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Course Requirements

For

FIN 4324

Commercial Bank Management

Prepared for:

Professor Marcos A. Kerbel

Department of Finance

Florida International University

Miami, Florida

Prepared by:

Name

ID

Phone number

Email Address

Date of Report
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1. Introduction

Since the industrial revolution, the growing social and economic gap complemented

by the increasing frequency of ecological disasters has increasingly influenced awareness

concerning the inevitable link between unethical business activities and poor social,

environmental, and economic outcomes. As a result, the need to incorporate business ethics

has become more than a compliance issue. Innovative businesses have leveraged business

ethics to unlock unique competitive advantages. But what is business ethics? According to

Moriarty (2021), business ethics are a system of ethical and moral beliefs that guide an

organization’s decisions, behavior, and values of individuals within that organization.

Specific ethical requirements such as occupational safety and health (OSH), minimum wage,

collusion, and insider trading have been developed into laws. Business ethics and other non-

legal perspectives enhance the law by describing moral conduct beyond government control.

Almost all companies today have an ethical program in place. This development was

captured in the Ethics and Compliance Initiative (2021) survey that fewer than one in five US

employees were in workplaces with a strong ethical culture compared with one in ten in

2000. This increased incorporation of business ethics in contemporary business management

points to the importance of business ethics. As part of compliance and stakeholder relations,

business ethics play a crucial role in creating credibility and legitimacy in the public eye,

particularly in the era of increased awareness and scrutiny by the public. Besides, business

ethics correspond to the basic human need to be part of a socially and environmentally

responsible organization. Responsible organizations benefit from business ethics through

improved decision-making systems incorporating social, environmental, and economic

perspectives. Such extended decision-making systems are critical for identifying

opportunities, particularly in underserved markets and innovation, to achieve the efficiency

that yields cost benefits and improved profitability.

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However, implementing business ethics comes at a cost that creates a tradeoff for

most businesses. Pérez-Villalba et al. (2021) argue that most unethical companies act like so

primarily because of financial incentives surrounding the shareholder theory. This is well

illustrated in the European automobile market after BMW and Volkswagen, two leading auto

manufacturers, were fined $1 billion over diesel-tech collusion. This paper analyzes this case

to outline the ethical issues and generate insights to avoid such unfavorable industry

outcomes.

2. Summary of the Case

Following a three-year investigation by the European Commission, BMW and

Volkswagen were fined $1 billion after being found in violation of the European Union’s

antitrust rules by colluding amongst themselves and their competitor Daimler on the technical

development in the area of nitrogen oxide cleaning. According to the commission’s

investigations report, the three auto manufacturers that are part of a ‘cartel’ dubbed ‘the circle

of five’ held technical meetings between 2009 and 2014, whose deliberation and outcomes

breached the EU’s antitrust laws because the companies agreed to collude and not compete in

the area of emissions technology, to develop more efficient systems for diesel-powered

vehicles. The discussions centred on developing the Selective Catalytic Reduction (SCR)

system that treats nitrogen oxide particles from ICEs with Adbluse to reduce emissions and

pollution. The companies agreed on how to develop this technology to reduce costs and meet

the minimum EU requirements.

According to the European Commission, this collusion effectively restricted

innovation in emission-cleaning technology for diesel-powered cars. Despite agreeing to pay

the fines, the two auto manufacturers have failed to take responsibility, releasing press

statements suggesting their actions were legitimate technical cooperation that should not be
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treated as an antitrust violation. Both companies deny implementing their deliberations to

manipulate emission control systems.

3. Primary Stakeholders in the Case

According to Scherer & Patzer (2017), stakeholders are individuals or institutions

with vested interest or power in an organization and can affect or be negatively affected by its

operations and performance. In this case, the primary stakeholders are institutions. However,

it is noteworthy to recognize one individual at the center of the case Ms Vestager, EU

Competition commissioner. Ms Vestager heads the EU’s Competition Commission, a

division of the EU Commission, the regulator and primary stakeholder in this case. The

regulatory body is responsible for enforcing EU’s competition rules for better markets and a

level playing field, where companies compete fairly based on merits. The other stakeholders

involved are the management of and the five German automakers dubbed ‘the circle of five’,

including BMW, Volkswagen, Audi, Porsche, and Daimler. As the largest auto manufacturers

in Germany and the global automobile markets, their cartel-like behavior poses a significant

threat in a highly concentrated market.

