Case Study: Volkswagen Emissions Scandal

Case Study: Volkswagen Emissions Scandal

Bruno Moorthamers, Kun Zhang, Mariana Feitosa De Melo
Ottawa University · BUS-7200: Value Systems and Professional Ethics
Dr. Donald Dunn · October 13, 2024

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This paper discusses the group case study “Volkswagen Emissions Scandal” as part of the course work for BUS-7200: Value Systems and Professional Ethics. It looks at the fraud committed by the Volkswagen Group to manipulate nitrogen oxide emissions during testing. The first part of this paper introduces the case, identifies the different parties involved, the salient ethical and legal issues with the case, and the factual and conceptual issues and social constraints. The second part of the paper analyzes the primary ethical dilemma of the case and possible courses of action, and the third part discusses what course of action the student group would choose and why.

Case Introduction / Context

After a 2014 study by the West Virginia University Center for Alternative Fuels Engines and Emissions (WVU CAFEE) on the on-road emissions of diesel cars sold in the United States, it came to light that the German car manufacturer Volkswagen Group committed fraud during laboratory testing of nitrogen oxide emissions. Some of their diesel engine-powered vehicles emitted up to 40 times more NOx during live road testing than in a laboratory setting. This was due to software installed by Volkswagen that would only trigger certain emissions-lowering mechanisms during a laboratory test, but would deactivate these during regular driving. This artificially lowered the emissions to be compliant with certain regulations.

Identification of Parties Involved, Their Rights and Responsibilities

This section identifies the main parties involved:

Volkswagen Group is a German car manufacturer. While it releases products under different brands such as Volkswagen, Audi, Bentley, Porsche, and Lamborghini, this paper only discusses specific models of Volkswagen with diesel engines. Volkswagen has a right to define its own code of conduct and to maximize profits by marketing a range of products. The first of its Group Essentials is taking on a responsibility to the environment and society. This includes the responsibility towards its customers to produce safe products and be honest in its marketing claims. It also has a responsibility to the governments managing the markets where it releases products to adhere to the regulations they set on safety and environmental requirements.

International Council on Clean Transportation (ICCT) is a multinational not-for-profit research institute founded in 2001 and headquartered in Washington, D.C. They provide scientific, policy and technical analysis on environmental, energy and transportation policies to environmental regulators. They have the right to perform the research that they feel is important to pursue, and a responsibility to ensure honest and independent research that is not biased to any one party.

West Virginia University Center for Alternative Fuels Engines and Emissions (WVU CAFEE) were commissioned in 2013 by the ICCT to test the on-road emissions of cars driving in the U.S. with diesel engines. They brought to light the fraudulent activities that Volkswagen engaged in to artificially lower their NOx emissions during laboratory testing. They have the right to perform their research study as rigorously as they want to and the ethical responsibility to report any malpractices or fraudulent activities, which they did to the California Air Resources Board (CARB) and the United States Environmental Protection Agency (EPA). (West Virginia University, 2015)

United States Environmental Protection Agency (EPA) is an independent agency dealing with environmental protection issues in the United States. They are tasked with setting and enforcing national standards for a variety of environmental laws, including regulations for the maximum allowable emissions of vehicles. They have a responsibility to protect society and the environment by monitoring and enforcing national standards.

Consumers are the individuals and organizations that purchase Volkswagen products. Consumers have a right to be informed about the products they are comparing and intending to purchase, and a right to assume truthfulness in Volkswagen’s marketing. They have a right to express complaints and demand restitution after having found out they have been lied to (Markowitz et al., 2017). They have a responsibility of using Volkswagen products within the scope of their intended use and doing their best not to harm others or the environment.

Identification of the Salient Ethical and/or Legal Issues of the Case

Volkswagen blatantly refused to obey regulations and lied about the harmful emissions of its diesel engine vehicles. For Volkswagen and Audi diesel cars designed from 2009–2015, the company created software to avoid EPA emissions standards. Later, government regulators found that Volkswagen vehicles produced up to 40 times more emissions than permitted. The company engaged in fraudulent behavior, false certification to the government, and untrue marketing to consumers. They faced massive consequences, including several car recalls, and social, legal, and political implications.

