Volkswagen Scandal: Lessons Learned and Impact on Business Ethics

This report discusses the Volkswagen Scandal, where the company placed defeat devices in nearly 600,000 of its automobiles to circumvent emission tests. The report explains the scandal, its impact, and lessons learned from it. It also discusses the role of leadership style and myopic thinking in the scandal. The report concludes with the importance of corporate values and strategic thinking in preventing such scandals. Course code, course name, and college/university are not mentioned.

Running head: VOLKSWAGON SCANDAL 1
Volkswagen Scandal
Peter Jones
Columbia University

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Contents
Abstract............................................................................................................................................3
Volkswagen Scandal........................................................................................................................4
Leadership Style and Myopic Thinking..........................................................................................6
Lessons from Scandal......................................................................................................................8
Role of regulations...........................................................................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Abstract
Every commercial firm/business has a common objective that is profit earning;
nevertheless, another aspect is also significant in today’s era, which is ethics. A business has
several stakeholders and they all have different expectations. For instance, shareholders want a
high return, employees expect high remuneration, and society demands a responsible behavior.
However, there is a common expectation that all the stakeholders have. This expectation is
known as ethical behavior. Business ethics is an important area of study, which stipulates the
manner in which a business should deal with its stakeholders and carry business activities
(Businessjargons.com, 2019). In the past few years, many of the scandals have been reported
where businesses have behaved in a very irresponsible manner. In the future, results of these
scandals prove to be very dangerous for the profit and reputation of firms. For the preparation of
this report, one such scandal that has been selected which has been done by the well-known
automotive manufacturer is the Volkswagen entity. In the presented report, the subjective
scandal will be explained in addition to reason and impact of the same. In conjunction with this,
lessons that one can learn from the same will also be discussed.

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Volkswagen Scandal
Before starting the discussion over scandal, first the background of the company is
required to know. Volkswagen group has done the scandal, which is a German automotive
manufacturing company. The company is a multinational company having its headquarter in
Germany. The scandal is about operations of the company in Unites States. Before the scandal
company has huge faith of customers in US as well as across global but the event can be consider
as a major shock for the performance and success of the company.
The subjective scandal erupted in September 2015 when Volkswagen accepted that the
same placed defeat devices in nearly 600,000 of its automobiles with the intention to circumvent
the emission test (Mansouri, 2016). In order to discuss what exactly this company has done, this
is to state that the same was involved in the cheating of the emission tests and presented its cars
very less polluting than they were actually. The above-mentioned defeat device played an
important role in the whole scandal. This device was a program in the engine software rather
than a physical device. Clean diesel engines are there which reduce emissions via various
techniques such as exhaust flows, adjustment of air-fuel ratios and injection of the urea-based
solution in order to render Nitrogen Oxide. Cars of Volkswagen were not eligible to operate in
this manner. There was a proper system by which the respective defeat device could know that
it's being tested. The EPA tests have standard profiles and practice. Under this test, vehicles are
used to put on rollers and to run at a specific speed for a specific time. In such a situation, the
central computer of the car has the ability to detect and determine whether it is a test condition or
not considering the inputs (Topham, Clarke, Levett, Scruton & Fidler, 2015).

