Ethics are the moral principles that are presumed to govern people’s behavior or the way that a certain activity will be conducted. Business ethics on the other hand refers to the study of proper policies of business. These proper business policies include the potentially controversial issues for example insider trading, corporate governance, fiduciary responsibilities, discrimination, and corporate social responsibility. In business ethics, it is the law that guides businessmen in most of the times while other business set their basic frameworks that are ethically proper for their business. This frameworks must however be accepted by the public and have the moral principles of how the business behaves since the principles that guide human beings and their actions are also applicable to businesses.
Background of the Ethical Issue
The Volkswagen group is one of the largest automakers in the world. Headquartered in Wolfsburg, Germany, the company has been for a long time the testament of Germany’s engineering marvels. However, in recent years, the company’s well-known brand name has been tarnished by several actions that violated the trust the company had with its various stakeholders (Mansouri, 2016). The company was involved in an emissions scandal. The scandal along with how the company reacted to the issue revealed well-established flaws in the company’s organizational structure as well as its corporate culture (Siano et al., 2017). This paper examines the ethical issues that were faced by the company and how it impacted various issues surrounding multinational issues and environmental protection.
Ethical refer to moral principles that govern the behavior of certain parties. While ethics applies to the actions of individuals, when these individuals are acting on behalf of an organization, their actions will be seen as a reflection of the organization’s stand on ethics (Siano et al., 2017). Ethics differs from legal requirements as there are often no formal ways of enforcing ethical issues. More so, an organization can choose to have or not have an ethical code of conduct. More so, legal actions can be unethical and unethical actions can be legal. As such, legality is not always an accurate determinant of whether an action is morally right.
Characteristics of the Ethical Problem
To understand the ethical issues that threatened such a large corporation, it is vital to examine the motivation behind the events and the specific actions that led to the crisis faced by the company. At the time the scandal unfolded, Martin Winterkorn was the chief executive officer. He had been the CEO since 2007 (Rhodes, 2016). Martin had the ambitious objective of unseating Toyota as the world’s largest automaker and in the process sells at least ten million automobiles annually. At the same time, this objective would do well in helping Germany recover from the devastation of the 2008-2009 financial crises (Rhodes, 2016). To drive these sales, the company decided to place greater emphasis on the United States market. To meet these supply objectives, the company’s engineers had to deliver powerful, fuel-efficient cars whose emissions would pass America’s stringent pollution regulations. The company aimed at increasing the number of vehicles it sold to the United States threefold.
The company set out to increase sales in the diesel segment despite the segment holding just 5% of the US vehicle market in 2007 (Rhodes, 2016). Diesel engines, if designed to be fuel efficient enough can be desirable as they are often powerful. Nevertheless, these engines can generate more pollutants than their petrol counterparts. To achieve the feat of developing a diesel vehicle that was efficient enough to pass US regulations and at the same time powerful enough to attract a significant market share would require the company’s engineers to overcome a significant obstacle (Blackwelder, Coleman, Colunga-Santoyo, Harrison, & Wozniak, 2016). The engineers had to work under the watchful eye of Winterkorn. Winterkorn was known to keep the company under tight control. He was known to lead the company in setting aggressive objectives and at the same time involve himself in even small decisions. The subordinates worked in fear of contradicting their superiors or even admitting failure (Valentini & Kruckeberg, 2018). As such, the subordinates would always ensure they gave the top management only desirable news and attempted to as much as possible hide or resolve any issues.
Winterkorn decided not to team with Daimler to develop a viable solution for reducing nitrogen oxide. Nitrogen oxide is one of the main pollutants from the internal combustion engine. At the moment, Daimler had come up with a promising solution to this problem. Nonetheless, Winterkorn’s decision meant that Volkswagen’s engineers had to start from the ground up in designing a new solution to the problem. They had to work within a significantly limited timeline. Faced by crushing constraints in this project, the engineers decided to install software that cheats when a vehicle is tested for emissions.
