Business Values & Ethics

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Running head: BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 1 Business Values and Ethics: Volkswagen Case Study Student’s Name Institutional Affiliation
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 2 Business Values and Ethics: Volkswagen Case Study Executive Summary Towards the end of 2015, Volkswagen, a car manufacturing company, was rocked by the revelation of an unethical practice that involved the installation of defeat devices intended to aid in reducing the level of emissions registered when testing the cars under laboratory conditions. After the scandal's eruption, the carmaker's economic situation was seriously damaged from the decrease in its stock market price, loss of sales, and worldwide car recalls. Considering the direct impact of the emissions on the health conditions of residents within the affected nations, in addition to the massive amount of costs related to the excess of pollution from Volkswagen vehicles, this paper highlights several theories of unethical analysis, including utilitarianism and moral duties theories. From an economic viewpoint, the application of ethics is termed as an approach that impacts the operations of an entire economic system since immoral behaviors are likely to distort a market’s functioning mechanisms that, as a result, affect the environment’s quality and harm the consumers’ interests. Therefore, this analysis focuses on demonstrating why such unethical business practices by Volkswagen severely altered sustainability philosophies and has to be eradicated in the future.
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 3 Table of Contents Executive Summary ......................................................................................................................... 2 Introduction .................................................................................................................................... 4 The Main Points Obtained from the Emission Scandal ............................................................. 4 What Happened ............................................................................................................................ 4 Types of Cars Affected ................................................................................................................. 5 How the Scandal Impacted Customers ........................................................................................ 5 How Volkswagen was Impacted .................................................................................................. 5 The Role Regarding Moral Intensity in Decision-making that Resulted in the Scandal ........ 6 Rest’s Four Stage model in Determining when VW Deviated from it and was Involved in Attempted Cover-up ...................................................................................................................... 6 Context-related Factors that Influenced the Decision VW Employees of not Whistleblowing on the Scandal ................................................................................................................................ 7 How VW’s Senior Management Handled the Situation and the Effect of their Earlier Admission of Fraudulent-related Activities on the Firm ........................................................... 8 Applying the Theories of Utilitarianism and Moral Duties in VW’s Case ............................. 10 Utilitarianism Theory (Jeremy Bentham) in VW’s Case ........................................................... 10 Moral Duties Theory (Immanuel Kant) in VW’s Case .............................................................. 11 Strategies that VW Could use to Improve Future Ethics Management Approach ............... 12 Discernments that VW’s Abrupt Cultural Change Should Be Scrutinized ................................ 13 Conclusion .................................................................................................................................... 14
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BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 4 Introduction Volkswagen (VW), a German auto giant company, was involved in one of the greatest- ever scandals, specifically in the automobile industry. This incident happened following the accusations from the U.S. authorities citing it for having installed pollution-cheating monitoring software in a number of its produced diesel engines. The root of VW’s corruption scandal was found in the Environmental Protection Agency’s (EPA) accusations based on which the firm would have programmed around even million cars to give false results on environmental tests. Therefore, VW cars’ clean running was only enhanced when their testing conditions were captured by the line of software code embedded in the defeat devices installed. This issue continued and led to the carmaker announcing the uncovering of other irregularities in the engines of more of its vehicles. Below are some of the main points obtained from the scandal: The Main Points Obtained from the Emission Scandal What Happened Sophisticated emissions software called defeat devices were installed on several vehicles estimated to be more than half a million in America and almost eleven million globally. According to the EPA and the CARB (California Air Resource Board), defeat devices can be able to detect whether a particular car is wholly acquiescent with the federal emissions standards or not (Wendler, 2015). When being driven typically, the software switches a separate mode which results in a change in injection timing, fuel pressure, and a car’s exhaust-gas recirculation (Atiyeh, 2015). Thus, this particular model might be known to deliver more enhanced power and mileage. It also allowed heavier NOx (nitrogen oxide) emissions, a smog-forming contaminant associated with lung cancer.
