Ethics and Sustainability in Volkswagen: A Stakeholder Perspective

This report analyzes the ethical and sustainable issues faced by Volkswagen due to the incorporation of a fake device with the engine. It provides an overview of stakeholder perspectives and the impact of the ethical issue with a strategic analysis tool called PESTLE. The report suggests alternative solutions and recommends a stakeholder management approach to rebuild credibility.

Running head: ETHICS AND SUSTAINABILITY
Ethics and Sustainability
Name of the Student
Name of the University
Author Note

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Executive Summary
This report is based on ethical and sustainable issue occurred in Volkswagen due to
incorporation of fake device with the engine. The report provides a complete overview of
stakeholder perspectives in terms of how business should consider its stakeholder interest when
taking a management decision. The impact of the ethical issue has been analyzed with a strategic
analysis tool called PESTLE, while the discussion on stakeholder theory determines how
business should react on a complex ethical issue like VW had. In order to minimize the impact of
public damage VW has been suggested to develop a horizontal communication approach in the
internal environment and keep an intrinsic values with the product to meet the stakeholder needs.

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Table of Content
1.0 Introduction................................................................................................................................3
2 Summary of the scenario..............................................................................................................3
3. Description of the theories used for analysis...............................................................................4
4. Analysis.......................................................................................................................................6
5. Identification of 3 alternatives solutions......................................................................................8
6. Recommendation.........................................................................................................................9
7. Conclusion...................................................................................................................................9
References......................................................................................................................................10

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1.0 Introduction
The following report is performed on ethics and sustainability issues that businesses face
particularly when dealing with a large operation and globally dispersed markets. The report
discusses the techniques or the strategies that businesses essentially apply when dealing with
complex ethical issues. Discussion has been made on the basis of ethical and sustainability issues
faced by Volkswagen- a car manufacturer. The report also analyses the impact of external market
trends on the ethical and sustainability issue observed in Volkswagen. On the basis of the
analysis, three different alternative solutions have been generated in the report and one particular
suggestion has been proposed to address the type of ethical challenge faced by Volkswagen.
2 Summary of the scenario
The “Environmental Protection Agency” found that several VW cars were being sold in
America, which was designed with fake software or a device associated with the engine, which
exceeds the range of carbon emission legally allowed by US. The CEO of Volkswagen targeted
US market to gain optimum success (Ruddick 2018). Volkswagen had observed a major push to
increase the sales of diesel cars in United State with the support of a huge marketing campaign
promoting low emissions. So, to deal with the market needs, Volkswagen engineers were
required to design powerful diesel cars whose emission should pass the test of America’s
stringent pollution regulations.
In the middle of the implementation, VW has changed their idea by going with an
innovatively designed diesel cars, which was expected to reach the fuel efficiency range.
However, the end design generated more pollutants compared to gas powered cars (Siano et al.,

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2017). At a press conference, it was found out that VW had issues of aggressive leadership goals
and engagement of senior executive in minor decisions. There was no input from the internal
environment, as former employees described the workplace claiming that subordinates were
afraid to admit failure as well as contradict superior. By going with the decision of CEO and due
to the constant manufacturing pressure, engineers installed fake device with the engines.
Consequently, the Environmental Protection Agency findings include 482,000 vehicles in US,
with the inclusion of VW manufactured Jetta Beetle, VW manufactured Audi A3; specially it
was found almost 11 million cars of VW globally are designed with a “So-called “Defeat
Device” (BBC News 2018).
3. Description of the theories used for analysis
Although there are several theories of stakeholders in strategic management, Freeman’s
“Strategic Management: A Stakeholder Approach (1984) delivers a managerial as well as
real-world scope. Even though it does not formulate any particular theory but it develops a
fundamental base for the foundation of the stakeholder theory. According to Sama, Welcomer
and Gerde (2004), the Normative theory developed by Freeman is about the identification of
moral or philosophical guidelines related to the management of corporate businesses. The major
objective of normative theory is to find out answers of the questions what are the responsibilities
of the organizations with respect to stakeholders? and why organizations should take care other
interest besides stakeholders’ interest?. More specifically, the normative theory is aligned with
moral values, philosophic purposes.
However, Freeman (2001) mentioned that stakeholders should have a genuine interest in
Multinational Corporation and their interest must hold intrinsic values. Notwithstanding Freeman

