controlling 12.7% share of the company. So this is not a company solely controlled by some profit maximizing hedge funds or other purely profit driven investors. The decision to try and cheat the regulators however has ended up wiping billions off the value of the company in a matter of days. So what should we conclude about whether ethics pays or not and whether social purpose can really be integrated into the corporate form? 

There are many more aspects to the story. At the end of the day, the 'green car' and VW's 'BlueDiesel' will maybe just count among the many ways car companies (and yes, the rest of us) try and disguise the fundamental ecological contradictions of our modern automotive civilization. But it will also be fascinating to watch the details of this story unearthing the kind of decision making prevailing at supposedly responsible companies. VW's original motto, 'Kraft durch Freude' or 'strength through joy', it certainly won't be though. 


Photo by John Matthies. Reproduced under Creative Commons Licence

10 comments:

  1. Great questions. My first conclusions are that short term financial return thinking rules companies and that CSR has only a small impact on the financial success of firms as many studies suggest. Furthermore, it is no excuse CEO does not have any knowledge about such behaviour. Rather, doubts come up about the leadership ability of such a CEO.

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  2. I am curious about whether the worker members of the Board were informed of these practices. Were they complicit or were they kept in the dark in a way that challenges our understanding of codetermination?

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    Replies
    1. Good question David. We were thinking the same. It will be very interesting to see if more information comes out on who knew and who didn't (and who should have, of course). The Economist reported yesterday that they anticipate a harder line from the US authorities on this with respect to personal responsibility - which has its own obvious risks for those set up as the fall guys: "An accused firm will no longer get credit for co-operating with investigations (as VW says it will) unless it gives the feds the names of every manager or employee involved in wrongdoing, and seeks to gather and submit evidence of their personal responsibility."

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    2. The New York Times lays some of the blame on codetermination (in an ideologically charged argument, perhaps):

      http://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html

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    3. Well that is a common criticism of co-determination - that it emphasizes employment over other considerations. In general, an inward culture seems to have afflicted both VW and Toyota with their earlier gas-pedal recall problems. Not sure how well the US style governance structure helped GM avoid their ignition scandal though. Looks like an industry problem rather than a problem of governance structure. Mintzberg is saying its a syndrome not a scandal, which makes some sense: http://www.theglobeandmail.com/report-on-business/rob-commentary/volkswagen-corruption-crisis-isnt-a-scandal-its-a-syndrome/article26479332/

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  3. Hi Crane and Matten
    A well written post echoing familiar thoughts as my post on the deception. The link to my post would be : http://www.georgeron.com/2015/09/diesel-deception-ode-to-volkswagen-jetta.html

    You wonder, since EPA has ruffled some feathers before catching test rigging among diesel engine manufacturers, why they couldn't come up with adequate controls to catch a software trick? I suspect a justice department hearing will obviously question this void in judgement on the EPA's part.

    Do you also have any idea how the fines that VW will pay to the EPA be distributed? Whose coffers will it go into?

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  4. I think the impact of this scandal is going to be bigger than we think, and for some part I think that it is going to make room for electrical driving, which is not a bad thing actually. For Volkswagen though, it is disastrous. There are already filed a lot of lawsuits in the US and it is not going to stop there.

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  5. This scandal highlights how corporate social responsibility can go wrong. With growing customer awareness regarding the environmental impact of their purchases, pressure from investors and suppliers to conduct themselves ethically as well as the increased demand from stakeholders for corporate disclosure, large corporations can be pressured into adopting CSR in order to remain competitive or even just to remain operating (IISD, 2013). This is especially true for a company like Volkswagen which is in an industry that is heavily scrutinized for its environmental impact.

    Although Volkswagen may have had the foresight to embrace sustainability and responsibility ahead of their rivals they still may have felt required to implement CSR into their image and operations when examining recent consumer trends. The financial and engineering challenges of producing an automobile that is economically viable and low in emissions may have forced Volkswagen into a position where they could no longer maintain their promises outlined by their sustainability policies. To alter the software so that their engines passed emission tests was Volkswagens answer to maintain their green image without actually having to bear the costs of producing an environmentally friendly car. It’s a major failure of Volkswagen to be socially responsible from a stakeholder obligation perspective as it breaks Kantian ethics with the consumer being treated merely as a means to an end, as well as from the profit maximisation position as the relationship between Volkswagen and the consumer is based on deception – the public does not have informed consent.

    Ultimately CSR is defined by the company that adopts it, not by law or regulation. A company will select policies which are convenient and beneficial to themselves while disregarding any socially responsible activity which is to costly or difficult to implement (Bauer, 2014). This leads to the aforementioned issue of “greenwashing” that arises when a company adopts CSR merely as public relations campaign and not as a genuine effort to be responsible for the environment or society. So long as a business projects an image that is seen by the public as socially responsible the actual reality of the impact of their operations is irrelevant – the PR goals are being met and the business profits (Corporate watch, n.d.).

    Financial and technological reasons may have been the cause of Volkswagen producing a vehicle with unacceptable emissions but it is not outside the realm of possibility that corporate social responsibility was the root cause behind the unethical act of attempting to deceive the world. Intentions could have been pure at the outset of CSR adoption but continued challenges in keeping within these self-made guidelines can lead to dishonest acts in the future.

    The corporate culture at Volkswagen also appears to have been a leading cause behind the deception. The engineers whose main motivations are to employee more workers and who are prejudiced against emission regulations hold great power within the company due to the co-determination policy (Stewart, 2015). This raises the issue of who should be held accountable for this scandal: the individuals who committed the deception or the company itself.