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 5 Types of Cars Affected EPA cited Volkswagen, Skoda, SEAT, VW commercial vehicles, and Audi for emission violations. Currently, recall issues are not witnessed since all cars are exposed to state inspections. It is important to note that VW admitted its mistake of violating federal emissions regulation, which makes it neither a safety nor a state issue (Gibney & Gibney, 2018). This matter also led to VW being committed to electric vehicles, and it is expected that the carmaker may not be able to sell TDI diesel cars in the U.S. (Atiyeh, 2019). Thus, this aspect has indeed affected VW models accepted in different countries based on set environmental policies. How the Scandal Impacted Customers VW, having admitted its errors with the installed software, the vehicles affected started being recalled as a strategy to get rid of the defeat devices. Some models only required a simple software alteration, but many of the cars required a mechanical alteration of a complete engine. For instance, TDI owners who had bought their vehicles before 17 th September 2015 were allowed to resell them to Volkswagen. This resell was based on aspects like the model, region, and trim (Atiyeh, 2019). Consequently, since the customers had no idea about the defaults, they were entitled to compensation or claim their money back. How Volkswagen was Impacted This scandal led to the sentencing of one of its former executives to a federal prison based on his role in the organization’s diesel emission scandal. This action followed the prosecution of five other Volkswagen executives (Atiyeh, 2017). This move was intended to help the company in recovering the amount of money it had so far lost due to the incident (Atiyeh, 2017). Besides the court cases and potential fines that the company faced after the scandal, the
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 6 recall action also cost billions of dollars, seriously impacting its overall market capitalization. Since the 18 th of September 2015, when the first violation occurred, almost the entire corporation’s market cap has been drained by the issue, forcing it to abandon its vision of being the global automaker. The Role Regarding Moral Intensity in Decision-making that Resulted in the Scandal Ethically, the decision that was made by VW’s top management regarding the use of the defeat devices had significant moral intensity and influence in the entire decision-making process. For instance, the management ignored the magnitude of the consequences on the environment while permitting the installation of the software. Still, it only focused on the profitability of the company by producing several models of cars that had similar errors. Besides, since the defeat devices' use was an unethical act by bodies like the EPA and CARP, this was indeed a social consensus factor that the company should have considered before the scandal (Weiss, 2014, p.142). The temporal immediacy of the decision was based on the fact that the continued use of the devices could have led to the rise in cancer cases not only for car users but also for the entire society. The probability of the effect regarding the negative aspects of the software was also high since environmentally, the concentration of the effects as a result of the gas that the VW vehicles were producing focused on many people. Rest’s Four Stage model in Determining when VW Deviated from it and was Involved in Attempted Cover-up The four Rest stage model asserts that ethical-related actions cannot be an outcome of just a single process but is a result of a combination of psychological and cognitive processes (Mintz, 2018). Thus, the four-component model can be used to describe some of the cognitive steps used by individuals in ethical decision-making. These four steps included moral sensitivity
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BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 7 as the first one, moral judgement as the second, the moral focus and moral action, respectively (Mintz, 2018). Looking at VW’s case, it is indeed true that professional managers and leaders are prone to unethical behavior and consensus-dominated decision-making processes are likely to occur if not keenly evaluated (Weiss, 2014, p.340). Therefore, VW can be seen to have deviated from Rest’s four-stage model in varied approaches. Based on Rest’s four-stage model, VW might have deviated from this model at the moral stage, which is stage two. For the deviation to have occurred at stage one, VW should have been aware of the presence of some ethical issues. This aspect means that the deviation could not have occurred at stage one, which involves recognizing the sensitivity of a particular moral issue. According to Sharpe (2017), VW engineers came up with defeat devices to assist the cars in passing emission tests at regulatory bodies. Therefore, since senior company executives were found to have been involved, it could be