Volkswagen Emission Scandal: Ethics, Conduct, and Business Analysis

This report delves into the Volkswagen diesel emission scandal, triggered by the discovery of cheating devices installed to bypass fuel emission tests. The scandal led to investigations revealing a corporate culture that prioritized compliance over ethical conduct. The report highlights the detrimental impacts of the scandal, including threats to public health, reduced employee bonuses, decreased sales revenue, and damage to the company's brand image. Proposed solutions included recalling affected vehicles and compensating for environmental damage through green initiatives. The report concludes with implications for business management, emphasizing the need for stricter environmental regulations and ethical corporate governance. The analysis underscores the importance of ethical behavior in business and serves as a cautionary tale for environmental control agencies.

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The Volkswagen Diesel Emission Scandal
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Executive Summary
In December 2015, the automotive industry, and indeed the whole world was shocked by the
revelation that Volkswagen, a global giant in automobile products, had engaged in unethical
acts of installing cheating devices to bypass regulatory fuel emission tests. Upon this revelation,
a series of investigations were launched on the company and various factors including its
corporate culture were found to have contributed to the company’s engagement in the scandal.
Findings of the investigation led to overwhelming reputational and financial consequences to the
company. This report identifies that by engaging in the scandal, the company endangered
people’s lives and exposed several others to premature death. Other impacts of the unethical
practice include a decline in the company’s sales revenue, a decline in sales revenue, a
reduction in employees’ bonuses and salaries, a decline in the company’s brand image and
several other effects on the company’s dealership network. The investigations led to a series of
proposals that could bring the scandal to an end. First, it was proposed that the company had to
recall all the affected vehicles. Secondly, the company had to compensate for the environmental
effects of the scandal, and it was proposed that this compensation had to be in the form of a
green punishment where the company could invest in green projects such as electric cars. The
events surrounding this scandal sound a wake-up call to the Australian environmental control
agencies to become more effective in identifying and regulating companies that are likely to
engage in unethical practices against the natural environment.

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Table of Contents
1.0 Introduction............................................................................................................................ 4
1.1 Background........................................................................................................................ 5
2.0 Participants in the Scandal....................................................................................................6
3.0 Possible Reasons for VW Participation in the Scandal..........................................................7
4.0 Impacts of the VW Emission Scandal....................................................................................9
4.1 The threat to People’s Lives.............................................................................................10
4.2 The decline in Workforce Bonus.......................................................................................11
4.3 A Drop in Company Sales Revenue.................................................................................11
Figure 1: A drop in VW sales revenue....................................................................................12
4.4 A Drop in Share Price.......................................................................................................13
Fig 2: a Drop in VW Share Value...........................................................................................14
5.0 Impacts on VW Dealers.......................................................................................................14
6.0 Solutions for the Scandal.....................................................................................................15
7.0 Conclusion and Implications for Business Management......................................................17
References................................................................................................................................ 20

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1.0 Introduction
The events surrounding the Volkswagen (VW) emissions scandal began in September 2015
after the United States Environmental Protection Agency (EPA) served a notice regarding the
company’s violation of the Clean Air Act 1963 (Bovens 2016). Basically, VW was accused of
intentionally violating environmental laws by programming its turbocharged direct injection
engines (TDI) to reveal low Nitrogen oxide (NOx) gas during laboratory tests yet the vehicles
released nearly 40 times the NOx in real life driving. According to reports by Schmidt (2016), the
company installed the ‘cheating’ software in nearly 11,000,000 cars worldwide in the years of
2009 to 2015 while only 500,000 of the cares were installed with the software in the United
States. Before the 2015 revelation, EPA in conjunction with California Air Resources Board
(CARB) had commissioned a study in 2014 to investigate the emission discrepancies between
the VW US models and the European models by summing up results from studies conducted by
three different agencies on 15 vehicles (Iovenko 2016). According to the author, the agencies,
one of them being the West Virginia University, detected high NOx emissions in three VW cars
during the live road test. Subsequently, according to Dearden (2016), the International Council
on Clean Transportation (ICCT) was intrigued to purchase some other data from two other
sources which were later merged with the live road test data to produce a strong evidence of
emissions cheating.
This report aims to give a detailed analysis of the VW scandal and the ethical issues around it.
First, the report will give a background of the fuel emission scandal by delving into the diesel
emission standards and how they compare around the world. The second part of the report will
highlight the participants in the scandal and how the ‘cheating’ idea was crafted. Thirdly, there

