Volkswagen installed "defeat devices" in 11 million of its diesel vehicles worldwide between 2008-2015 to circumvent emissions tests. In 2015, the EPA issued Volkswagen with a notice of violation for installing the devices in US vehicles. The scandal had major financial and reputational consequences for Volkswagen, wiping out a third of the company's market value. Former CEO Martin Winterkorn resigned under threat of criminal investigation. The company faced billions in fines and lawsuits, and its actions damaged consumer trust and its public image.
2. In mid-2015, Volkswagen overtook the Toyota as the biggest auto manufacturer in the world and
marked the early achievement of an ambitious ten-year goal that had been set in 2007 by former
CEO Martin Winterkorn, and which critics at the time had ridiculed as delusional, were that by 2018
they would be ‘the world’s most profitable, fascinating and sustainable automobile manufacturer’.
3. On 18 September 2015, the United States Environmental Protection Agency issued
Volkswagen with a notice of violation of the Clean Air Act. The auto manufacturer
had been caught having installed ‘defeat devices’ in 482,000 of its diesel vehicles
in the US, a number that was later revealed to be 11 million worldwide.
4. Caught red-handed, the future of Volkswagen was cast under a dark shadow of doubt. At best its
reputation was in tatters, at worst its continued existence was in question. Almost a third of the
company’s market value was wiped out in less than a week. Within days the author of the 2018
strategy, Martin Winterkorn, resigned under threat of a criminal investigation.
7. The Volkswagen (VW) Group is a company formed in 1937;
firstly, as a manufacturer of a famous car known as the
“Beetle”. The company was founded by the Nazis with
the help of a billionaire family, Ferdinand Porsche's
descendants, a German state government (Lower
Saxony) and powerful labour unions.
Company Background
8. Acknowledgement
VW Group has held the largest market share in Europe. The company ranked ninth in the Fortune
Global 500 list of the world’s largest companies in 2013. In 2014, VW achieved a production
output of 10.14mil vehicles. In the first half of 2014, VW was global number two carmaker.
The company sold 5.07 million vehicles, behind Toyota which sold 5.1 million vehicles.
9. In December 2007, under the direction of then CEO Martin Winterkorn,
the VW group launched an incredibly ambitious growth strategy called “Strategy 2018.”
Strategy 2018
01
02
03
04
Volkswagen intends to deploy intelligent innovations and technologies to become a
world leader in customer satisfaction and quality.
Increase unit sales to more than 10mil vehicles a year; in particular, VW intends to
capture an above-average share of growth in the major growth markets.
A sustainable return on sales before tax of at least 8% to ensure that the Group’s solid
financial position and ability to act are guaranteed even in difficult market periods.
Volkswagen aims to become the top employer across all brands, in all companies and
regions. This is necessary to build a first-class team.
10. Volkswagen’s Downfall
Until recently, Volkswagen was well
underway to achieving these goals,
having achieved over 10mil unit
sales in 2014.
However, the success was short-lived.
On October 26, 2015, Toyota officially
released its sales numbers for the
first three quarters of 2015;
Volkswagen had fallen behind.
VW’s downfall stemmed from the same
thing that enabled the company to
commit such wide-scale misconduct in
the first place: technology.
11. Scandal Break
VW Group installed this programming emissions-compliance “defeat device” in about 11 million
vehicles worldwide. This cheating continued for ten years until detected. The scandal started
when Volkswagen was issued a notice by the U.S. Environmental Protection Agency (EPA) in
2015 for violating the Clean Air Act. Volkswagen initially lied to the EPA and cited “technical
problems”. Eventually, Volkswagen pleaded guilty in 2017 and settled to a $4.3 billion
agreement, the highest ever criminal fine imposed on a carmaker in America
12. Initial Response & Impact
Subsequently, Volkswagen issued a public apology and arranged to pay $22 billion to claimants
including car owners, dealers, and regulators. Volkswagen lost more than one-third of its stock
value, 500,000 cars were recalled, sales were stopped, six executives were charged and the chief
executive officer for North America and other directors resigned.