assumed that their primary goal was covering up the issue of emissions, knowing very well that it was an unethical and a wrong moral judgment move for the company. Context-related Factors that Influenced the Decision VW Employees of not Whistleblowing on the Scandal Whistleblowing is perceived to be an intentional act undertaken by an employee in making a detailed disclosure in the public’s interest. It is also important to note that a whistleblower can be internally or externally conducted (Weiss, 2014). Internal whistleblowing is where the issue is reported to the company executive, while external whistle-blowing is where the incident is exposed to the public interest groups (Weiss, 2014, p.507). However, such an intentional act may be perceived as a legal or ethical desecration by an organization where a particular whistleblower might be employed. Therefore, there are several context-related factors
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 8 that can be thought to have influenced the choice made by engineers and executives at Volkswagen not to be involved in whistleblowing following the incident. The choice to deceive the emission testers was ultimately towards Volkswagen’s top management hierarchy. The executive and engineers had some sort of power over other employees, making it hard for them to whistle-blow. Alternatively, considering VW’s top management level, it had power over the executive and engineers, which, of course, might have instructed them not to spill the beans regarding the scandal. Moreover, VW’s operational culture might have been unethically structured, whereby despite employees having knowledge of what was going on, no one was ready and willing to spill the beans. The consequences of whistleblowing always impact not only an individual involved but also narrows down to his or her close friends and families (Weiss, 2014). Therefore, other people might have opted to avoid being judged by their families and friends based on the ethical issues that might have arisen after whistleblowing. It is also important to remember that whistleblowers must be fully aware that their actions, when undertaken, can result in changes before making any move (Crane eta l., 2019). This aspect might have also influenced the executives and engineers’ decisions not to whistle-blow. How VW’s Senior Management Handled the Situation and the Effect of their Earlier Admission of Fraudulent-related Activities on the Firm Having effective leadership in an organization calls for people skills, whereby people can build robust and effective communication and accountability. The VW scandal exposed what can be termed as a conservative corporate culture whereby status quo and tradition were being prioritized in the top to bottom management levels ( Jung & Park, 2016). This aspect as well revealed how the German culture had influenced VW’s overall business operations ( Jung & Park,
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 9 2016). However, after the exposure had occurred, VW senior management bounced into action and effectively handled the situation using several approaches. VW’s top management showed a great effort of addressing the situation in a better manner made a move to announce strategies of recalling the already sold vehicles that could see the company spend billions of dollars. Besides, investigations into the scandal had been launched after Volkswagen had pleaded guilty to criminal charges ( Jung & Park, 2016). The use of the defeat devices in VW vehicles raised the alarm since it was hard for diesel models to succeed in passing the U.S. emission tests. Defeat devices were therefore used in concealing the negative aspects related to the use of diesel in car engines ( Jung & Park, 2016). An earlier admission regarding the scandal played a significant role in reducing the negative impact of the fraudulent activities on the firm in several ways. For instance, this move saved the company from costs that would have arisen related to investigations and court proceedings trying to prove their innocence in installing defeat devices in their car models. Therefore, VW was genuinely aware of its mistake and believed that no matter how long it would have tried to delay the case, the truth would still have been revealed, and it would have been a costly experience for the company. As a strategy of breaking out of the scandal, Volkswagen started the reconstruction of the firm’s structure, management and even morale. This move started with the resignation of Winterkorn, the by then VW CEO, who was replaced by Matthias Müller ( Sharpe, 2017). Besides, VW started recouping its sustainability and accountability when it opted to hire two managers who were working for its close competitors to head its integrity and legal affairs and the corporate strategy divisions ( Sharpe, 2017). Therefore, based on VW’s new employment strategies, it was expected that its strategic business plan should shift from the earlier sales volume to productivity.
