Volkswagen Emission Scandal

Module: Ethical Issues in Management

Course Facilitator: Dr. Sujata Mukherjee
Submission Date: August 6, 2021
Submitted By: Abhuday Aggarwal
Roll No: F045
SAP ID: 80512100464
Introduction

Volkswagen group is one of the leading automakers in the world. They are the parent company
of more than a dozen of high-performance automakers like Audi, Bentley, Lamborghini,
Porsche, etc. They usually encourage practices of environment-conscious cars, considering that
everyone these days is struggling with the effects of global warming. In 2015 everything
changed when Volkswagen was involved in the Emission scandal referred to
as Dieselgate or Emissiongate. 
In September 2015, Volkswagen was found in violation of the Clean Air Act issued by
the United States Environmental Protection Agency (EPA). The issue at hand was that the
company was directly involved and aware of the maleficence and had intentionally installed
software known as “Defeat Device” in their TDI engines. It activated under lab testing
conditions in a way that it would activate emission controls by running on low performance,
whereas on the roads it ran on maximum performance emitting 40 times more than the set
standards.

Global Impact

With the eruption of the news, it had countless repercussions on the stakeholders, along with the
automobile industry as well. As soon as the scandal news was revealed there was a major dip in
the stock prices. Starting from September there was a 33% drop in their stock price. Other
automakers like BMW and Daimler stock prices also fell by 4.9% and 5.8% respectively. 

It was also recorded ~59 premature deaths were caused by excess pollution from 2008-15 was
due to the cars equipped with defeat-device software.
 A peer-reviewed study published in Environmental Pollution estimated that the fraudulent
emissions would be associated with 45 thousand disability-adjusted life years (DALYs) and a
value of life loss of at least 39 billion US dollars.

Volkswagen was liable to pay $22 Billion in Civil and Criminal fines just in United States. More
than 11 Million vehicles were recalled back worldwide. Volkswagen AG was fined more than
125 Million for not being compliant with Australian diesel emission standards. After the scandals
countries like China, India, France, Germany, etc. also opened up investigation against their
different countries counterparts.

Ethical Issues
In this scandal, they committed several ethical and moral violations. 

1. They violated the utilitarian approach since they were deceiving customers, shareholders,
authorities, and the environment.
2. They also violated the individualistic approach, as it wasn't in the best interest of the
shareholders. With the news their share prices went down and, the goodwill of more than
50 years was lost for short-term gains. 
3. They were also morally wrong since they lied to the customers and major shareholders
who should have been aware of the standards and the quality of the car they were
purchasing or promoting.
 4.  Their corporate culture was extremely toxic as most of the executives knew about the
device and were looking at short-term results to gain maximum profitability.
5. The company committed outright fraud, engaged in illegal practice with the sole purpose
of deceiving regulators and consumers. 

Ethical theories violated

All the business have the responsibilities to adhere to moral and ethical code of conduct. While
in this case the company violated all the major code violations. In order to increase their bottom
line, they were more focused to look at short-term goals and thus being non-compliant with the
ethical and moral standards. According to Kanatian business theory, all the business have to
compliant to fulfill the ethical and moral aspects to retain the market. When Volkswagen got
involved in the Dieselgate, it falsified this theory and leading to negative implications on the
company. It resulted with the long-standing reputation being tarnished. This also manifested in
the belief that they were greedy and were trying to justify their means.

Another ethical theory which was violated was Utilitarianism. It states that right and wrong is
based on the outcome. Volkswagen case is in clear violation of this theory as it is mentioned
above the outcomes caused by the scandal resulted in negative outcome and it adversely affected
the major shareholders such as customers, stakeholders, regulators and environment thus making
it unethical.

Volkswagen response to the scandal

While their whole involvement in the scandal was ethical blunder, their response to the scandals
was much more ethical, as they acknowledged their involvement in the scandal and admitted of
all the misconduct in the matter. On 23 September 2015, CEO of Volkswagen AG Martin
Winkelhorn resigned from his position.

Volkswagen also announced that 11 Million cars were involved with falsified emission reports
and were recalled back for adjustments. With over $7 Billion was also earmarked in the cost of
rectifying the software to deal with pollution statements. On 28th September 2015 many top level
officials were suspended who were involved with the scandal.

Core Issue

The major issue was they were trying to justify their means by the ends. Company had a toxic
work culture which had negative influence, as all the senior level officials were involved in this
scandal and everyone knew about the misconduct which was going in the company and no one
came out and said anything about it, till someone blew the whistle which lead to the company
being investigated. If no one had notified the regulators, there was a high probability, the
unethical practice would have continued.

The other core issue at hand is even though they were involved in malpractice, no one bothered
enough to even think about how it affects their integrity and how in the long run, it might affect
their stakeholders. This process continued for about a decade and everyone was just more
worried how it affects their bottom line.

Volkswagen knew about the problems with the care, but rather than focusing on correcting it,
they were more worried about the consequences accompanying them. Rather than focusing on
the issue ethically, the worries of reputation being tarnished looms over their head, leading to
leadership engaging in unethical and immoral decision making.

The biggest issue was the emission of the enormous amounts of NOx in the atmosphere. It is
responsible for causing acid-rain, smog and creation of ground-layer ozone which effects the
health of a person adversely. It also causes damage to the vegetation. The effect on environment
and sustainability were adverse.

Impact on Stakeholders

1. Customers: Consumers trust was violated, as Volkswagen had a goodwill and their
brand name was always associated with trust, loyalty and goodwill. But the news of
emission scandal made them rethink their choices as it was a clear case of cheating.

2. Shareholders: When the news of emission scandal erupted in the media, the stock prices
of VW were badly hit and the year 2015 saw the lowest ever stock price in years. With
this many investors such as Qatar who then had 17% investment in the company lost $24
Million. Many other investors planned to sue for unethical and illegal practices on the
company.

3. Environment: The worse affected stakeholder was the environment. Nitrous oxide
emissions were 40 times more than US standard, which causes smog, acid rain and
creates ground-level ozone affecting the health of a person adversely. The company
which till 2002 was known for its’ sustainability had now created one of the major
scandals regarding environmental adversity.

Critical Perspective

If I was I in the position of Mr. Martin Winkelhorn, I would have adhered to the ethical and
moral guidelines. I believe that Ends do not justify the means. Even if the company was
making profits, ethical and moral values supersede everything. If I was in the position where I
knew about any misconduct which could potentially affect the goodwill of the company or could
potentially harm the stakeholders, an appropriate action would have been taken against the
person, group or an entity.
Furthermore even if a misconduct had taken place and once I was notified about it, my first
priority would have been to rectify the error from our side, completely adhering to the standards
set by different country regarding emissions.
In the end a company’s bottom line never always defines their valuye., their goodwill, their
values, customer and shareholder satisfaction under the moral and ethical compliance defines the
company’s true value.