During the testing of vehicles, the engineers were aware that only two wheels were used. The engineers designed software that recognized this aspect along with steering wheel position, duration of engine run-time, tire rotation and atmospheric pressure to determine if the car was being tested for emissions or it was on the road (Mansouri, 2016). If the software detected that the vehicle was being tested for emissions, it would activate emission-controlling devices. If the car was on the road, these devices were disabled as they would inhibit the performance of the vehicle. As such, the vehicles met the US standards for emissions as they were tested in the labs but they failed to adhere to these regulations on the road (Blackwelder et al., 2016). The discovery of this phenomenon began the intensive scrutiny of Volkswagen practices that is ongoing to this day.
This discovery revealed that the emissions were many times higher than the regulations allowed. In some cases, the emissions were as much as 40 times the permitted levels (Rhodes, 2016). After the discovery in 2014, the company immediately started facing a backlash. Regulators from around the world conducted their investigations. The company stopped selling its 2015 models (Rhodes, 2016). In an apparent move to take responsibility or at least admit some culpability, Winterkorn resigned. At the same time, other senior managers were put on leave. Piling pressure on the company was the sudden fall in the value of its stock.
Further analysis of the factors leading up to the creation of the cheat system reveals that there are several factors at play. First, there was immense pressure on the engineers to deliver a system within a ridiculously constrained resource system. The most significant constraint was time. Although the organization had a well-established and communicated code of conduct, the pressure led to engineers to throw it out of the door (Valentini & Kruckeberg, 2018). The organization has an autocratic form of leadership that left the engineers little room to communicate their feedback and make the management know that the timeline was highly constrained (Siano et al., 2017). The top management needed the goal to be achieved at whatever cost. This pressure combined with an opportunity to cheat.
The opportunity was presented by the software that was sold to the company. It could detect when the vehicle was being tested. The company that supplied the software thought that the software would only be used for internal testing purposes (Williams, Agle, and Gates, 2018). His software was embedded in the software that is used to run the cars made by the company. At the same time, the company’s engineers had the knowledge that the company had used defeat devices in the 1970s that were used to cheat on emission regulations of the time (Rhodes, 2016). However, this action in the 1970s saw a minimal fine and the entire action had more benefits than costs (Rhodes, 2016). As such, these engineers may have rationalized that a similar scenario would unfold if their cheating was uncovered.
The ethical problem, in this case, had three typical characteristics. The people who made the decision were aware of its implications. They knew that the decision would affect other people in various ways. If the sales increased as expected, the shareholders would gain from profits and increased market value of their shares. The consumers of the vehicles were, however, being cheated regarding the emission rate of the vehicles. This would not be ideal for enhancing their decision making, and it would also distort their perception of externalities from their consumption of these products (Smit & Bierman, 2017). More so, the vehicles would have adverse impacts on the environment from the increased emissions. Another characteristic of the ethical issue is that it required a decision to be made. The engineers were put in a tight spot as they did not want to disappoint the top management. As such, hiding the real impacts of the engines would achieve their goals without the possible ramifications of not delivering what the executives wanted (Blackwelder et al., 2016). The third trait is the decision makers were unaware of which decision was best in the situation as each decision has its tradeoffs. Whatever decision was made by the engineers had to disappoint someone.
Apart from the events just leading up to the creation of the problem, there are other elemental issues and policies that laid the foundation for the emissions catastrophe. The immediate issue that can be identified is bad management. However, while management is not always perfect, the effects of such management do not reveal themselves as a global public relations disaster that threatens to ruin over half a century of building a brand (Mansouri, 2016). The management culture at the company is however largely to blame. Developing such a culture takes time, and as such, it would take time to effect changes that reverse the possible development of similar issues in the future (Valentini & Kruckeberg, 2018). The corporate culture at Volkswagen may have ignored transparency and integrity which lead to its peril. The board of directors has the responsibility of actively monitoring management to ensure that there is not only maximum corporate performance but also compliance (Blackwelder et al., 2016). The co-determination aspect that defines many companies in Germany limits the ability of the board to scrutinize its actions.