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BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 10 Volkswagen also took the initiative of regaining the trust of both the government and the public using several approaches. For instance, Boston and Sahin (2015) reveal that Volkswagen condemned and suspended some of its workers, including its chief quality controller Frank Tuch. Under a new North America division, VW management simplified the company’s structure, whereby operations in Mexico, Canada and the U.S. were all combined ( Jung & Park, 2016). There was also the reclassification of VW’s car brands, particularly by Porsche Bentley and Bugatti, which resulted in new and improved divisions that had Skoda and Seat models. According to Ruddick and Farrell (2015), VW’s management structure was as well decentralized, whereby division managers were given more autonomy than before. However, there are a few cases where VW’s new CEO Matthias Müller is perceived to contain similar features and background aspects just as when was still Porsche’s CEO. Applying the Theories of Utilitarianism and Moral Duties in VW’s Case The extent to which Volkswagen had to apply its technical skills for its own interest by being involved in misleading environmental tests has indeed remained not only a legal issue but also an ethical concern among many scholars. Thus, based on the outcomes of VW’s scandal, the ethical dilemma can as well be shaped in the same approach of using or not of an organization’s technical knowledge to cheat about environmental tests for their own advantage. Utilitarianism Theory (Jeremy Bentham) in VW’s Case Jeremy Bentham founded the Utilitarianism theory in 1748-1832, which serve d as a teleological conception regarding issues to do with morality. However, utility is perceived as the central concept based on which the utilitarian theory was developed ( Dura, 2017). Volkswagen indeed was guilty of using the defeat devices. Based on the Utilitarianism theory, a decision can only be termed good when it guarantees maximum wellbeing for as many individuals as possible
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 11 ( Dura, 2017). Therefore, the actions of Volkswagen cannot succeed in passing the utilitarian moral test since it had a lot of negative consequences that affected the environment. Based on ethical egoism, an action that benefits an instigating organization is classified as ethical. A rationale that can be used to support this viewpoint is that working towards attaining something for your own advantage can be termed to be ethical ( Dura, 2017). According to the fundamental economic theory, every entity always performs based on its own self-interest ( Tanguay, 2016). However, this concept goes against some of the theoretical approaches used in explaining Volkswagen’s conduct. Volkswagen undoubtedly followed its own interests by choosing to trick the pollution checks so that it could enhance its economic performance ( Abitalib, 2017). Thus, Volkswagen aimed at improving its sale volume, shareholders’ prosperity, and even its net income. Moral Duties Theory (Immanuel Kant) in VW’s Case Immanuel Kant’s moral duties theory can be perceived to be the opposite of the utilitarianism theory. Scholars and supporters of this theory assert that an action’s morality cannot base on the outcome since they are always uncertain and indefinite during decision- making. Therefore, based on this theory, an action’s moral value must be assessed with regard to its underlying intentions and whether the respective agents might have done a particular act out of duty. Based on Volkswagen’s case, we can consider Immanuel Kent’s moral conception whereby the idea of justice and duty are put above the issues and problems of good. Immanuel Kent perceives that justice is a measure that goes hand in hand with the good ( Tanguay, 2016). Considering the VW emission scandal, the moral duties approach arises due to the act of deliberate deception regarding how the company planned to evade pollution tests. Logically
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 12 speaking, the act of deceiving is indeed an example of dishonest practices that people should desist from. From the moral duties point of view, deceiving is also classified as an unethical act (Weiss, 2014). Unlike the utilitarianism theory, the moral duties theory ignores the fact that a particular action might have been undertaken for marketing or economic reasons. Therefore, Volkswagen was pursuing the time objectives by striving to make the most of its shareholders’ wealth so that the overall company’s market share could be increased. These activities focused on leveraging technology to have a competitive advantage over other carmakers. The moral duties theory approach does not put in mind other essential aspects of the ethical dilemma. These facts include the outcomes of a