Title: Volkswagen’s Dieselgate Challenge: Building an Ethical Culture.

This case was written by Sarah HUDSON, Rennes School of Business, France.

It is intended to be used as the basis for class discussion rather than to illustrate

either effective or ineffective handling of a management situation.

The case was compiled from published sources.

© 2019 Rennes School of Business.

No part of this publication may be copied, stored, transmitted, reproduced or

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 Volkswagen’s Dieselgate Challenge:
Building an Ethical Culture
In June 2015, the world woke up to the news that Volkswagen, the reputed German car-
maker had been accused by the US Environmental Protection Agency (EPA) of cheating
on its vehicles emission tests, allowing the cars to produce up to 40 times more pollution
than legally accepted.
German automobile producer Volkswagen is a leading vehicle manufacturer in Europe.
In 2017, 22% of new Western European cars originated from VW’s 123 production
facilities in 20 European countries. Its well-known brands include Volkswagen Passenger
Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati,
Volkswagen Commercial Vehicles, Scania and MAN.
The company is an international employer. In 2019, it had a total workforce of over
640,000 employees worldwide providing more than 44,000 vehicles and other services.
VW garnered a strong presence globally, selling its vehicles in 153 countriesi.
Founded in 1937, the German manufacturer entered the US market in the early fifties,
becoming a household name by the 1960’s. In the new millennium, VW grew from
strength to strength, weathering the 2008 financial crisis that hit the global economy and
the automotive industry, and maintaining its appeal to customers of all ages. So what was
the journey that led up to the shocking news of widespread cheating?

Leading up to Dieselgate
Before the mid-1990’s, diesel was little used, with under 10% of vehicles running on this
fuel. This all changed following the signing of the Kyoto protocol agreement in 1997
aiming to combat climate change. Under the agreement, most developed countries faced
legal requirements to reduce CO2, a major cause of global warming, over the next 15
years.
At that point, the U.S. and Japan started research into hybrid and electric vehicles, but the
German carmakers BMW, VW and Daimler lobbied the European Commission to
subsidize dieselii. VW headquarters in Wolfsburg, Germany have a longstanding and
stable embeddedness in their city – for example more than half the city’s residents
worked for VW. The company’s leaders wielded huge political power in Germany. So
they were able to lobby effectively to ensure that EU regulations did not interfere too
much with their operationsiii.
Diesel is cheaper and produces less CO2 than ordinary petrol per Km travelled, and so
was a quick and cheap way to reduce CO2 without facing the problem of developing
transformational and expensive technology. However, diesel emits more NO2 and tiny
particles, both of which have negative effects on the lungs, causing health problems and
potentially early deaths. In the 90’s, Britain, Germany, France and Italy all agreed to
subsidize diesel and to promote its sale to the publici.
The health effects of diesel are worse than predicted at the time. We now know that
diesel fumes cause cancer and cardiovascular illness. In addition, the use of palm oil in
diesel fuels in the EU also contributes to deforestation, which exacerbates global
warmingiv. Most European governments have admitted a major environmental mistake in
promoting diesel. The mayors of London, Paris, Madrid and Athens committed to
banning diesel by 2025v, and the German courts ruled that cities could ban diesel from
2018 onwards, and diesel taxes are set to rise in the EUvi. In the UK, recent calls have
occurred for sales of zero emissions vehicles to be brought in by 2030, sooner than the
original goal of 2040 in order to meet the terms of Paris Agreement of COP 21
addressing the urgent issue of global warmingvii. The detrimental effects of diesel on the
environment and health, however, has not stopped the automotive industry from its
efforts to lobby governments to continue allowing diesel in cities.viii
The European commitment to diesel meant that VW invested heavily in diesel vehicle
technology. In the years running up to 2008, the company developed a new high-
performance diesel engine, the EA 189. This engine was for use not only in the VW
brand cars, but also in their other brands like Audi, Skoda and Seat. Most importantly,
these engines were also intended for models to sell on the U.S. market with the aim of
promoting the concept of “clean diesel”. The vehicles were targeted at consumers who
wanted to be environmentally friendly but also to have a fuel-efficient and high
performing car.
VW engineers rapidly discovered that this engine could not deliver optimum power,
performance and fuel economy while at the same time staying within the legal
requirements for pollutant emissions set out in the Clean Air Act in the U.S. In other
words, combing high performance with low emissions was an impossible task.
It was at this point that things began to go wrong. VW had to meet the expectations of
consumers in the U.S, one of their most important expanding markets. In addition,
Martin Winterkorn the CEO of VW at the time had very ambitious objectives. In 2008,
he set the goal of tripling sales in the U.S. within a decade, so the pressure was on.
In 2006, VW engineers began researching illegal software known in the automotive
sector as a so-called “defeat device”, alternatively dubbed a “cheat device”. This
software allowed manufacturers to calibrate car computers to recognize that testing was
taking place, and reduce emissions until the test was over. This software was installed at
the beginning of 2008 in all vehicles with the new EA 189 engineix.
The practice of cheating on emissions tests is easy, as the EPA allows manufacturers to
know they will be tested, so they can calibrate the engines ahead of time. The tests, used
widely by the automotive industry, do not show the real emissions that will occur on the
road. So manufacturers do not have to make a car which actually emits less pollution, but
need simply to pass the EPA’s test. One of the problems with changing this practice is
that it is technically difficult to measure the emissions of a moving vehicle.
The use of these cheat devices was widespread in the car industry, both in the U.S. and in
Europe, and VW knew that other manufacturers had received sanctions in the past. The
fines imposed by the U.S. on other companies had been relatively affordable, reaching a
maximum of 100 million USD, well within the budget of VW, particularly when
calculated as a cost per carx.