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The issue was found when a non-profit organization, performed an independent emission
test on three cars namely BMW X5., VW Passat and the VW Jetta. The test included five routes
such as urban, downhill, highway and so on (Morgan, 2015). Volkswagen found worse in
parameters of emission performance and the subject NGO has conducted a further test on a
dynamometer. Considering the dangerous results of such tests, ICCT informed the matter to
environmental protection agency. On September 18, 2015, this was a significant date in this
scandal when the company submitted its reply to the US environmental protection agency (EPA)
and it has been noticed that clean diesel vehicles of the company were not in the line of
compliance of the Clean Air Act (Siano, Vollero, Conte, & Amabile, 2017). In this response, the
company accepted that it was a deliberate act of the same to use defeat device in its
Turbocharged Direct Injection (TDI) diesel engines. This device had eligibility to render, bypass,
or defeat inoperative elements of the emission control system of a vehicle during emission
testing (Blackwelder, Coleman, Colunga-Santoyo, Harrison, & Wozniak, 2016). As per the data
stated under the initial report, around 5 lakh Volkswagen diesel cars (the model year 2009
through 2011) found to have a defeat device. The investigation continued and later Volkswagen
revealed that a total number of affected vehicles were nearly 11 million across multiple brands
globally (Krall, & Peng, 2015).
As a result of this scandal, the company recalled approximately 482,000 cars in the US.
In 2016, the company made an expenditure of 16.2 billion in order to ratify emission issues in
vehicles. In addition to this, the company also made plans to refit all the affected vehicles. In
January 2017, it remained another significant for the purpose of this scandal as in this month the
company pleaded guilty of criminal charges (Shepardson & Cremer, 2017). The further company
itself arranged an investigation by a law firm Jones Day in the matter and based on its results,

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prepared and signed an agreed statement of facts. As the name of the document implies, this
agreed statement contained the manner in which engineers of the company developed and
installed the defeat device and reason of the same. In October 2015, the CEO of the company
confirmed to US lawmakers that a small group of engineers embedded the defeat device in the
car and this was not a corporate decision at all. Later on, it has been revealed by Jones day in its
internal investigation that nearly 50 staff members were fully aware of the defeat device. After
several inquiries and claim, a group of nine managers declared as suspended whereby included
managers from quality control and assurance, plant managers, engine designers, and many
others. Various parties of the scandal made different claims. It is described that many people
were engaged in the same as some of the staff members were involved in coding and some of
them were engaged in the implementation of the same in engines (Goodman, McGrath, & Leah,
2015). Apart from this, there is also a possibility that a third party has written cheating program’s
codes. In order to discuss penalties that the company suffered with because of the scandal, this is
to state that the company paid $25 billion for the subjective scandal (Parloff, 2018). The scandal
is also known as diesel gate scandal as there was an issue with clean diesel in Volkswagen cars.
Martin Winterkorn was in charge of the company during the periods of 2008 to 2015. On
September 23, 2015, Mr. Winterkorn resigned from the position of CEO of the company
(Seiffert-Brockmann, Einwiller, & Stranzl, 2018). He admitted the wrongdoings by the company
and stated the scandal as a mistake of a few people.
The scandal led out too many terrific results to the company. Firstly, the scandal affected
the sales of the company’s car. Scandal breached the customer’s loyalty and trust and this was
the reason that customers switched from Volkswagen to its customers (Kottasova, 2015). In the
start of 2016, the profits of the company tumbled by around 20% because of the decrease in sales

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of the car. The lead reason for such decrement was the emission scandal of 2015. In the first
quarter of 2015, the company made a profit before tax of €4bn, whereas this figure reached to
€3.2 bn in 2016. Revenues of the company fell down to €51b because of a decline in sales of the
vehicle. The company also lost its goodwill and trust of customers (Kollewe, 2016).
Leadership Style and Myopic Thinking
The lead reason behind this scandal was poor leadership style. It appears that the
company found US emission standards very high and could not satisfy the same hence used
defeat device. Additionally, in 2012 California regulators have tested Volkswagen cars and it
was found that the cars had a feature to spread pollution on roads more than in the lab. The
company was aware of the irregularities and concluded the same as a result of technical glitches.
Vision, strategy, and goals of the company also played an important role in the scandal. As per
one of the goals of the company, the same was intended to become the largest automobile
manufacturer by 2018 selling 800,000 vehicles in the US (Dauvergne, 2018). To achieve this
target, the company shifted its focus to diesel. The company associated Wolfgang Bernhard to
deal with the sooty exhaust by diesel engineers. Later on, Wolfgang Hatz took over this
responsibility, which was/is well known, however, it has been proved that the system developed
by Hatz failed to fulfill US emission standards. This shows myopic thinking of leaders of the
organization. In order to discuss the meaning of myopic behavior in leadership, this is to state
that the term refers to behavior or thinking when managers and leaders only focus on the
nearsighted vision (Thorpe, 2017). They do not understand the long-term consequences of their