particular action ( Tanguay, 2016). Looking at VW’s case, its corporate culture is believed to have been fear-based, whereby low- level executives and other junior managers were turned into being susceptible to distress pressure techniques in the company. Thus, regarding this framework, it can be believed that such employees turned a blind eye to VW’s erroneous emission tests, fearing being dismissed from the company or just for the sake of attaining the company’s sales objectives. Therefore, when we consider the perspective of human relations when it comes to management, the manner in which the moral duties theory is perceived could be intensely reversed. Strategies that VW Could use to Improve Future Ethics Management Approach In any form of business, the management needs to anticipate the possibility of encountering ethical predicaments, which may be, of course, complex to handle. As perceived in most university education business studies, ethics in a business should be perceived as a growing priority for corporate leaders (Coldwell et al., 2020). In the case of Volkswagen, it was seen to have had a lot of challenges trying to embed an applicable and influential ethical culture ( Sharpe,
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BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 13 2017). Enhancing training, leadership and communication are some of the approaches that VW can use to improve their future ethical management approaches. Volkswagen could start by developing a code that prioritizes its ethical performance. This approach would involve having in place a relevant code of conduct or ethics that can assist the company in setting clear expectations, standards and objectives (Blocher et al., 2019). This aspect means that expectations and requirements are critical ethical performance requirements. According to the CGMA (Chartered Global Management Accountant), VW should also set its managerial tone from the top. The senior management team should always show their leadership features and be seen living based on the organization’s ethical values ( CGMA, 2020). Involving employee training and communication in addition to other stakeholders like regulators, suppliers and communities involved in a business survival can also push VW towards its future prospects. Ethical culture in an organization can also be embedded by having virtuous, regular and reliable training and communication ( CGMA, 2020). These approaches can be effected through the implementation of business transformation programs in addition to other forms of change management initiatives ( McLaverty & McKee, 2016). Therefore, the manner in which such practices are implemented and embedded is critical to a company’s capability to achieve the most from its ethical performance philosophy. Discernments that VW’s Abrupt Cultural Change Should Be Scrutinized Claims that Volkswagen has quickly changed its structure cannot justify further scrutiny in its operations. The reconstruction of a company’s management structure has always been a common approach used in not only the VW scandal but also in other organizations like Enron, where executives were sentenced (Weiss, 2014). There is no organizational culture in the world that can be perceived to be perfect. Hence, whenever an unethical issue arises, firms are always
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 14 free to quickly dive into making structural changes, just like in the case of Volkswagen. This move is always meant to assist an organization in quickly getting its operations running and restoring confidence in all its stakeholders. Conclusion The deceptive manipulation that was seen in Volkswagen’s operations where defeat software were installed to manipulate environmental tests raises a lot of ethical concerns, particularly in business undertakings. Moreover, the most well-known approaches like Utilitarianism and moral duties theories are indeed convergent in asserting that Volkswagen’s practice of manipulating the environmental tests depicted one of the most severe deviances from the values governing the ethical way of managing a business in a modern period. Besides Volkswagen’s deceptive manipulation, its leadership also came up with some definite commitments concerning the company’s corporate sustainability and appropriate approaches of bouncing back in business in an ethical manner. On the same note, a moral dilemma suggests at least two resolutions that are both ethical. Correspondingly, the existence of moral temptation does not depict any sort of moral alternative, be it in the business of ordinary life. Apparently, regarding the cheating in environmental tests, VW’s leadership might not have received a false impression of having encountered a right versus right predicament. However, it was more than obvious that VW’s representatives had right versus wrong choices at the time of the scandal.