14. Clean Diesel Vehicle Plan
Diesel vehicles had been known for benefits over gasoline
vehicles, however, diesel vehicles had drawbacks:
15. West Virginia University Discovery
In May 2014, the California Air
Resources Board (CARB) embarked
on an investigation to test VW diesel
models on the road. Followed by the
investigation, the excessive level of
nitrogen oxide emission was found
by researchers at West Virginia
University. The emissions level was
almost 40 times higher than the US
regulation threshold. After the
investigation, the Environmental
Protection Agency (EPA) and the
CARB refused sale of VW’s 2016
diesel models.
16. West Virginia University Discovery
Even though the scandal erupted globally, it affected Europe more than the rest of the world
because diesel vehicles account for about 41% of all European cars. The European Union had
incentivized and subsidized production and purchase of diesel vehicles over gasoline models.
17. West Virginia University Discovery
More than 550,000 Volkswagen vehicles in the United States and more than 11 million Volkswagen
vehicles worldwide are allegedly equipped with “defeat devices,” illegal software.
18. Car System Work
The software sensed when the car was being tested and then activated equipment that reduced
emissions. The software turned the equipment down during regular driving, increasing emissions
far above legal limits, most likely to save fuel or to improve the car’s torque and acceleration.
21. Scandal Discovery
Daniel Carder and his small research team
at West Virginia University
Two models of VW’s diesel-powered were
studied in the lab and on the road
“The testing we did kind of opened the can of worms”
(Carder, 2015)
22. The Volkswagen Group Response
When news of the WVU study reached VW executives they adamantly denied any wrongdoing.
23. The Man Behind The Scandal
VW’s response to the crisis was led by Oliver Schmidt. Schmidt was aware of the defeat
device but continued to hide it. This act suggests within VW the defeat device was not
viewed in the same unethical light as it was outside the company. The continuation of
blatant lying-in response to the scandal further suggests the cultivation of a culture
in which lying is not abnormal.
General Manager
Oliver Schmidt
CEO
Martin Winterkorn
Head of VW’s Engineer
Stuart Johnson
24. Employees Perspective
• VW placed tremendous pressure on
employees. The culture of fear that
existed limited the number of
employees willing to step forward
and act as whistle-blowers.
• A former employee Walter Groth
said the pressure put on an engineer
in such an environment can be
enormous and if one fails the
expectation is to either be
reprimanded by a manager or fired.
25. Corporate Consequences
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02
03
04
VW tried to appease the public by recalling the affected vehicles which totalled to
about 11 million cars worldwide.
Within the US, consumers were given the option to trade in their car for cash to get
another car.
VW has paid more than 26 billion euros in fines and is still under investigation in the
UK, Italy, France, South Korea, Canada, and Germany.
The discovery of VW's defeat device has encouraged further investigations into other
makers' diesel vehicles.
05
VW was charged by the US Department of Justice and plead guilty to 3 felony counts:
Participating in a conspiracy to violate the Clean Air Act, Obstruction of justice for
destroying documents related to the scheme and importing these cars into the US by
means of false statements about vehicles’ compliance with emissions limits.
27. Financial Consequences
Shares plunged
significantly
12.5 billion EUR
equivalent
Recalled 11 million
of products
Lost around 16.2
billion EUR
The scandal costed the company 33.3 billion
USD in fines, financial settlements and so on.
28. Ethical Consequences
They lost a lot of customers’ trust VW’s ranking went down (from 31 to 35)
Effected to the labours
around the world Polluted the environment
30. How Volkswagen Recover
Saving customers’ trust → Attacking Marketing Campaign
“We have broken the most important
part in our vehicles: your trust”
Taking care of customers
Instead of ignoring customers’ complaint and
criticism, they had compensation policies
(buyback and compensate the suitable price)
01
02
32. Although the actions of Volkswagen did not deserve any praise at all, how they responded to
the scandal was very ethical. However, the company could have used alternative strategies in
responding to the scandal.
Ethical Insight
01
02
Volkswagen should not have admitted that they lied during the emission tests. The
main reason for doing this is the need to save their reputation, image, and goodwill
from the public.
Volkswagen could have given is that the testing process used by the American
authorities was faulty. This would have provided them with good grounds for arguing
their case given that all their cars had the same problem.
However, this response would have serious negative financial consequences because the test
would be done again in addition to re-engineering all the recalled cars at the company’s
expense.
33. Future Recommendation
Normative perspectives of ethics can be influential in aspiring followers with ideal
goals. To ensure ethical decision making, it becomes important to recognise any
ethical issues in a situation before making decisions.