Volkswagen’s code of conduct states that they take on responsibility for the environment and society, and that they are honest and speak the truth when something is wrong. The company betrayed the trust of its consumers and stakeholders and faced an ethical crisis while displaying unethical behavior. Volkswagen’s actions were also immoral when it deliberately caused harm to a great number of individuals. Besides civil charges, the company also faced criminal charges for elaborate fraudulent actions.

Identification of the Relevant Factual and Conceptual Issues, and Social Constraints

Factual issues: Volkswagen used a defeat device in its software to detect if a vehicle is in a lab environment. During emission tests, the software would activate the emissions control system to let the vehicle meet the standards. However, if the vehicle is in normal driving status, the emission control is turned off, causing up to 40 times more nitric oxide and nitrogen dioxide than the standard under law. The nitric oxide and nitrogen dioxide are harmful pollutants that contribute to smog and cause significant respiratory health risks. The scandal affected more than 11 million vehicles worldwide.

Conceptual issues: Volkswagen’s emissions scandal reveals the tension between maximizing profit and fulfilling social responsibility. The company chose to control the results of emissions tests to increase its market share and profits while knowingly violating laws. This decision increases short-term profit at the expense of long-term consequences. The decision to install defeat devices reflects a broader corporate mindset that valued short-term gains over long-term ethical considerations.

Social constraints: Consumer trust plays a very important role between the company and the public. In the Volkswagen emissions scandal, the deliberate deception destroyed the trust between consumers and Volkswagen, as consumers believed they were purchasing vehicles that are environmentally friendly. Global environmental awareness has increased significantly, and eco-friendly products received green car subsidies and tax exemptions in the US. Volkswagen’s cheating behavior directly conflicted with growing concerns about climate change and air pollution.

Identification and Analysis of Problems

Identification of the Case’s Primary Ethical Dilemma

As part of the automobile industry, our company, Volkswagen, is expected to meet the regulations imposed by the Environmental Protection Agency (EPA). In 2015, our team received information about possibly creating a device that would be installed as software in some of our diesel cars. This device could detect when a vehicle is being tested and control its emission to its lowest level (Wai et al., 2021). For us, that would mean passing the regulations whenever our cars are tested, even though we would not meet the actual requirements. We could make billions in profit by issuing bonds and asset-backed securities in US markets (“Exhausted by scandal: ‘Dieselgate’ continues to haunt Volkswagen”, 2019).

The ethical dilemma we face is that if we were to move forward with creating this device and selling the diesel vehicles with the hidden software, we would be committing fraud and lying. The creation and use of this device is illegal, unethical, and harmful as it would cause significant environmental damage. If we do not create the device and must comply with the regulations, we will have increased costs as well as lower road performance and less fuel economy, consequently greatly impacting our yearly sales (Jacobs et al., 2019).

Formulation of Possible Courses of Action

Move forward with creating the device. If we choose to do so, we will commit fraud and could face legal, social, political, and ethical consequences. Amongst the consequences, if we are caught, we would have to recall the cars, face legal charges for deceptive advertising, conspiracy to commit fraud, and violation of EPA’s Clean Air Act (“Exhausted by scandal: ‘Dieselgate’ continues to haunt Volkswagen”, 2019). We would also face reputation damages, financial and market capital damages, and damages in our management structure and company culture.

Follow our code of ethics and maintain VW’s ethical culture. We would stop any ideas of creating such a device. As part of the management team, we would investigate where this idea came from and report it to our superiors. We would run an internal investigation involving our code of ethics team, our lawyers, and the board of directors.

Whistleblowing. Whistleblowing facilitates safe and confidential reporting of illegal, immoral, and unethical actions. If my position in the company does not allow me to take direct action for this dilemma, I would report this situation to a superior or a government agency.

Education and investment in company culture. If this idea was entertained by our associates, superiors, or inferiors, we have a significant ethical crisis within our company. Measures would have to be taken to manage this issue, to rebuild a strong ethical culture, and to train and embed our ethical values into the daily actions of our employees.

Lobby the government to make the regulations less strict and provide testing data to show the difficulty of meeting them.