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thinks each corporate agency should adopt moral dimension even. Freeman et al., (2004) also
mentioned that the relationship between the corporation and stakeholders should be based on
moral commitments and it should not cease to optimization of profits managing stakeholders
relationship in a broad way. Likewise, Freeman in his “Strategic Approach to Stakeholders”
mentioned that each business should include core moral principles and apply the principles as the
foundation for decision-making (Freeman, 2010). Another backbone of normative theory is that
organizational decisions affect stakeholder consequences as well as need to be ethic. In a simple
sense, action of an agent impacts the other agent; so, the business has to develop ethical
principles. Decisions made without any consideration of the impact on the stakeholders involved
in the business, are generally known to be unethical. The mistake, which Volkswagen has
committed, is being arrogant about its business goals, while forgetting the interests of customers,
employees, external bodies such as government, shareholders and communities.
One of the principles of Normative Stakeholder theory is that stakeholders have an
intrinsic value not directly sitting beside organization’s interest; thereby, a business should not
shy away the claims of stakeholders simply as honoring them does not meet its strategic purpose.
Volkswagen did not think of the over-stress put on the workers for the race of being a fuel
efficient diesel car in US market (Krall & Peng, 2015). Engineers of VW had no choice but to
eliminate the research on engine manufacturing to deal with internal operational pressure coming
from the top management. Moreover, when it comes to external stakeholders such as the
communities where it serves, Volkswagen did not have any environmental sustainability plan
against the carbon emission, which, at least would have lessened the impact of negative brand
image caused by “Defeat Device” (Ewing, 2017). However, other large car manufacturing
brands like Tesla meets stakeholders interest through a CSR approach that include sustainability

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and environmental friendliness of automotive, energy storage as well as energy generation
products. In the context of Stakeholder interest, Friedman mentioned that responsibility of a
corporate organization is to make as much money as possible while complying with the
fundamental rules of the society (Friedman & Miles, 2002).
4. Analysis
Political: Emission scandal at Volkswagen turned out to be a significant trading clash
with United State and German. The incident caused a significant damage in the trading and
political relation between Germany and United State. The governments of United State went
forward to arrest VW engineer Oliver Schmidt. In addition, the organization also faced the
penalty of 18.0 billion from the EPA, US (Ruddick, 2018). The actions largely affected the
global market positions of VW and oppositions democratic and republic parties in US stood
against sustainability of VW in US market.
Economical: When VW admitted to the international fraud charges, stock price of
Volkswagen decreased by 20% as well as the market value declined by US26.8 billion. Such
economic downturn compelled VW to recall 11 million affected vehicles globally BBC News,
2018). In addition to this although, the organization fixed the deal by compensating a huge
amount, the negative impression also put the UK automotive market in risk, Jung, Chilton &
Valero, (2017) mentioned that decreasing sales of diesel cards have driven UK’s auto sector to
the brink of crisis cutting several manufacturing jobs.
Social: The scandal created a huge social impact as even though 11 million cards
worldwide had defeat device but potential customers of VW started frowning when selecting
VW. On the other side, the luxury VW manufactured Audi also observed a significant decline in

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its sales. The customers have significantly become way of their next purchase. Consequently,
VW got into the clash with other manufacturer in the industry as their market share kept
plummeting (Crête, 2016). In addition, the cost of potential class action lawsuits, emphasized
R&D to meet emission requirements as well as reputational effect on the volumes add
complexity to the problems.
Technological:
Volkswagen emission scandal put several other car manufacturers at risks as the
governments, especially in Europe and United States, car manufacturers are strictly asked to
control the emission rate. All diesels cars small in size have been recommended with an emission
control technology which must include a “lean NOX” tap and it takes up less space and better
than other solutions regarding emission control. Nonetheless, the issues regarding the lean NOX
tap of Volkswagen increased hesitation of other manufacturer due to customers concerns
Environmental
It has been identified that Volkswagen emission scandal causing 11 million cards to
pollute the environment. According to the EPA report, almost 11 million vehicles worldwide
were spewing more pollution into the environment. EPA mentioned that particularly VW in US
are emitting between 10,392 and 41751 tons of toxic nitrogen oxides into the atmosphere every
year. Park (2018) mentioned that VW particularly added 10 and 40 times higher NOx pollution
into the environment that EPA considers safe for people to breath. Furthermore, Jung, Chilton
and Valero (2017) performed a study and calculated the amount of ozone pollution between 2009
and 2015 and suggested VW stop another 130 early U.S deaths by recalling all affected cars in
United State by the end of 2016.