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will be a detailed analysis of the possible reasons why VW could have decided to develop the
cheating program. The penultimate section of this report will highlight the impacts of the rigging
to the organization and to its stakeholders. Ultimately, there will be an identification of the
solutions that emerged after the scandal; before making conclusions and recommendations.
1.1 Background
Environmental conservation and sustainability have recently gained much attention from nations
in the recent past. Likewise, according to Whiteman & Hoster (2015), global environmental
protection agencies have increased their consideration of natural phenomena such as
environmental pollution and globalization. A typical agency that that has in the recent past
tightened its environmental protection watch is the EPA, which has increased its control on
emanating from vehicle emissions (Elson et al 2017). In fact, according to Jung & Alison (2017),
EPA’s mission of controlling vehicle-related environmental pollution began in the 1970s when
the company started announcing more restrictions on emissions standards of light-duty vehicles
such as sport-utility cars and small pickups. Observably, the most stringent requirements were
introduced in 2004 when all car models were required to improve their fuel emission standards
(Elson et al 2015). According to Teagarden (2017), EPA’s fuel emission control has also been
supported by the US federal agency, a collaboration that aimed to reduce vehicle nitrogen oxide
emissions from 1.25 grams per mile to 0.07 grams per mile. This collaboration has largely been
seen as an effort to save humans from the toxicity of nitrogen oxide which has largely been
associated with human health complications such as bronchitis, cardiovascular disease,
respiratory complications, asthma and premature death (Katz-Rosene 2015).
EPA’s new emissions standards was a major challenge to auto-manufacturers especially those
who manufactured fuel efficient diesel cars in the United States like VW, Honda, Nissan and
Mazda (Coglianese & Nash 2017). However, while a majority of the market players had to bear
the cost of this regulatory compliance, managers at VW thought otherwise.

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In a surprising turn of events, VW was announced to be a ‘diesel dupe’ in 2015 for rigging an
emission test meant to reduce the amount of pollution emitted by diesel-consuming vehicles.
While announcing the scandal, EPA noted that VW’s main aim was to pretend that its vehicles
met the fuel emissions standards while in the real sense; it was producing above-board diesel
emissions (Bird 2015). Basically, according to Patra (2016), the software was designed in a
manner that it detected when the TDI engines were under test and transmitted information to
the vehicle’s various parts including the breaks, steering, and accelerator to make changes
within the engine. The changes could then trigger a diminution of nitrogen oxide emission levels
(Patra 2016).
2.0 Participants in the Scandal
Widely reported in the media, the events surrounding the VW scandal has received many
speculations from the public as to what factors created a ground for the scandal as well as who
was involved. Initially, it was reported that 9 managers had been suspended for participating in
the cheating. Similarly, according to Rogerson (2018), the media reported that the company’s
chairman attributed the scandal to a routine failure of some of the company’s department to fail
to comply with the rules.
In September 2015, the company’s CEO told the US lawmakers that only a small group of the
company’s software developers participated in developing the software and embedding it on the
cars. However, according to Piazza & Jourdan (2018), the CEO was keen to mention his
unawareness of the exact number of engineers who participated in the scandal and that it was
not a corporate decision to cheat. In an interesting turn of events, a law firm (Jones Day)