The company was also faced by governance issues stemming from the structure of the voting system by each of the principal shareholders. The company has many influential shareholders with significant chunks of the entire company’s shares (Smit & Bierman, 2017). As such, there are often conflicts among the shareholders during decision-making processes. The controlling shareholders often fail to monitor their expectations and needs to prevent poor management. Many minority shareholders have little say because of their minimal votes. The company was dominated by Ferdinand Porsche, from the Porsche family who had been a chair of the board for years (Blackwelder et al., 2016). In one controversial move, he managed to get his fourth wife on the board (Blackwelder et al., 2016). This action while objected to by minority shareholders went through on account of the power held by the key shareholders.
The country’s government is also a dominant shareholder. As such, the interests of such a body are unlikely to match the interests of private shareholders. There is often a conflict of interest when a powerful entity such as the government gets two people to be its representatives on the board of directors of the company (Aurand et al., 2017). The co-determination principle in Germany requires the board to have half its members from shareholders and the other half from the company’s employees. As such, of its 20 members, 10 were labor representatives (Blackwelder et al., 2016). The goal of unions is more employment and better terms of employment such as wages and benefits. The goals of shareholders, on the other hand, are profit maximization and thereby increasing the returns to investment. The board is therefore faced with a problem of reconciling the conflicting goals of each party. As each group pursues its interests, there are losses in accountability.
Analysis under a Theoretical Framework based on Economic, Legal and Ethical considerations
The ethical issues at Volkswagen can be analyzed using at least three theoretical frameworks. The first one is individualism. Individualism, in this case, would imply the company acting as an individual and making decisions based on what was good for it without considering the needs of other people (Blackwelder et al., 2016). The concept was phrased by Milton Friedman, a renowned economist. Given the ultimate goal of any business is to make profits, Volkswagen had no business in taking care of the needs of other individuals other than its own (Janssen, 2013). The forging of the scandal can be readily attributed to the individualistic approach in decision making.
Another approach of the ethical issue is the utilitarian path. According to utilitarianism, an act is desirable or should be promoted if it produces the greatest benefit to the greatest number of people. The theoretical foundation of utilitarianism is consequentialism. An act is not considered inherently good, but it can be gauged as good or bad depending on its consequences. As such, the perspective of the observer has considerable influence on their judgment of an act. As this scandal was being unveiled, there is little leeway for any observer to point at any good that was happening to any of the parties involved (Smit & Bierman, 2017). The short-term sales that would increase the company’s profits did not materialize as the vehicles were recalled from the market. The recall of the millions of vehicles was a perfect example of taking a step forward and two steps backward. Apart from the recall, the company faced numerous lawsuits and had to deal with a public relations crisis like it had never seen before. The actions of the company can be considered unethical as no stakeholder gained from them. Employees would later lose jobs as there were costly steps to mitigate the crisis. Consumers had wasted resources acquiring vehicles that served them only for short periods only to be ruled unlawful due to not meeting the emissions guidelines (Janssen, 2013). The only positive impact of the crisis is the lessons learned by the company and other companies in the spheres of compliance, risk, management, and internal auditing.
Another perspective of analyzing the ethical problem relies on the work of Immanuel Kant. Kant developed a philosophical framework that would later be known as Kantianism. Kantianism differs from utilitarianism as it is the opposite of consequentialist ethics. Kant developed an ethical theory that is classified as deontological. Deontological ethics are concerned with the action not the consequences of the actions (Rhodes, 2016). As such, an action is moral if it is inherently right. As such, in cases where seemingly unethical actions lead to positive consequences, the actions can still be deemed as unethical or immoral. Duty-based ethics emphasize the value of every person, and as such, it is essential to act in such a manner that all people are respected.
This is often the basis for universal human rights. As such, Volkswagen was involved in unethical acts by lying about the emission levels of its vehicles. The act of lying for self-gain or any other reason is inherently wrong. More so, the company attempted to cover up its tracks by citing the emissions as being the result of technical malfunctions (Aurand et al., 2017). However, further analysis revealed that the emissions were as a result of deliberate human action. Kantianism provides certainty where utilitarianism doesn’t. Under utilitarian analysis, some parties may have the views that an act had benefits to some people that other parties contradict. Kantianism deals with the intentions and motives of action.