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Legal impact: As put forward by Crête (2016), environmental campaigners have long
argued that the rules of emissions are being flouted as well as in European markets diesel cars
tend to operate with worse technology compared to US. On the other side, in UK market almost
60,000 people have signed up to sue German carmaker VW over its emission scandal (Fortune
2018). The High Court was approached to approve an application by law firms for a unanimous
litigation order, which is quite similar to a US class action lawsuit.
5. Identification of 3 alternatives solutions
Stakeholder management: As discussed in the Normative Stakeholder theory, VW
should respond to the stakeholder concerns performing responsibilities and meeting
stakeholders’ needs. The organization needs to think of the interest of external customers and
communities where it serves. This means before selling a car VW needs to ensure that customers
face no further trouble and they receive an intrinsic value with the product such as long-term
sustainability of the product and significant contribution to the environmental sustainability
initiatives. Likewise, for the interest of the communities, the brand needs to ensure that the
businesses meets all environmental guidelines and runs under a legal framework (Mansouri,
2016). Most importantly, VW needs to create a healthy balance between own interest and
stakeholder interest.
Internal management effectiveness: The internal investigation of VW scandal indicates
the facts that there was a communication gap between top management and manufacturing
segment. Volkswagen needs to follow a horizontal structure for a healthy flow of
communication. This means that it needs to develop a direct communication mode between the

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board of directors and manufacturing segments. Regular way of communication will help to
identify the issues that occur in the operational departments.
Involvement with an Independent Verification Agency
As VW has its own internal team which investigates vehicle emission, the organization
should also tie up with other independent verification organization to regain the trust of
customers. Some particular agencies should consider the involvement with World Business
Council for Sustainable Development, Fair Labor Association (FLA) and Federal Trade
Commission (FTC).This might help the organization to create a sustainable future for business,
environment and society.
6. Recommendation
Volkswagen should dedicate all its efforts as well as resources into re-building the
credibility with the business. VW should choose to amend to its stakeholder management
practices to include stakeholder values and principles into the business ethics. This would help to
deal with the external needs both internal and external environment, while restructuring the
business to create a clear flow of communication is also required. Horizontal communication
would help to give and collect feedbacks from each department, which particularly help to avoid
the deliberate mistakes in business. As there is a huge environmental impact due to the
increasing carbon emission, VW should also be involved in carbon mission control initiative
publicly.

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7. Conclusion
In conclusion, it is worth mentioning that emission scandal put Volkswagen reputation at
stake; however, it also lead the entire car manufacturing sector under scrutiny. The organization
should reconsider its stakeholder policy management. The leaders and the managers in the
organization should act in the interest of stakeholders to maintain the survival of the
organization.

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References
BBC News. (2018). Volkswagen: The scandal explained. [online] Available at:
https://www.bbc.com/news/business-34324772 [Accessed 16 Aug. 2018].
Crête, R. (2016). The Volkswagen scandal from the viewpoint of corporate governance.
European Journal of Risk Regulation, 7(1), 25-31.
Ewing, J. (2017). Faster, Higher, Farther: The Inside Story of the Volkswagen Scandal. Random
House.
Fortune. (2018). http://fortune.com. [online] Available at:
http://fortune.com/2017/01/11/volkswagen-emissions-scandal-2/ [Accessed 16 Aug. 2018].
Freeman, R. E. (2001). A stakeholder theory of the modern corporation. Perspectives in Business
Ethics Sie, 3, 144.
Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge university
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Ft.com. (2018). Volkswagen scandal is rooted in technology shortcomings | Financial Times.
[online] Available at: https://www.ft.com/content/58975016-720f-11e5-9b9e-690fdae72044
[Accessed 16 Aug. 2018].

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Jung, K., Chilton, K., & Valero, J. N. (2017). Uncovering stakeholders in public–private
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Park, M. (2018). Environmental impact of the VW emissions scandal. [online]
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Guardian. Available at: https://www.theguardian.com/business/2015/dec/17/vv-management-
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