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conducted an internal investigation and found that 50 members of the staff especially those
based in Wolfsburg were well aware of the cheating plans.
Afterward, the media learned that although some VW technicians and engineers had informed
their supervisors about the scandal back in 2011 the supervisors ignored the reports (Silvia
2018). In the eleventh month of 2015, according to Carberry et al (2018), a dramatic number of
managers, engineers, and technicians who participated in the scandal emerged. Since then,
multiple theories have emerged of how the cheating was conducted; one describing that a
program could be designed by one individual but installing it in the cars required multiple
numbers of a coordinated workforce (Cavico & Mujtaba 2017). Furthermore, according to
Cavico & Mujtaba (2017), it was finally established that employees in the junior positions were
not involved in the scandal, but a large number of staffs in the managerial and mid-managerial
positions participated. As a result, nine managers from quality control, supervisory board, plant
control, engine designers and managers of sub-companies such as Audi and Porsche were
suspended. It is worth noting that the cheating device was added in several millions of codes to
defeat EPA’s 100 million codes of detection, to mean that an external/third-party programmer
might have been involved in writing the code (Coglianese & Nash 2017).
3.0 Possible Reasons for VW Participation in the Scandal
Before resigning in September 2015, VW CEO Martin Winterkorn made it clear that he was not
aware of the company’s engagement in the scandal. Nonetheless, according to Grover & Hasel
(2015), Ping & Chen-Bo (2017) and Ferriera (2016), it is greatly believed that technological
shortcomings were the most likely reason for the company’s decision to cheat in the emission
test. Moreover, the company’s chairman made an announcement in December 2015 that the
company had attempted the same technique in 2005 when EPA introduced the most stringent

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fuel emission compliance rules, and that they were forced to engage in cheating due to
technological shortcoming (Woodhouse 2016). According to the Chairman’s narrations, the
company engineers were unable to comply with the rules within the time frame and that the
company’s available resources were inadequate to activate the compliance (Whiteman & Hoster
2015). The authors note further that despite a team of VW Spanish engineers finding a solution
to the problem, it still chose to implement the rigging idea. Hence, from the previous chairman’s
statement, VW’s 2015 engagement in emission test cheating was not a one-off mistake but
rather a culmination of a series of uninterrupted mistakes.
Another major contributor to the company’s engagement in the cheating scandal is its corporate
culture. The company is had a compliance-based culture where employees must comply with
organizational rules and must work under a critically centralized command (Auletto & Miller
2017). The authors write further that this culture holds that expectations and demands of the
company must be met regardless of how employees perform to meet such expectations, and
therefore employees are susceptible to doing anything, however unethical it may be, to comply
with the corporate culture. The company’s culture, as observed by Veschoor (2016), is different
from that of other automobiles because rather than being democratic, all the management
systems are autocratic, a phenomenon that contributes to a paucity of global thinking in all its
activities (Bovens 2016). Even if the key managers did not enforce the workers to develop the
cheat device, the working environment might have played a big role in encouraging it because
working at VW means avoiding discussion and dissent (Elson et al 2017).
The human resource practices in VW encourages managers to tell employees to consider tasks,
and if they are not capable of doing so, someone else with better capabilities will come and do

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it. Therefore, according to Katz-Rosene (2015), VW employees find themselves in a situation
where they can do anything to keep their jobs.
According to the assertions of a VW employee, employees may prefer engaging in such
unethical acts due to the company’s rewarding system (Roulet & Clemente 2018). The authors
say that employees at VW are exposed to a bonus system that runs from the lower ranks to the
higher ranks and is based on individual performance. This means that employees, as well as
teams, receive bonuses based on their performance and productivity, and therefore even if one
would want to give a dissenting opinion on an unethical practice that improved their productivity,
they would not do so for the sake of other team members (Hupp et al 2018).
When the company publicly admitted having engaged in the scandal, its human resource
manager, Bernd Osterloh claimed that the company’s approaches and culture were unethical,
inappropriate and needed drastic value-based changes to give employees the freedom to share
their dissent opinions (Bowman 2017). Clearly, this supports the proposition that the company’s
corporate culture could have created an atmosphere of engagement in the unethical practice.
While some commentators might stick to the idea that the emission test cheating was motivated
by profit maximization, this idea might be a misconception. According to Coffee (2017), it is
clear that this scandal traces its roots to the company’s approaches and culture.