Discussion of the Role of Information Technology or Context

The cheating scandal has become possible because of the mindset and failure to comply with company rules of some departments within the Volkswagen Group (Goodman, 2015). Volkswagen has been described as a company where it is too easy for people to look the other way and assume something is someone else’s responsibility. Willful blindness—a concept that maintains you are liable if you don’t know a certain piece of information that you could and should have known—was prevalent in the company. The rat race of people wanting to climb the corporate ladder and maintain their image leads to situations where someone would rather stay silent than risk their position (Heffernan, 2015). The CEO is fully responsible for cultivating this mindset.

Hans Dieter Pötsch, chairman of Volkswagen at the time, admitted that the first step towards cheating was made in 2005 when the company wanted to start promoting their diesel cars in the United States. It became apparent that they would not be able to meet the strict emissions regulations with legal methods (Ruddick, 2015). This set off a series of unethical decisions that led to the installation of the fraudulent software.

Evaluation of Strengths and Weaknesses of Courses of Action

Installing the manipulative software: The strength is that it is the easiest route, saving billions in R&D costs. The most obvious weakness is that it goes directly against our code of ethics. If this comes to light it could cause irreparable damage to our reputation as a trustworthy company built on honesty and integrity. It would create a bad company culture where others are invited to make similar unethical decisions, and likely cause anxiety among the membership team out of fear of getting caught.

Running an internal investigation and changing the organization: The strength is that it demonstrates an eagerness for change to all stakeholders—employees, board members, partners, and investors—and to the outside world. One weakness is that it would require a lot of effort, which could divert focus away from main activities and production. Depending on the findings, it could also require firing employees and be costly by requiring external consultants.

Whistleblowing: The strength lies in the fact that it is directly in line with our personal moral philosophies. We would be able to be proud of making the right choice and protecting consumers’ interests and the environment. A weakness is that whistleblowing could put our reputation at risk and will likely lead to being fired from the company.

Lobbying the government: The strength is that we would take matters into our own hands and can help direct the future of the industry. The weakness is that it could quickly become unethical if we stop making our best efforts to promote sustainability and become complacent.

Analysis of Different Courses of Action

Moving forward with creating the device is based on a consequential approach—weighing potential benefits and maximizing possible profits against the negative consequences if caught. This course of action is unethical; it is based on deceit and violates legal and moral standards.

Following the company’s code of ethics and maintaining VW’s ethical culture is based on a non-consequential approach that adheres to a strict moral code regardless of the consequences. This is an ethical action as it aligns with the company’s code of ethics, values, and legal obligations.

Whistleblowing is based on a consequential approach focusing on illegal, immoral, and unethical actions. It is morally and ethically correct, regardless of potential personal or organizational fallout.

Changing the company’s culture through education and investment is based on a consequential approach with partial ethical consideration. It considers long-term benefits to improve the company environment and reduce the number of ethical dilemmas in the future.

Lobbying the government to make the regulations less strict prioritizes the company’s profits over environmental sustainability and public health. It could be seen as an attempt to weaken important environmental protections for the sake of financial gain.

Pros and Cons of Courses of Action

Continuing the device and fraud: Pros include short-term financial gain and increased profits. Cons include legal risks, reputation damage, ethical failure, and long-term financial loss. If discovered, VW could face heavy fines, legal actions, and potential criminal charges.

Following ethical standards and investing in company culture: Pros include maintaining company integrity, avoiding legal issues, ensuring long-term sustainability, and improving internal culture. Cons include immediate financial impact, increased cost of compliance, and stakeholder pushback.

Whistleblowing: Pros include legal and ethical compliance, moral integrity, and protecting the public from fraud activity. Cons include internal conflict, reputation risk, and personal risk for the whistleblower.

Lobbying the government: Pros include more favorable regulations and continued market competitiveness. Cons include public backlash and long-term harm, as this action does not solve the underlying emission system problem and could be recognized as dodging accountability.

Proposed Solution

Identification of Group’s Course of Action

When our team received information about possibly creating a device that would detect when a vehicle is being tested, we decided to follow our code of ethics and stop any idea that our company would be interested in this illegal activity. We realized our company faced an ethical crisis and consulting with our ethics committee was our first action to deal with this dilemma.

