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

Oil spills and externalities

What does business owe the world? OK, now that's a pretty big question. Where do you even begin to start the long list of demands and grievances that are stacking up against the corporate world? But this is the question that the Harvard Business Review has posed in a new online debate launched a week or so ago. It's a provocative starting point, and not simply (as some might have expected from HBR), an excuse to really ask 'What, if anything, does business owe the world?'.

With uncommon good timing, the debate kicked off with a lively exchange of blogs from invited contributors on the issue of externalities, and whether the internalizing of externalities - or moving from external to internal (e2i) costing of social impacts - is an appropriate expression of corporate responsibility. We say good timing because just as the first part of the debate was drawing to a close, the US began to experience one of its worst oil spills in history in the Gulf of Mexico. Now pollution is a standard example used to explain externalities - i.e. it imposes costs on those not party to the original transaction. So it is little surprise that the 'blame game' regarding responsibility for the current spill has already started. Obviously though, because this is the result of a specific accident rather than just standard run-of-the-mill everyday pollution, the questions over whether BP, the rig's owner and operator, should be held responsible are somewhat more straightforward. It should. US President, Barack Obama has said as much. In the discussion around whether firms should e2i, we need to consider social and environmental costs imposed on others from 'normal' business activity, not just accidents. So the question then becomes, should BP take responsibility for the impacts of its products (e.g. the pollution caused by burning its gasoline), for example by adopting a pricing model that accounts for the full environemntal costs of petrol.

The HBR debate seeks to tackle this question head-on. The first post is written by Chris Meyer and Julia Kirby and stems from their April HBR article arguing that companies indeed should focus on externalities. Or as they put it, "the true measure of corporate responsibility—and the key to a business’s playing its proper role in society—is the willing, constant internalization of externalities." This is nothing new in itself. A focus on externalities has been a feature of the CSR debate for some time. In fact in our CSR textbook, published a couple of years ago, we specifically identified "Internalizing or managing externalities" as one of the 6 core characteristics of CSR. So in one sense it's kind of disappointing that HBR is passing off standard business school textbook material as a "Big Idea". That said, the article (and blog) do accomplish an important task in bringing these ideas into the mainstream, and in a way that is readily digestible by executives. They also do a good job in stirring up some important debate on whether this is indeed the right way to go about CSR, and about how it can be practically accomplished.

Of course, the proposition that firms should consider e2i remains for some a distinctly controversial idea. In the HBR debate, Michael Schrage provides a lively, if slightly scatty, account of why in fact it's "the road to hell". In doing so, he makes some good points - and probably captures the understandable fears of many in the business community. But in presenting "the natural conclusion" of the e2i philosophy - that businesses become accountable for every social impact, however indirect, of their actions - his argument becomes somewhat shrill and reductionist:

"If everything is increasingly interrelated — and it is! — then who won't be aggrieved? Who won't be wounded? Who won't be disadvantaged? Who won't be harmed — or see themselves as harmed — in some meaningful way? What won't be an externality to some third party?"

Yes it's true that once you embark on a path of acknowledging some kind of responsibility for the 'side effects' or 'spillovers' of economic actions, it is difficult to determine a clear line in the sand beyond which you no longer have responsibility. But the point is that no one is saying that firms are responsible for ALL externalities, only that focusing on externalities helps identify those impacts where responsibilities are most critical, and where market mechanisms, namely pricing, can be leveraged to institutionalize that responsibility. It is intereting in fact that Schrager argues that e2i is about more government interference whereas in fact it is a market alternative to regulation. That is, rather than governments dealing with all the problems caused by economic activity, you make companies and consumers more responsible for their own actions by establishing a mechanism whereby the true costs of their activities are factored into the market price. It's no different from establishing a price for carbon, which is one of the best known recent examples of e2i pricing.

That a debate on externalities should provoke a row over government interference is perhaps not completely surprising given the orientation of HBR ... and the fact that their invited experts, for all their starry credentials, are all based in the US. It is hardly the best recipe for starting a conversation on what business owes the world (as opposed to say, what US business owes the US). Some different voices from other parts of the globe would be sure to enrich the debate (...so if that is you, then do take the opportunity to add your comments to the blogs). And you never know, with HBR's timing, by the time the debate gets to its final week's subject of "Are activists out of bounds?" we might have another very real case to discuss (... any activists reading this, now would be a great time to get "out of bounds"!)




Photo by NASA Goddard Space Flight Center. Reproduced under Creative Commons licence