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4.0 Impacts of the VW Emission Scandal
In 2014, the only car manufacturing company that was ahead of VW in terms of market
capitalization was Toyota. However, it is speculated that when the company publicly admitted its
participation in the emission scandal, its position as world’s second largest car manufacturer
was shaken by the financial burden that ensued thereafter (Bovens 2016). According to Jung &
Alison (2017), the company had to contract three public relations companies to deal with the
crisis. Moreover, according to the authors, the company hired former BMW communications
director to help deal with the public relations issues that accompanied the scandal, at a salary of
$22,000 per month. The company also had to deal with various issues of international relations
since the case included several countries (Bovens 2016). However, the following are several
other impacts that the scandal had on the company:
4.1 The threat to People’s Lives
Research estimates that by the end of 2016, the cars that were ratified based on the defeat
device had produced additional emissions that triggered a premature death of close to 60
people in the United States (Iovenko 2016). Nonetheless, from 2008 to 2015, VW and Audi cars
are estimated to have produced 40 times more nitrogen oxide than is allowed by the country’s
Clean Air Act. According to Dearden (2016), this translates to a 6 years emission of an
estimated 3.67 million kg of nitrogen oxide to the environment.
Patra (2016) write Nitrogen oxide is the primary element of smog and particulate matter which
expose humans to diseases such as asthma, bronchitis, cardiovascular and respiratory
diseases. Similarly, according to research by Whiteman & Hoster (2015), Piazza & Jourdan

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(2018) and Jung & Alison (2017), nitrogen oxide produced by VW vehicles is responsible for
endangering 60 human lives by causing 10 to 20 years of premature death.
Rogerson (2018) mentions that scientists have also estimated that VW nitrogen oxide emissions
have directly contributed to an estimated 31 cases of bronchitis and 34 cases of respiratory
disease within the US since 2015. The author also claims that the environmental pollution
emanating 2008 to 2015 emissions cause the US $450 million worth of health related expenses.
Piazza & Jourdan (2018) aver that a decline to recall all the affected vehicles would lead to 140
premature deaths from 2015 onwards. Moreover, according to the authors, failure to recall the
cars would cause $840 million worth of health costs. Finally, Teagarden (2017), Patra (2016)
and Rogerson (2018) claim that the excess nitrogen oxide emitted by the affected VW cars can
lead to acid rains which have an impact on human health, nature and natural resources.
4.2 The decline in Workforce Bonus
VW’s workforce was the most affected by the scandal. When the company publicly admitted
having participated in the scandal, its sales revenue declined. As a result, according to Piazza &
Jourdan (2018), the company had to reduce the bonus of all chief management staff in order to
cope with the situation. This was part of the plan to adopt a comprehensive solution that would
ensure fairness for all the parties that participated. The bonus reduction which targeted a group
of executives as well as the management board led to a significant diminution of all the
company’s salary payment. However, according to Jung & Alison (2017), it is worth noting that
the bonus cut majorly affected the company’s executives operating the US division and not its
Germany division.

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4.3 A Drop in Company Sales Revenue
While the scandal affected all members of the VW including Audi and Skoda, the sales decline
experienced by the Volkswagen brand was more substantial than that experienced by the other
brands. According to Whiteman & Hoster (2015), the scandal contributed to a damage of the
VW brand image which saw most customers shifting to other competitor brands such as
Mercedes Benz and Toyota – this contributed to a sales decline. In fact, according to Teagarden
(2017), the company experienced a sales decline for the first time in 11 years. The following
figure illustrates the sales decline experienced by VW as a result of the scandal:
Figure 1: A drop in VW sales revenue
Source: Dearden (2016)
Interestingly, the Australian VW market did not get a hit as a result of the scandal. In fact,
according to Patra (2016), there was a 10% increase in sales of the car brand within Australia
as reported by the country’s Chamber of Automotive Industries. Other brands related to VW
such as Skoda and Audi saw an increase in sales from 19,000 units to 23,000 units in 2014 and
2015 respectively for Audi and 4000 to 5000 in 2014 and 2015 respectively for Skoda (Bovens
2016). Teagarden (2017) attributes the scandal’s low impact on the Australian VW market to the