4. The Course and Elements of the Case

Start

The formal investigations by the European Commission began in 2018, and a formal

enquiry started the same year (European Commission, 2021). The companies involved

initially contested the case until an agreement was reached in 2021, and a ruling was made in

July of the same year. However, the events leading to the case began more than a decade ago,

in 2006, when the companies’ managers started holding technical meetings concerning the

development of SCR technology.

Location
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The meetings were held across Europe, and in 2009 the companies began sharing data

about their SCR technology, particularly the size of their Adblue tanks and expected

maintenance frequency. This way, they would not have to be wary of their competitors’

innovations across all European manufacturing locations.

Fines

The firms agreed to an out-of-court settlement that saw them receive a 10% discount

on their fines. As a result, BMW agreed to pay a fine of €373 million, and Volkswagen

agreed to pay €502 million. Daimler AG, also part of the case, managed to avoid a potential

penalty of €727 million after agreeing to act as a whistleblower (European Commission,

2021).

Duration of the violation

The commission’s latest announcement said that the carmakers had also worked

together over five years to delay more efficient technology. Despite starting discussions on

SCR technology in 2006, the firms began collusion on June 25, 2009, and lasted until

October 1 2014, just before Volkwagen’s emissions scandal in the United States began in

2015 (European Commission, 2021).

Ending

The formal investigations by the European Commission began in 2018, and a formal

lawsuit was filed in 2019. The companies involved initially contested the case until an

agreement was reached in 2021, and a ruling was made on Thursday, July 8, the same year.

5. The motive for this case

Significant research has been conducted to explain the motivations of unethical

business practices. According to Pérez-Villalba et al. (2021), most employee act unethically

due to the goals set out by the company. Therefore, most unethical businesses act like so

primarily because of financial incentives surrounding the shareholder theory. This is well
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reflected in this case. The focus on maximizing shareholders’ welfare in an era of intense

competition in the industry increases the tradeoff between focusing on profitability or ethics,

causing more unethical behavior. The growing need for eco-friendly cars has created fierce

competition, forcing manufacturers to innovate more efficient systems to remain compliant

and achieve higher product marketability. However, this competition and the cost of

innovation have a huge cost impact on car manufacturers. Besides, while using Adblue tanks

dramatically lowers diesel emissions, it reduces the performance of the engines. This hurts

the marketability of diesel-powered machines, negatively affecting manufacturers’

profitability.

Therefore, to overcome these unfavorable external factors, the companies decided to

collude and share data about their SCR technology, particularly the size of their Adblue tanks

and expected maintenance frequency. This would effectively eliminate competition in

developing more efficient fuel emissions while ensuring they meet the minimum

requirements of the EU’s regulation (Boston, 2021). Besides, they eliminated all uncertainty

concerning the future of nitrogen oxide treatment in diesel-powered vehicles. This way, all

firms would benefit from cost savings and a less strict regulatory framework. The companies

have maintained that their actions were legitimate technical cooperation that should not be

treated as an antitrust violation.

6. Public Disclosure

This case attracted the media’s attention as early as 2018 when the European

Commission announced opening an enquiry into the three companies. This announcement

came almost a year after the EU had searched the three companies’ offices over allegations of

price fixing. Through a public press statement, the EU announced that it had information that

the three firms had engaged in unlawful legal activities between 2009 and 2014. In this case,

we see the role of whistleblowers in advancing ethical business practices. Whistleblowers are
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commonly perceived as individuals or employees, but in this case, the whistleblower is an

entity, Daimler AG. Despite being part of the companies involved in the violation, Daimler

helped the European Commission by agreeing to become the whistleblower for the

commission’s investigations. By claiming a whistleblower’s position, Daimler effectively

shielded itself from an estimated €727 million fine.