Dieselgate, the fallout

A group of students from West Virginia University accidentally discovered the cheating
during a research project, completed in 2013. They recorded the actual emissions from
VW vehicles as they drove around Los Angeles with their own equipment. They soon
realised that these emissions did not match the legal limits set by the Clean Air Act, nor
those reported by VWxi.
In June 2015, the affair came out in the media, and VWs share prices tumbled overnight.
While VW’s sales recovered phenomenally between 2015 and 2019, its share prices did
not do so well. Share prices dropped from a high of around 250€ in April 2015 to below
100€ in September 2015 on the breaking of the dieselgate scandal in the media. Over the
following four years, VW slowly regained financial health, and shares stood at about
150€ in January 2019xii.
The fallout from the dieselgate scandal was serious indeed. By January 2019, 13
managers from the VW group had been indicted by the U.S. courts. For example, Oliver
Schmidt, a former emissions compliance executive for Volkswagen Group was arrested
in 2017 while on holiday in the U.S, and received a 7-year prison sentence for his
involvement in the scandal. Winterkorn, the CEO at the time was indicted by the U.S.
courts, but since Germany and the U.S do not have an extradition agreement, by 2019 he
had not received any sentence or finexiii. The CEO resigned in September, 2015 with a
gargantuan pension worth more than €28mii.
In the immediate aftermath of the scandal, Volkswagen declared that the fraud was the
fault of a few engineers, and that the management team was unaware of what had gone
on. On German television, Winterkorn blamed the “mistakes of a few”. However, the
media and US courts have since said that VW managers, including CEO Winterkorn,
were fully aware and informed about the cheat device, from 2010 at least. They
understood how it worked, as well as the legal risks and implications. Some sources
claim that certain managers actually instructed the testing and registration department to
assess the risks of being caught by the U.S. authorities iii, vi, vii, x.
The impacts of cheating on CO2 emissions are not only on VW and on the automotive
industry. The societal effects are of prime importance. Climate change is already having
effects on food supplies, climate refugees, biodiversity and planetary resilience. Some
sources estimate that understating diesel emissions has caused 38,000 premature deaths
due to the excess pollution, and that overall, diesel emissions within regulatory limits
could still cause 70,000 early deaths per year worldwidexiv,xv. In spite of these deleterious
effects, attempts to reduce the availability of cheap diesel is a difficult political decision.
This difficulty showed up in the “Gilets Jaunes” movement in France in the winter of
2018 -19. The flaring up of this social movement caused chaos in France, and was
triggered by the decision of Presodent Macron to raise the price of diesel.xvi