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actions and only put their focus on one or more selected goals. The same happened in the studied
scandal. A huge failure in leadership seems to be there.
As mentioned above, the main goal of the company was to increase the sale of its
products and to give a tough competition. In order to reach in maximizing their goals, the
company decided to focus on short-term orientations rather than developing the trust of
customers in the long run. Winterkorn and other top management instilled pressure on middle
management to achieve unrealistic targets with respect to increase the sale of Volkswagen cars.
From here, the whole issue arose. To fulfill the expectations of top management and to meet the
given targets, automotive and software engineers designed a system to detect emission during
testing and used an illegal rate in the same (Dugar, 2018). While focusing on the sale, the
company forgot ethics. In addition to engineers, it was also a fault of the CEO of the company
who always developed the focus on sale increment and never discussed ethics and goodness of
all of the stakeholders. It shows his myopic thinking where all he focused were short-term
benefits. The CEO was notified of the defeat device and unethical practices in the emission test a
full year before the scandal broke. Further, this is to state that throughout the scandal, leaders of
the business did not take responsibility and tried to present the engineers as responsible people.
Shareholders of the company faced a huge loss, as the company had to pay $14.7 billion for
customers claim. In such a situation, it is clear that poor leadership and myopic thinking
contributed to the scandal.
This is also to state that the scandal is a clear breach of ethics and was a preventable
event in every situation. If leaders would have focus on ethics equal or more than profits then
they could fix the issue before the happening of event.
Lessons from Scandal

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There are many lessons, one can learn from the subjective emissions scandal. The very
first lesson that one can get is that flailing to think consequences can lead to bad decisions.
Whoever was responsible for this scandal, did not consider monetary as well as reputational
damages. Hence, the lesson for leaders is to evaluate the whole situation in addition to all of the
possible consequences properly before taking any actions. Another lesson is to understand the
importance of corporate value. Similar to every other corporate, Volkswagen also stated its value
and vision in its sustainability report. After the scandal, it has been proved that printing the value
statement on the company’s document is a very easy task to do whereas the implementation of
the same is far difficult.
Failure or forgetting value statements can lead to dangerous consequences for a company
and therefore while making any decisions; companies are required to consider and to ensure that
their decisions are aligned with its value statement. The third lesson is that making an investment
in strategic thinking is easy and cheaper than paying penalties for strategic failures (Gupta,
2015). However, no one can take guarantee to avoid strategic failures but the same can be
reduced by proper planning and thinking. This lesson says that at each stage of decision-making,
people must be able to think in a strategic manner, to review options and to consider the
consequences of each option. Companies pay enormous fines and penalties, but the same can
save money by investing a little at strategic thinking. This is also required from the perspective
of ethics. Paying fines is a clear indication of unethical actions and therefore in order to remove
such unethical actions, a business must develop strategic planning.
One more lesson that a company’s management can get from the Volkswagen scandal
regarding leadership is that in every organization, people follow to their seniors, not in a formal
but also in an informal manner. Generally, employees work with the same intention and