7. The outcome of the Case

Following the investigations, the European Commission concluded that the three

companies had acted unlawfully between June 25, 2009, and October 1 2014, to undermine

competition and innovation in minimizing diesel emissions and pollution. The commission

decided to slap hefty fines on the companies based on the commission’s 2006 guidelines on

penalties. Under the 2006 Leniency Notice, Daimler received complete immunity, effectively

shielding itself from a possible €727 million fine (European Commission, 2021). Volkswagen

received a 45% leniency reduction and a 10% settlement discount to pay €502. Volkswagen’s

leniency reduction and settlement discount were affected due to its timed cooperation and

support for the investigation. BMW agreed to pay €372 (European Commission, 2021). As a

result of these outcomes, industry players have warned such new legal grounds by the

commission may discourage legitimate collaborations on technical developments. However,

the commission has refuted this criticism, promising to publish critical guidelines between

creating a cartel and legal cooperation, using this case as an example.

8. Possible Ways that this violation Could have been Avoided

The threat of a criminal record, jail term, and hefty fines is a solid disincentive for

engaging in collusion. From the case analysis, despite the hefty fines slapped on the

companies, no single manager has been mentioned as being held accountable for the

violation. In the stakeholder analysis, managers are part of the primary stakeholders in the

case having initiated, participated, and implemented unlawful business practices in their
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organizations. One way this violation could have been avoided is by the European

Commission having in place effective policies that hold executives responsible for such

business decisions. The commission can take the example of the US, where the DoJ has

powers to investigate and hold executives accountable for criminal activity. For example, in

2016, four Barclays Bank employees were sentenced to 17 years for LIBOR rate

manipulation (Serious Fraud Office, 2016). Without holding managers and executives

accountable, the EU is likely influencing a culture of low accountability that promotes

unethical behavior.

Another way that could have avoided this violation involves developing elaborate

policies that clearly define legal and illegal cooperation. In this case, Volkswagen accused the

EU of using new legal grounds to counter legitimate technical collaboration. Besides, one of

the outcomes is the EU promising to publish critical guidelines between creating a cartel and

legal cooperation, using this case as an example. Therefore, there were no clear guidelines

regulating collusion in technical innovation. Therefore, having clear guidelines outlining the

nature of legal and illegal technical collaboration is a welcome tool that could have avoided

this adverse event.

9. Lessons Learned

One of the critical lessons concerns the role of whistleblowers in advancing business

ethics. Whistleblowers play a vital role in corporate governance, which benefits organizations

and other employees in numerous ways. Whistleblowers help develop a healthy culture of

accountability and transparency within organizations. Creating a healthy workplace and

industry culture that embraces accountability and transparency gives employees and

economic agents confidence that the top executives and regulatory bodies will address

emerging issues and ensure a healthy culture and values are maintained. Using this lesson, the

EU approach to the case is recommendable, offering protection to Daimler.

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References

Boston, W. (2021, July 8). Volkswagen and BMW fined $1 billion by Europe over Diesel-tech

collusion. The Wall Street Journal. Retrieved November 3, 2022, from

https://www.wsj.com/articles/volkswagen-bmw-fined-1-billion-by-europe-over-diesel-

tech-collusion-11625741892

Ethics and Compliance Initiative. (2021, October 20). 2021 Global Business Ethics Survey.

Ethics and Compliance Initiative. Retrieved November 3, 2022, from

https://www.ethics.org/global-business-ethics-survey/

European Commission. (2021). Antitrust: Commission fines car manufacturers €875 million

for restricting competition in emission cleaning for new diesel passenger cars.

European Commission - European Commission. Retrieved November 3, 2022, from

https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3581

Moriarty, J. (2021). Business, ethics, and Business Ethics. Business Ethics, 1–19.

https://doi.org/10.4324/9781351016872-1

Pérez-Villalba, M., Sánchez-Oliver, A., Río-Rama, M. de, & Grimaldi-Puyana, M. (2021).

Corporate Social Responsibility, management and solution to unethical environments in

sports. Progress in Ethical Practices of Businesses, 65–79. https://doi.org/10.1007/978-

3-030-60727-2_4

Scherer, A. G., & Patzer, M. (n.d.). Where is the theory in stakeholder theory? A meta-

analysis of the pluralism in stakeholder theory. Stakeholder Theory.

https://doi.org/10.4337/9780857936349.00012
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