The company has since done some serious soul-searching to understand what went
wrong. How could a successful and respected company like Volkswagen have been so
mired in such a scandal?
Organizational Culture at VW
Since 2015, much ink has been spilt in the media and in Volkswagen’s own documents
on analysing why the cheating started and went on for so long. The finger soon pointed at
VW’s organizational culture.
Many media observers and VW representatives have suggested that there was a
combination individual employees taking flawed decisions and a weak ethical culture in
the group.
Some of the foundations for the fraud came from the fact that there was a tolerance for
rule-breaking within the company, and a blind eye could be turned to misconduct. There
also existed a high-pressure management style. For example, both the media and VW
managers spoke of Winterkorn fostering a climate of fear, where people were afraid to
speak up or contradict their managers.
There was an authoritarian structure, and very high pressure, for example, to meet
aggressive sales objectives. Few executives dared approach Winterkorn, and some
suggested that if they presented bad news, they could suffer threatening or demeaning
moments. This culture permeated down to the lower levels of management, and some
employees have described meetings where people tended to hold back their opinions and
wait for the boss to speak first. Concretely, in the case of the scandal, investigators noted
that engineers who had raised concerns were told to stay silent and to keep working iii, vi,
vii, x
.
Another aspect of the past culture at VW is the lack of focus on gender diversity.
Professor Dr. Jutta Allmendinger speaks in in VW’s own magazine “Shift”i about the
necessity of corporations, including VW to overcome systemic employment modes that
disadvantage women in the workplace. One of the few women on the management board
of VW stated that she had to “learn the language of men” and to push in meetings for her
opinions to be taken into accountiii.
Before 2015, Volkswagen enjoyed a good reputation in terms of its efforts in various
social and environmental issues. The company provided clear and positive information
about its sustainability efforts, providing full sustainability reports yearly and progressing
on the Global Reporting Initiative (GRI) indicatorsxvii. They supported and were involved
in many community programs encouraging diversity, protection of the planet, and
transparency. Notwithstanding the emissions scandal, the group has continued its CSR
and sustainability efforts, and has continued its communication around these effortsi.

Volkswagen: 2015 and beyond

Dieselgate and its serious implications caused a seismic shift in VW, and the company
made efforts to ensure that emissions cheating and similar company misconduct would
be difficult or impossible in the future.
The group enacted a radical new strategy the “TOGETHER – Strategy 2025” to realign
themselves to be a leader in sustainable mobility. They redoubled efforts to develop new
ranges of electric vehicles and expanding research and development of battery
technology and autonomous driving. In addition, they invested in intelligent mobility
strategies such as carsharing or on-demand mobility solutions. Testing for emissions
from VW vehicles moved from the laboratory to on-road driving, audited by external,
independent third parties.
In addition, the new CEO, Matthias Müller, who replaced Martin Winterkorn promised
to radically change the company culture bringing more openness and less hierarchy. To
do this, the group began introducing cultural change into its core processes and employee
relations. In 2017, they brought out a new, more comprehensive and group-wide code of
conduct
(https://www.volkswagenag.com/presence/konzern/documents/Code_of_Conduct_2017_
VW_Group_english.pdf) which is clear and easy to understand.
The code emphasizes speaking up and transparency, and the values of integrity and
fairness. It outlines responsibilities to society, as a business partner and in the workplace,
with concrete examples of each. It ends with a short questionnaire so that VW members
can ensure they are acting in accordance with the code, ending with the question “What
would my family say about my decision?” Training was provided on the new code of
ethics both face-to-face and online, standardized across the Group brand and companies.
Their whistleblowing system (where individuals can report misconduct anonymously)
was expanded substantiallyi.