Ethical Decision Making
Volkswagen has to enforce ethical values in its further practices. It can produce zero-
emission cars that can reduce the emission levels by a considerable value and strive
to avoid any negative behaviour that can affect its reputation. It can involve creating
electric cars that can serve the interest of society.
Incorporate Ethical Value
Ethical leadership makes the leaders demonstrate conduct by responsible and
unselfish behaviour by the following integrity. The importance of ethics has to be
realised and the leader has to spread the word to his followers.
Ethical Leadership
35. Utilitarianism is a theory of morality that advocates actions that foster
happiness or pleasure and oppose actions that cause unhappiness or
harm.
Utilitarianism is an ethical framework that says that we ought to focus
not on what rules to follow, but on what kinds of people (or organizations)
we should be, and what kinds of ethical exemplars we ought to imitate.
Utilitarianism is an ethical theory that says actions are good or bad
according to a clear set of rules.
The Utilitarianism
01
02
Which is the correct answer?
03
36. Utilitarianism is a theory of morality that advocates actions that foster
happiness or pleasure and oppose actions that cause unhappiness or
harm.
Utilitarianism is an ethical framework that says that we ought to focus
not on what rules to follow, but on what kinds of people (or organizations)
we should be, and what kinds of ethical exemplars we ought to imitate.
Utilitarianism is an ethical theory that says actions are good or bad
according to a clear set of rules.
The Utilitarianism
01
02
Which is the correct answer?
03
37. The utilitarianism was founded by Jeremy Bentham (1748-1832) and later developed
by John Stuart Mill (1806-1873), as a teleological conception on morality: "the moral
value of the conduct of a person can be determined only by the consequences of his
behavior, respectively the benefits and the satisfactions for the soul that he can
obtain“. Based on microeconomic theory, the utility is defined through the
perception of an individual/corporation regarding the net benefits they derive from
an action, good/service, compared to the costs to be committed for their
realization.
The ultimate goal of utilitarianism is to ensure "maximum of good for maximum of
people". Proponents of utilitarianism recommend the use of simple rules in
business: "always tell the truth", "never break a contract", "respect your business
partners" etc., rules that could generate the most significant benefits, in the
majority of cases.
The Utilitarianism
01
02
38. The Utilitarianism
Affected
Parties
List of Negative
Consequences on Stakeholders
List of Positive
Consequences for Stakeholders
Volkswagen and
its employees
Image losses reflected in sales, bad
reputation affecting consumer loyalty
affecting not only the brands involved
in the scandal
Increased sales during 2008- 2015
and related financial gains
Clients They paid up to $ 6,000 more for a
vehicle
they enjoyed a stronger engine and
a lower consumption which
resulted in cost reductions at the
personal budget level
Dealers (e.g.
Auto Nation)
Sales and low profit following the
scandal
Increased sales during 2008-2015
and related financial gains
39. The Utilitarianism
Affected
Parties
List of Negative
Consequences on Stakeholders
List of Positive
Consequences for Stakeholders
Competitors Disadvantage on the market in front
of Volkswagen, sales and lower profit
within the period 2008-2015
An eventual consolidation of image
and reputation
The
communities
where the cars
having problems
were sold
Researchers estimate that due to
nitrogen dioxide emissions released
between 2008-2015, 60 people will die
prematurely, various respiratory and
cardiovascular diseases.
Benefits from the taxes collected
from VW between 2008 and 2015
It is obvious that Volkswagen's actions do not pass the utilitarian ethics test, having far more
negative consequences for the affected parties. In the end, after the cheating was discovered no
one was left happy. They knew that what they were doing was wrong but they ignore it. Besides,
even for the company, the balance seems to be negative in the long term.
40. The ethics of virtues is the ethics based on the Aristotelian tradition inaugurated by
the work of the Greek Philosopher Nicomachean ethics. According to Aristotle, if we
refer to the feelings of fear and confidence that accompany the anticipation of the
effects of a decision, the middle path is defined by courage. And between deception
and naivety, prudence is considered the middle way, and therefore – virtue.