    Volkswagen appears to have many characteristics of corporate culture that make it culpable as a company. The disdain that Volkswagens engineers have towards emission regulations could easily lead to policy setting where emission tests are disrespected and should be cheated rather than passed legitimately. Engineers who hold this prejudice and sit on the board of directors can be easily be pictured endorsing such deception and be ratified by a failure from these engineers to correct any such violations (Moore, 1992).

    continued next post...

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  6. Although holding the company culpable helps highlight the problems that co-determination can cause, there are concerns with punishing the company rather than the accountable individuals. If no one is held accountable then we cannot expect the delivered punishment to deter this kind of behaviour from happening again in the future or in other participants of the automotive industry. Furthermore innocent employees who may have opposed the deception or those who were ignorant are viewed as guilty along with the company, the scandal and subsequent punishment of Volkswagen can adversely affect their personal lives and reputation (Velasquez, 2003).

    Regardless of whether or not Volkswagens leaders were aware of falsified tests it shows a failure on their part to set an ethical tone. The corporation has displayed their willingness to take advantage of market failures. Ethical imperatives such as reducing information asymmetries and minimizing negative externalities have not been followed (Heath, 2014). Customers depend on emission test results when making a decision to purchase an environmentally friendly car and Volkswagen has failed to give sufficient effort into reducing pollution on external parties.

    This scandal also causes one to consider that the current international business environment is closing the gap between profit maximisation theory and stakeholder obligation theory. With consumers and the media’s growing awareness of businesses and product’s environmental impact and the rise of special interest groups such as the clean-air group that discovered Volkswagens deceit often result in profit maximisation best being served by putting stakeholders first. By betraying the public Volkswagen has lost customers and brand reputation. Employees who opposed the fraud and who are dissatisfied with the current corporate culture are likely to leave the organisation, their capacity to attract and retain staff has been greatly reduced. Suppliers will not want to be associated with this scandal and will certainly want to distance themselves from Volkswagen. The company has lost billions and may never recover simply because there actions did not respect these stakeholders. Any cost that the company would have to bear from being socially reasonable would have been negligible in comparison to what this scandal has cost them. What we can conclude is that ethics does pay or at least that being unethical is certainly very costly.

    REFERENCES

    Corporate social responsibility (CSR). (2013). Retrieved from: https://www.iisd.org/business/issues/sr.aspx

    Bauer, J. (2014). The problem with corporate social responsibility. Retrieved from: https://www.opendemocracy.net/joanne-bauer/problem-with-corporate-social-responsibility

    What’s wrong with corporate social responsibility? : The arguments against CSR. (n.d.). Retrieved from: https://corporatewatch.org/content/whats-wrong-corporate-social-responsibility-arguments-against-csr

    Stewart, J B. (2015). Problems at Volkswagen start in the boardroom. Retrieved from: http://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html?_r=2

    Moore, J. (1992). Corporate culpability under the Federal Sentencing guideline. Arizona Law Review

    Velasquez, M. (2003). Debunking corporate moral responsibility. Business Ethics Quarterly

    Heath, H. (2014). Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics. Oxford University Press.

    ReplyDelete
    Replies
    1. This scandal highlights how corporate social responsibility can go wrong. With growing customer awareness regarding the environmental impact of their purchases, pressure from investors and suppliers to conduct themselves ethically as well as the increased demand from stakeholders for corporate disclosure, large corporations can be pressured into adopting CSR in order to remain competitive or even just to remain operating (IISD, 2013). This is especially true for a company like Volkswagen which is in an industry that is heavily scrutinized for its environmental impact.

      Although Volkswagen may have had the foresight to embrace sustainability and responsibility ahead of their rivals they still may have felt required to implement CSR into their image and operations when examining recent consumer trends. The financial and engineering challenges of producing an automobile that is economically viable and low in emissions may have forced Volkswagen into a position where they could no longer maintain their promises outlined by their sustainability policies. To alter the software so that their engines passed emission tests was Volkswagens answer to maintain their green image without actually having to bear the costs of producing an environmentally friendly car. It’s a major failure of Volkswagen to be socially responsible from a stakeholder obligation perspective as it breaks Kantian ethics with the consumer being treated merely as a means to an end, as well as from the profit maximisation position as the relationship between Volkswagen and the consumer is based on deception – the public does not have informed consent.

      Ultimately CSR is defined by the company that adopts it, not by law or regulation. A company will select policies which are convenient and beneficial to themselves while disregarding any socially responsible activity which is to costly or difficult to implement (Bauer, 2014). This leads to the aforementioned issue of “greenwashing” that arises when a company adopts CSR merely as public relations campaign and not as a genuine effort to be responsible for the environment or society. So long as a business projects an image that is seen by the public as socially responsible the actual reality of the impact of their operations is irrelevant – the PR goals are being met and the business profits (Corporate watch, n.d.).

      Financial and technological reasons may have been the cause of Volkswagen producing a vehicle with unacceptable emissions but it is not outside the realm of possibility that corporate social responsibility was the root cause behind the unethical act of attempting to deceive the world. Intentions could have been pure at the outset of CSR adoption but continued challenges in keeping within these self-made guidelines can lead to dishonest acts in the future.

      The corporate culture at Volkswagen also appears to have been a leading cause behind the deception. The engineers whose main motivations are to employee more workers and who are prejudiced against emission regulations hold great power within the company due to the co-determination policy (Stewart, 2015). This raises the issue of who should be held accountable for this scandal: the individuals who committed the deception or the company itself.

      Volkswagen appears to have many characteristics of corporate culture that make it culpable as a company. The disdain that Volkswagens engineers have towards emission regulations could easily lead to policy setting where emission tests are disrespected and should be cheated rather than passed legitimately. Engineers who hold this prejudice and sit on the board of directors can be easily be pictured endorsing such deception and be ratified by a failure from these engineers to correct any such violations (Moore, 1992).

      Delete

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