Hiltrud Werner was appointed as new chief integrity officer in 2017 and launched several
initiatives to encourage employees to discuss their new values and to voice their concerns
openly with each other and with management. Employees are encouraged to address each
other with the informal German “Du” rather than the formal “Sie”. New words such as
“sharing” and “cooperation” are entering the CEOs communication. Over the three years
post-dieselgate, VW sought a climate where problems were not hidden and open
communication encouraged, where individuals were “allowed” to argue with their
superiors. The CEO said that VW needed professionals who would not simply say yes to
everything, but show independence by providing good arguments supporting their beliefs
and pioneering projectsiii.

Clearly, after the first weeks of shock, VW reacted to the scandal, and began slowly to
re-invent and reposition itself as a more sustainable, ethical company. By the beginning
of 2019, it looked like recovery was on the way. The question remains as to how VW can
maintain and develop its position as an ethical corporation and make sure that other such
scandals never happen again?

Pre-Reading
Kaptein, M. (2008). Developing and testing a measure for the ethical culture of
organizations: The corporate ethical virtues model. Journal of Organizational Behavior,
29(7), 923-947.
Steinmeier, M. (2016). Fraud in sustainability departments? An exploratory study.
Journal of Business Ethics, 138(3), 477-492.
The Paris Agreement & The Kyoto Protocol. www.unfccc.int
COP 21, www.cop21paris.org.
The Clean Air Act. www.epa.gov
References

i
This section uses materials from www.volkswagenag.com
ii
John Vidal, The rise of diesel in Europe: the impact on health and pollution. September
22, 2015. www.theguardian.com. Accessed on October, 20, 2015.
Vivienne Walt, Volkswagen races to put ‘dieselgate’ in the rear view. July 23, 2018.
iii

http://www.fortune.com. Accessed on January 30, 2019

iv
Philip Blenkinsop, EU targets palm oil for road fuel phase-out, but with exemptions.
February 11, 2019. www.reuters.com. Accessed February 13, 2019.
v
Matt McGrath, Four major cities move to ban diesel vehicles by 2025. December 02,
2016. https://www.bbc.com. Accessed on January 29, 2019
vi
Bill Lehane, Europe's diesel drivers beware: Heftier tax is on the way. February 07,
2019. www.bloomberg.com. Accessed on February 13, 2019
vii
Rachel Cooper, MPs call for petrol and diesel ban to be brought forward to 2032.
October 19, 2018. www.climateaction.org Accessed on January 29, 2019
viii
France Info, Vignette Crit'Air 1 pour les véhicules diesel : le gouvernement divisé sur
la question. February 07, 2019. www.mobile.francetvinfo.fr. Accessed on February 13,
2019.
ix
Jack Ewing, Volkswagen engine-rigging scheme said to have begun in 2008. October
04, 2015. www.nytimes.com. Accessed on January 30, 2019
x
Megan Geuss, Volkswagen’s emissions cheating scandal had a long, complicated
history. September 24, 2017. www.arstechnica.com. Accessed on January 31, 2019
xi
Jack Ewing, Researchers who exposed VW gain little reward from success. July 24,
2016. www.nytimes.com, Accessed on January 30, 2019
xii
www.volkswagenag.com
xiii
David Shepardson, U.S. grand jury indicts four Audi managers in VW emissions
probe. Reuters, January 17, 2019. www.reuters.com Accessed on January 30, 2019
xiv
Susan Anenberg et al. (2017). Impacts and mitigation of excess diesel-related NOx
emissions in 11 major vehicle markets. Nature, 545, pp. 467–471. Accessed on February
01 2019
xv
Damien Carrington, 38,000 people a year die early because of diesel emissions testing
failures. May 15, 2017. www.theguardian.com Accessed on February 01, 2019
xvi
Angelique Cheisafis, Who are the gilets jaunes and what do they want? December 07,
2018. www.theguardian.com Accessed on March 11, 2019
xvii
www.globalreporting.org