The modern ethics of virtue was developed by David Hume (1711-1776) and Adam
Smith (1723-1787). In general, from the perspective of the ethics of virtue, business
is a fundamental segment of contemporary society; the commercial activities
within them do not have the sole purpose of achieving the profit, but they
emphasize the social relations and the self-respect; therefore, the generation of
utilities in material form is a means used to achieve the entrepreneur's goals and not
for the purpose itself
Virtues Ethics
01
02
41. Virtues Ethics
Approached from the point of view of ethics of virtue, VW's decision to deceive and commit fraud
was not profitable in the long term, because the corporation violated its ethical principles:
1. Improving the quality of products and respect for its customers
2. Satisfying as much as possible the consumers
3. Ensuring a stable climate
4. Stimulating employees and conquering their devotion to the company
5. Maintaining stable and best relations with suppliers and creditors
6. Appreciation and sympathy of the community in which the company is located
7. The most scrupulous respect of the laws in force, environmental protection.
As a market player, the company did not contribute to the formation and development of the
positive character traits of the economic agents and did not contribute to the formation of a set
of values based on social responsibility and altruism.
42. The universal (deontological) approach is found, essentially, at the opposite pole to
the theory of utilitarianism. Supporters of this theory argue that the morality of an
action cannot depend on the results, because they are indefinite and uncertain
when making the decision; the moral value of an action must be evaluated according
to the intentions underlying it and whether the agents acted out of duty.
At the heart of this approach is the moral conception of Immanuel Kant (1724- 1804),
who puts the idea of duty and justice above the problem of good and considers that
justice is, in fact, a criterion that accompanies the good.
Some postulates of this theory could be formulated as follows: "treat the others as
goals, not as means", "one member of a group has a responsibility for the well-being
of the other members of the group”, “behave with others as you wish they would with
you ”,“behave in such a way that your conduct becomes a universal law”
Deontological Approach
01
02
03
43. Deontological Approach
In the case of VW emissions scandal, the deonthological approach is brought up for
discussion, due to the practice of deliberate misleading of the pollution tests.
Logically, deceiving is seen as a dishonest practice and, therefore, from the
deontological point of view, it is classified as an unethical activity.
It is argued that VW management pursued at the time objectives related to the
maximization of stakeholders’ wealth and the increase of the market share by
leveraging technology as a competitive advantage in relation to other automakers.
Volkswagen’s corporate culture was fear-based and lower-level managers were made
vulnerable to distress pressure techniques. Besides, it can be easily seen that the
action does not go beyond the universalization of the saying, because it is not desirable
for any of the participants that deception and fraud become general practices and all
car manufacturers pollute the environment and include fraud among their current
business practices.
01
02
03
44. Deontology is an ethical theory that says actions are good or bad according to a clear set of
rules.
Expectations mixed with unexpected developments, stress, psychology and intent are
strong drivers of predictable behavior. “As we look at Wirecard, Enron, etc., the executive
decision-makers are assisted in their deviation from the ethical path by both motivated
blindness and indirect blindness,” Hood says. “With motivated blindness, ‘I am willing to
overlook things because it is easy for me to overcome internal objections as I am
motivated to succeed.’ When you get into large organizations such as these, it is easier to
diffuse responsibility through psychological distance from the victims as well as the actual
act of committing the fraud.”
“As an example, the CEO of VW did not sit in on the meetings talking about falsifying the
codes, nor did he create the software code that accomplished the mission. This leads to
indirect blindness since ‘I did not take part in the mechanics of the process,’” Hood says, as
an example of how this works.
Deontology
01
02
03
45. Direct injection— where a fuel injector sprays the diesel fuel directly into the
main combustion chambers. This causes a more complete combustion process than using
a pre-combustion chamber (known as indirect injection), which therefore increases the
torque output and reduces the exhaust emissions.
Turbocharging— where an exhaust-driven turbine compresses the intake air, in order to
obtain higher power and torque outputs from a small displacement engine.
Under normal driving conditions, the emissions controls are suppressed, allowing the
engine to produce more torque and get better fuel economy, at the expense of emitting up
to 40 times more nitrogen oxides than allowed by law. Such NOx emission levels are not in
compliance with US regulations. VW has since admitted to these allegations, and said that
the illegal software was in use in its diesel cars worldwide, affecting some 11 million
vehicles
Deontology
04
05
06
46. The cold and difficult truth is investigators, the law, the media and the public don’t buy
this type of defense. The evidence trumps the corporate or legal spin.