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philosophy as their leader. In case of this scandal also, engineers developed a defeat device as
they were under pressure of their leader. Therefore, it is one of the greatest lessons that this
scandal gives to the world that leaders are required to be responsible for their behavior first, then
they can expect the same from employees.
In addition to this, taking full responsibility is another learning of this scandal. Cover up
can prove worse than crime. Putting liability to each, others make no good for business as well as
for stakeholders. In the subjective scandal, the CEO of the company was stating engineers for all
the wrongdoing. Later on, the company accepted its mistake and made a public statement stating
that we have broken your trust. This could be done early but the management was continuously
trying to hide the truth. Leaders of the business presented themselves unaware of the whole
incident. It also creates dissatisfaction in employees. Apart from this management of the
company were equating innocence with ignorance but they were required to know that ignorance
cannot be an excuse. A situation where the leader of the business does not know what is
happening can create an issue. Whether a leader knows or not about failures, the same must take
responsibility. It means not only for self-action but a leader must take responsibility for the
action of his/her followers.
Another leadership lesson that one may get from this scandal is that after an incident,
leaders are required to think what to next. Negativities are there and will always do exist. This is
up to leaders that how they see a particular situation. In the respective scandal, leaders of the
company had two options. First to take the scandal as an unpleasant problem and second to take
the same as an opportunity to rebuild the business for the better. The company chose the second
one as it apologized to its customer for cheating them and paid imposed penalties and now again
is doing well in the market. The lesson is that leaders must always see the positive sides of

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incidents. Occurrence and existence of problems are normal but leaders must overcome from
such issues for the betterment.
Role of regulations
Regulations from emission from vehicles and engines play an important role, globally as
well as in America too. These regulations provide standard measures for on-road vehicles as well
as for off-road vehicles and greenhouse gases. The environment is a concern for everyone. With
the development of economy and technology, most individuals have vehicles today that
somewhere affects the environment. In such a situation, a standard is required to be there in order
to control the emission level out of the use of vehicles. Different nations have different standards
based on population, a number of vehicles, and other environmental situations. The United States
Environmental protection agency is an organization of US that ensure compliance with emission
standards. Imagine a situation, where no such standards are there. In this situation, people would
use polluted vehicles and will take no actions. In addition to this, motor vehicles companies
would also not make any efforts to produce clean diesel engine.
All of this can prove dangerous for the environment. Because of the burning of fuel,
Nitrogen Dioxide gets into the air. This is a harmful gas, which is generally used to produce from
emission from buses, trucks, and cars (Epa.gov, 2019). Breathing in air with a high level of NO2
develops many diseases such as asthma, wheezing and so on. Acid rain, low visibility, haze, and
nutrient pollution are some of the environmental effects of NO2. Not only the health but also
environmental issues are also there. This gas and other NOx interact with oxygen, water, and
different other chemicals and form acid rain. This rain harms subtle ecosystem such as forest and
lakes.

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This is the reason that the concentration of this gas in the environment is required to
always be low. As such, emission standard and regulations reduce the emission of the subjective
gas and help local and state governments to save the environment. These standards do not
provide benefits to a particular nation but to the whole globe. The clean air act requires the
respective agency i.e. EPA to set air quality standards for nitrogen Oxides. As mentioned above,
these standards ensure an idol content of different gases in the air and maintain a proper balance
in ecosystem.
Conclusion
In a conclusive way, this is to state that Volkswagen scandal can be counted as one of the
leading scandals in the history of vehicle emission disgrace. The company paid a huge fine to
government and compensation to its customers. In the presented report, some of the major
impacts of scandal have been studied, out of which reduction in sale and profits and loss of
goodwill counted as main. In addition to this, a few lessons that one can learn from this scandal
has also been discussed. As with the greatest lesson, one can learn that leaders are required to be
clear and strategic in their thinking, and then only they can show correct pathways to other
executives in the organization. Other lessons are for leaders that require them to be positive
throughout such incidents. The lesson says that even in cases of ethical breach, leaders must be
clam and try to shift their focus to a better future rather than spoiled past. At last, the role of
vehicle emission standards and regulations was detailed. NO is a very dangerous gas that spoils
the health of citizens as well as the environment as it cause many health issues such as asthma
and others and environmental issues such as acid rain. These issues are dangerous in nature and
therefore needs to be address in proper way. Environmental regulations and emission scandals
plays important role here that has been discussed above.

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Substantially and ultimately, this is to state that the environment is a significant concern
for government and its authorities whereby motor vehicle companies are required to act in an
ethical as well as in a responsible manner, especially while designing engines of cars and other
vehicles.

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