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

Fun facts about corporate accounting scandals

Regular readers will know that we have a soft spot for corporate responsibility infographics. The one below, which recently crossed our desk courtesy of Accounting-degree.org, provides a nice overview of some of the big corporate accounting scandals of the last 15 years or so. The title may be misleading - it hardly seeks to capture the biggest scandals of "all time" - but it does give a good summary of those that have happened in recent memory. And the sources of the details they provide are cited - most of which (but not all) are pretty reliable. So if you want a five minute summary of all that's wrong in the world of accounting fraud, and you don't mind a strong US bias, this is a good place to start.

One thing we particularly like are the "fun facts" accompanying each scandal. OK, so most of these are not really much fun at all - is anyone laughing about the introduction of Sarbanes-Oxley after the Worldcom and Enron scandals? - but they do point to some of the absurdities of the system in which the accounting scandals have taken place. Enron being voted most innovative company six times in a row by Fortune magazine, Lehman brothers being honored with "Most Admired Securities Firm" a year before its collapse, AIG execs getting $165m in bonuses just after posting the largest quarterly loss in American corporate history and getting a government bailout? It doesn't say much about how well we scrutinize or reward supposedly "successful" companies, does it?

It's also interesting that the infographic has been created by an organization promoting online accounting degrees (we might add that their other Featured Article is titled "10 Accounting Tricks the 1% Use to Dodge the Taxman", which is also worth a look). Are they saying that an accounting degree will help avoid some of these problems in the future? That what we need are better accounting degrees? That an on-line offering is in any way more or less likely to lead people to engage in shady accounting practices? Clearly there is an important role for accounting education in here somewhere, but we're not too sure about the offerings being recommended by Accounting-degree.org, or even who the organization is or what its methodology is. In the spirit of good accounting, a little more transparency would be a good thing. But don't let that stand in the way of enjoying a nice infographic.

Source: Accounting-Degree.org

Photo by AJC1. Reproduced under Creative Commons Licence

The beautiful game? You bet!

Ethics in sports has become a big talking point. In North America, we are just at the end of a humongous news cycle on Lance Armstrong’s ‘confessions’ on the Oprah Winfrey Show. Armstrong’s story very much turned – as many ethical issues tend to – into a story of character, personal integrity and individual morality. Even though most people know by now that doping in cycling is endemic and that he is probably much more the product of entrenched practices in the business of professional cycling. We have commented on ethics in sports here and there in the past and this week’s installment of scandals in professional sports seems another good occasion to add some observations from a business ethics angle.

We are talking about the news from Europol (the pan-European crime investigation unit) revealing large-scale match fixing activity in global professional football (or soccer, for our North American readers). They claim to having identified 380 manipulated games (at all levels) and 425 individuals implicated in making some €8m by betting on games with individual players, referees or officials accepting bribes up to €140,000 in one case! The international network of criminals betting on football games by bribing those with influence on the outcome of the games was allegedly run out of Singapore. With football being a multibillion industry itself this case of corruption seems to have all the trimmings of a good business ethics case.

To understand the reasons, dimensions and mechanisms of such an ethics scandal we always find it useful to look at the structure of an ‘industry’ and the basic characteristics of the environment in which it operates. Our colleague Wolfram Eilenberger (former University of Toronto Philosophy Professor and football wonk)  has done so in an interview this week on German radio. Here are some of the take-aways.

Uncertainty. ‘Folks go watching football because they don’t know the outcome’, Eilenberger cites the legendary German coach of the 1954 world cup winning team Sepp Herberger. Uncertainty is a core element of football – but also its Achilles heel. It is a game which despite any such intimation has never been able to be fully determined by money, skill, legacy or past glory. Just one example: when Roman Abramovic took over the English Premier League Club Chelsea F.C. in 2003 with endless amounts of cash, despite a buying spree of the top players and coaches, it still took the club seven years to finally win the ultimate prize in European football, the Champions League. This has always been the fascination of football. It is at once the strongest temptation to manipulate the game and the reason why this betting scandal is also its greatest threat.

Rare events. Football is not basketball or cycling. Success is not measured by many scores, many moves, multiple chances and efforts on the pitch, or by a long period of competition. It may be one lucky goal – or even in some cases in a tournament no goal at all - which may win the game for one side. It is therefore a relatively minor effort to link bets to the outcome of football games. It is not about orchestrating a complicated team of actors, or manipulating a complex set of circumstances. If you can somehow influence this one event, this one goal (or its absence for that matter), you can have a fairly strong handle on the outcome of the game.

Small number of key actors. Closely connected is the fact that in order to manipulate the outcome of a football game you only need to manipulate a relatively small number of actors. Most prominently the referee, the goalkeeper, and maybe one of the key strikers would come to mind here. The temptation then to bribe these individuals is very high as the limited number makes it not only economically more viable but would also allow for better chances to keep the entire thing under the carpet. This then makes the manipulation of the game relatively easy (compared to other sports). For a referee: an extra penalty given, another red or yellow card can very directly change the result; for a goalkeeper: to deliberately jump into the ‘wrong’ corner at a penalty kick, to make simple ‘errors of judgment’ which lead to a goal; for a striker: to make the ball miss the goal, to make a ‘sloppy’ pass or to give a corner kick to the opposite side.

Global execution networks. The scandal uncovered by Europol involves a global network of actors based in Asia (most notably Singapore), which operate from different jurisdictions, use opaque channels of communication and dispose of a clandestine network of financial transactions.

All these characteristics apply to other infractions in business ethics. Insider trading comes to mind, where often a small number of players, focusing on rare events (such as the insider information about an impending innovation, losses etc of a company), in a climate of uncertainty (such as the stock market) collude in global networks to perpetrate their crimes. We discussed the recent example of Raj Rajaratnam and his small network of executives perpetrating one of the largest insider scandals in recent history.

Currently, the debate on how to tackle this form of corruption is in full swing. The majority of suspects are allegedly in Germany, Turkey and Switzerland. Obviously one focus is on how to change the incentives of the few individuals who can change the outcome of the game. A clear indication seems to be incentives: often match fixing occurs (or starts) on lower level leagues or leagues with relatively low pay of players and referees. That seems to be one of the reasons why the English Premier League shows relatively lesser cases of criminal incidents in this context. By the same token, the debate now seems to focus on increasing the punishment of convicted game-riggers.

It remains to be seen if this approach is going to work. It currently seems that the very nature of football seems to invite this specific type of crime. And very little seemingly can be done about it without avoiding changes in the fundamental structure of the game.

Photo by gnews pics. Reproduced under Creative Commons Licence.