To make this decision, we first identified an ethical issue. We evaluated what made the creation of the device illegal and unethical. We gathered the facts about the creation of this device, what it would do to our company, our sales, and our reputation. We also collected data about the sales of our diesel cars without this device and analyzed how our company would perform without it. We evaluated and compared possible courses of action and decided to not build this device.

The pursuit of power and revenue at the expense of truthfulness and transparency is unacceptable in business activities. Our company’s values are the foundation upon which we have built trust and fostered relationships with our employees and customers. If we decided to cheat and lie, we would break that trust and destroy the foundation of who we are as a company.

Demonstration That the Pros of the Solution Outweigh the Cons

There is no question that the pros of not creating the cheating device outweigh the cons. This allows us to stay true to our morals and maintain a clean ethical record. If we had decided to cheat, we would risk getting caught, which could have caused significant damage to our reputation and business. We would have damaged professional relationships with our technical partners, suppliers, and investors. We would have also damaged the trust of our loyal customers and of governing bodies, risking increased scrutiny in the future.

The pros of not creating the cheating device are that it allows us to take this as an opportunity to make drastic positive change in the company. We can update the code of ethics, increase its visibility, and use the opportunity to educate our employees about the potential scenario that we avoided. We can also make changes in our leadership by hiring ethics officers.

Enhancement of Soundness of Group Course of Action with Facts

To demonstrate the soundness of our solution, we addressed the ethical dilemma by stopping device development, assessing the consequences, consulting the ethics committees, and following the company’s code of conduct.

From a utilitarian perspective, our decision maximizes overall well-being by preventing potential environmental damage and ensuring transparency within our company. Upholding our ethical standards would raise trust between all stakeholders, which is important for our long-term success. Deceptive practices would compromise trust and lead to widespread negative consequences. By prioritizing transparency and accountability, we not only align with legal standards but also preserve the trust we have built with our stakeholders, safeguarding our reputation and aiming for long-term success.

References

Goodman, L. M. (2016, May 8). Why Volkswagen cheated. Newsweek. https://www.newsweek.com/2015/12/25/why-volkswagen-cheated-404891.html

Heffernan, M. (2015, September 25). The Volkswagen Scandal Was Entirely Preventable. Here’s How. Observer. https://observer.com/2015/09/killer-instinct-how-ceos-can-prevent-mistakes-that-put-them-in-jail/

Jacobs, D., JD, & Kalbers, L. P., PhD CPA. (2019). The Volkswagen Diesel Emissions Scandal and Accountability. CPA Journal, 89(7).

Markowitz, E. M., Chapman, D. A., Guckian, M. L., & Lickel, B. (2017). A Corporate Scandal that Hits Close to Home: Examining Owners’ Responses to the Volkswagen Diesel Emissions Scandal. Environmental Communication, 11(6), 740–755. https://doi.org/10.1080/17524032.2017.1363071

Ruddick, G. (2021, August 25). VW admits emissions scandal was caused by “whole chain” of failures. The Guardian. https://www.theguardian.com/business/2015/dec/10/volkswagen-emissions-scandal-systematic-failures-hans-dieter-potsch

Volkswagen Group. (2024). The Code of Conduct of the Volkswagen Group. https://www.volkswagen-group.com/en/publications/more/the-code-of-conduct-of-the-volkswagen-group-1882/download?disposition=attachment

Wai, C. K., Teck, T. S., Junkai, M., Lu, H., Hoo, W. C., Ng, A. H. H., & Sam, T. H. (2021). Mapping the Volkswagen Diesel Dupe Crisis, its Implications and Sustainability of their Responses. International Journal of Academic Research in Business and Social Sciences, 11(5). https://doi.org/10.6007/ijarbss/v11-i5/9919

West Virginia University. (2015, September 24). WVU study found elevated levels of emissions from Volkswagen vehicles. WVUToday Archive. http://wvutoday-archive.wvu.edu/n/2015/09/24/wvu-study-found-elevated-levels-of-emissions-from-volkswagen-vehicles.html

Zaring, D., & MacDuffie, J.P. (2019, March 21). Exhausted by scandal: ‘Dieselgate’ continues to haunt Volkswagen. Knowledge at Wharton. https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/volkswagen-diesel-scandal/