Based on all of the discussions that have been made on the various ethical parts of this issue, the analysis of Volkswagen’s actions reveals that its acts are not justifiable and are highly unethical. In the United States, the company faced a lawsuit due to producing and lying about cars that had emissions that violated the emissions standards of the country. The company only wanted to make profits at the expense of the customers and the environment. Volkswagen lied to customers as well as regulatory bodies such as governments (Aurand et al., 2017). At the time this lie was working, the company saw an increase in vehicle sales which was desirable to the firm. The company also took no responsibility for the environment. It took no actions to stem the accelerating pace of global warming as a result of emissions from vehicles. The company was more concerned with its bottom line than with paying its social cost. Other countries may not have strict emissions standards or the legal framework to sue the company. As such, there are still many vehicles on the roads in countries such as India, China, and Australia (Rhodes, 2016). The company could have avoided the scandal by spending more time and resources in developing a cleaner engine. In the process, the company traded its integrity and image for sales. In the end, the company lost a significant portion of its customers, investors and other stakeholders.
Recommendations to Solve Ethical Problem
There are several courses of action that the company can take to remedy the situation. The first battle the company has to fight is to win back the trust of millions of consumers and stakeholders worldwide. Failure to act would result in consumer boycott that can bring the company to its knees. The company has been on the right path by admitting blame and complying with investigations and legal actions taken against it. It has also set aside about $15 billion as penalties for its actions in the United States (Rhodes, 2016). First, the company can join independent verification agencies in a bid to rebuild trust in the brand. While it is under intense scrutiny, it is necessary to assure customers that its claims can be verified by external parties without any conflict of interest with the firm’s core operations.
The company could consider rebranding. Rebranding would be difficult given the time it has taken to develop the now tarnished Volkswagen brand. While people may forget about the scandal in the long-run, it may be viable to rebranding and improve the brand image. Rebranding would restate the company’s commitment to admitting its failures and its resolve to move forward without any more scandals. However, rebranding can be expensive and risky. The new brand may fail to capture the hearts of consumers as the old one did. The new brand can invest heavily in green energy to show the company’s commitment to fighting for a greener future.
References
Aurand, T. W., Finley, W., Krishnan, V., Sullivan, U. Y., Bowen, J., Rackauskas, M., … & Willkomm, J. (2017). The VW Diesel Scandal: Engaging Students via Case Research, Analysis, Writing, and Presentation of Findings. Journal of Higher Education Theory and Practice, 17(7), 10-21.
Blackwelder, B., Coleman, K., Colunga-Santoyo, S., Harrison, J. S., & Wozniak, D. (2016). The Volkswagen Scandal.
Janssen, C. I. (2013). Corporate historical responsibility (CHR): Addressing a corporate past of forced labor at Volkswagen. Journal of Applied Communication Research, 41(1), 64-83.
Mansouri, N. (2016). A case study of Volkswagen unethical practice in diesel emission test. International Journal of Science and Engineering Applications, 5(4), 211-216.
Rhodes, C. (2016). Democratic business ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty. Organization Studies, 37(10), 1501-1518. Retrieved from https://journals.sagepub.com/doi/abs/10.1177/0170840616641984
Siano, A., Vollero, A., Conte, F., & Amabile, S. (2017). “More than words”: Expanding the taxonomy of greenwashing after the Volkswagen scandal. Journal of Business Research, 71, 27-37.
Smit, A. M., & Bierman, E. J. (2017). An evaluation of the reporting on ethics and integrity of selected listed motor vehicle companies. African Journal of Business Ethics, 11(1).
Valentini, C., & Kruckeberg, D. (2018). “Walking the environmental responsibility talk” in the automobile industry: An ethics case study of the Volkswagen environmental scandal. Corporate Communications: An International Journal.
Williams, R. N., Agle, B. R., & Gates, D. (2018). Teaching business ethics: current practice and future directions. In The Routledge Companion to Business Ethics (pp. 80-96). Routledge.
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