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 15 References Abutalib, M. (2017). “People’s Car” Scandal: Critical Analysis of Volkswagen’s Ethics and Governance Practices. Retrieved 4 January 2022, from https://www.academia.edu/33819988/_People_s_Car_Scandal_Critical_Analysis_of_Vol kswagen_s_Ethics_and_Governance_Practices ATIYEH, C. (2015). EPA: VW Guilty of Second Violation for V-6 Diesels, Including VW, Porsche, and Audi TDIs. Retrieved 3 January 2022, from https://www.caranddriver.com/news/a15350541/epa-vw-guilty-of-second-epa-violation- for-v-6-diesels-including-vw-porsche-and-audi-tdis/ ATIYEH, C. (2017). Second Volkswagen Exec Sentenced to Prison for Diesel-Emissions Scandal. Retrieved 3 January 2022, from https://www.caranddriver.com/news/a15338700/second-volkswagen-exec-sentenced-to- prison-for-diesel-emissions-scandal/ ATIYEH, C. (2019). Everything You Need to Know about the VW Diesel-Emissions Scandal. Retrieved 3 January 2022, from https://www.caranddriver.com/news/a15339250/everything-you-need-to-know-about-the- vw-diesel-emissions-scandal/ Blocher, E. J., Stout, D. E., Juras, P. E., & Smith, S. (2019). Cost Management (A Strategic Emphasis) 8e . McGraw-Hill Education. Retrieved 3 January 2022, from https://ecommerceprod.mheducation.com.s3.amazonaws.com/unitas/highered/changes/bl ocher-cost-management-8e.pdf Boston, W., & Sahin, M. (2015). Volkswagen Is Expected to Post Quarterly Loss. The Wall Street Journal .
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BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 16 CGMA, J. A. L. P. C. (2020). CORE VALUES ARE ORGANIZATIONAL PILLARS. Strategic Finance , 102 (4), 11-12. Coldwell, D., Venter, R., & Nkomo, E. (2020). Developing ethical managers for future business roles: a qualitative study of the efficacy of “Stand-Alone” and “Embedded” University “Ethics” courses. Journal of International Education in Business , 13 (2), 145-162. doi: 10.1108/jieb-08-2019-0040 Crane, A., Matten, D., Glozer, S., & Spence, L. (2019). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press, USA. DURA, C. (2017). THE VOLKSWAGEN EMISSIONS SCANDAL-A CASE STUDY ON UNETHICAL BUSINESS PRACTICES. Annals of the University of Petroşani , 17 (2), 69-78. Retrieved 4 January 2022, from https://www.upet.ro/annals/economics/pdf/2017/p2/Dura.pdf Gibney, A., & Gibney, A. (2018). Hard NOx. Dirty Money Jung, J., & Park, S. (2016). Case Study: Volkswagen's Diesel Emissions Scandal. Thunderbird International Business Review , 59 (1), 127-137. doi: 10.1002/tie.21876 McLaverty, C., & McKee, A. (2016). What You Can Do to Improve Ethics at Your Company. Retrieved 4 January 2022, from https://hbr.org/2016/12/what-you-can-do-to-improve- ethics-at-your-company Mintz, S. (2018). How Do We Make Ethical Decisions? An Essay. Retrieved 4 January 2022, from https://www.ethicssage.com/2018/10/how-do-we-make-ethical-decisions-an- essay.html Ruddick, G., & Farrell, S. (2015). VW scandal: Staff suspended as car giant appoints new CEO. The Guardian . Retrieved from
BUSINESS VALUES AND ETHICS: VOLKSWAGEN CASE STUDY 17 http://www.theguardian.com/business/2015/sep/25/volkswagen-appoints-matthias- muller-chief-executive-porsche-vw Sharpe, N. F. (2017). Volkswagen's Bad Decisions & Harmful Emissions: How Poor Process Corrupted Codetermination in Germany's Dual Board Structure. Mich. Bus. & Entrepreneurial L. Rev. , 7 , 49. Retrieved 4 January 2022, from https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1065&context=mbelr Tanguay, D. (2016, September). Fundamental economic analysis of ground source heat pump markets in North America. In Proceedings of the 12th IEA Heat Pump Conference, Brussels, Belgium (pp. 19-23). WENDLER, A. (2015). How VW Got Busted for Skirting EPA Diesel Emissions Standards. Retrieved 3 January 2022, from https://www.caranddriver.com/news/a15352518/how- volkswagen-got-busted-for-gaming-epa-diesel-emissions-standards/ Weiss, J. (2014). BUSINESS ETHICS A Stakeholder and Issues Management Approach (6th ed., pp. 1-581). San Francisco, California: Berrett-Koehler Publishers, Inc.