“Despite this, the CEOs of all these organizations had an active hand in the unethical
behavior by what they said or didn’t say,” Hood says. “In the VW case, an engineer went up
to an executive and said, ‘We don’t have the technology to accomplish this.’ The executive
responded by saying, ‘Maybe it is time I get another engineer.’ While there was no specific
unethical message, there was clearly an implied message.”
The blame-shifting and attempt at exonerating oneself organizationally or individually is
not just poor form; it is considered contemptuous to throw your team into the fire, given
that the professionals are doing as expected – and uncertainty or fear is a very real
component of psychological safety.
Deontology
07
08
08
47. “Competition and rivalry can certainly lead to unethical behavior as the perception of
rivalry creates in (and out) groups,” Hood says. “This usually leads to advantageous
comparison wherein you look at yourself and say ‘what I am doing is not nearly as bad as
what my competitor is doing’ or ‘I have to do this in order to make this a level playing
field.’”
VW has survived its scandal and reputation crisis, but has VW learned from it? Or will the
company repeat its errors, as other organizations do?
Are leaders in other organizations paying attention to and learning from this story and
similar scandals – from the psychological errors, belief systems, natural competitive
tendencies and compromise or failures of ethics, decision-making, governance and
compliance?
Deontology
09
10
11
48. Some, maybe. The wise ones. However, not all organizations and leaders will pay
attention and correct the course they are currently traveling.
Scandals are not closely dissected and examined, but they really should be. Organizations
that choose to do so – that regularly test and question their own mindset, practices and
weaknesses and make critical adjustments – will be taking significant steps toward
critical, protective improvements and risk management, therefore protecting mission,
shareholders, reputation, the board and executive careers.
When coupled with humility and a growth mindset, intellectual honesty is a safety
precaution critical to prevent embarrassing, costly and career-damaging scandals and to
keep your organization from becoming the next cautionary tale.
Deontology
12
13
14
49. Summary of the situation:
On September 18, 2015, the U.S. Environmental Protection Agency made a notice of
violation addressed to the company of Volkswagen (Environmental Protection Agency,
“Notices of Violations: Volkswagen” par. 1). The Agency accused the German car
manufacturer of breaking the American car emission standards. It was found out that
the diesel vehicles produced by Volkswagen in 2009-2015 contained a certain piece of
software that enabled these cars to enter a special “safe mode” when the program
“suspected” that the car was being tested (Hotten par. 3-5). As a result of this “safe
mode”, the cars’ engines stopped working at their full power, which caused a drop in
performance and, accordingly, significantly lowered the emissions. EPA was able to
find out that the noxious gas output of these cars under normal circumstances, in the
road setting, was dangerously high; the output of nitrogen oxides (NOx) was
approximately 40 times greater than the maximum quantity of these outputs allowed by
the USA
Deontology
01
50. Summary of the situation:
After the EPA’s actions, the “Volkswagen Group” leading officials admitted that the
company indeed had devised a sophisticated piece of software and had been using it in
order to cheat the emissions tests. The business was forced to recall nearly 500,000
cars in the United States only, which cost approximately €6.5 billion. It is also pointed
out that the EPA is legally able to fine the car manufacturer additional $37,500 for every
car that violates the emissions standards, notably, these are the consequences that
occurred only in the US. Worldwide, the company’s vehicles are also being planned to be
tested, and not only Volkswagen’s cars but also the vehicles made by other
manufacturers
Deontology
02
52. An ethical dilemma implies at least two solutions, both of them being moral; at the same
time, the moral temptation does refer to any moral alternative. Apparently, in deciding
upon the cheating of emission test results, the Volkswagen representatives did not
receive a “false impression” that they faced a right versus right dilemma. It was more than
evident at that time that the choices they had were right versus wrong.
Economic reasons such as increasing company’s benefit and performances are
arguments that fade when balanced with the profoundly negative impact of unethical
actions undertaken by Volkswagen management: increasing the incidence of premature
deaths due to excess of NOx in the atmosphere; the appearance of acid rain.
The fact that Volkswagen was burden by huge costs in the form of fines, penalties,
expenses incurred in repairing vehicles that had installed the software for handling
pollution tests; payment of compensation to cover the huge losses recorded by the
dealers in their own distribution network; erosion of the company's long-term image and
loss of customer loyalty etc.
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02
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