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Critical Lessons from the Volkswagen Scandal

Ethical failings precipitated the auto giant’s reputation crisis.

Volkswagen has paid dearly for the ethical shortcomings that led to “Dieselgate.” But has VW learned from the scandal? With the FTC recently filing the final court summary on the case, Michael Toebe reflects on the crisis that leveled the company’s reputation.

Volkswagen’s good name has been tarnished regularly in the media in the last four years over its low-level decision-making and irresponsibility. Severe financial penalties have been meted out as punitive and corrective measures. There are lessons to be learned from VW’s errors.

In 2015, the company confessed to cheating emissions tests on 11 million vehicles across the globe. “Dieselgate,” as the scandal was called, was a punch to VW’s reputation. The financial hit, significant. The company has paid a whopping $9.5 billion in the last four years to American car owners.

That’s historical, with the Federal Trade Commission (FTC) calling it the “largest consumer redress program in U.S. history.”

The total penalties paid internationally has totaled $35 billion.

VW knew of the problems with its vehicles. As is common in developing scandals and the reputation crisis that accompany them, instead of responding ethically, leadership engaged in reckless decision-making. The needed corrections were deemed undesirable, and the financial incentives and temptation to cheat proved too great.

There is, however, another school of thought, says Bret Hood, Director of 21st Century Learning & Consulting and adjunct professor of Corporate Governance and Ethics at the University of Virginia. “Some have argued that VW actively contemplated the risk versus the reward, but I would bet that they approached the issue as did Ford with the Pinto. We take the issue and turn it into a cost-benefit analysis and, as we are taught, the lowest cost is the choice,” he says. “Where we are fallible is that we never do an objective evaluation, because our System 1 brains (automatic) are working in our subconscious to help us produce a predetermined outcome; in this case, sales volume.”

Hood sees another variable as very likely in play, as questionable a rationalization as it could seem to critics. “There are a number of ethical models, such as the Rest Model, Kohlberg’s stages of moral development and the Jones Moral Intensity model, but as Ann Tenbrunsel and Max Bazerman point out, most of the time, the decision-makers have not classified the dilemma as an ethical issue,” he says. “This idea is reinforced by (Daniel) Kahneman’s work on the System 1 (automatic) and System 2 (rational deliberation) thinking.”

It’s reasonable to suppose that moral courage was either insufficient at VW or absent altogether. In cases like these, governance and compliance will never be conducted as skillfully as necessary. As history proves repeatedly, scandal is far more likely.

Click to read more coverage and analysis of the Volkswagen scandal

Expectations mixed with unexpected developments, stress, psychology and intent are strong drivers of predictable behavior. “As we look at Wirecard, Enron, etc., the executive decision-makers are assisted in their deviation from the ethical path by both motivated blindness and indirect blindness,” Hood says. “With motivated blindness, ‘I am willing to overlook things because it is easy for me to overcome internal objections as I am motivated to succeed.’ When you get into large organizations such as these, it is easier to diffuse responsibility through psychological distance from the victims as well as the actual act of committing the fraud.”

This psychological distance is an important variable to understand and recognize as a driver of decision-making and behavior. It plays a role in acts and momentum that lead to a violation of principles, weak or failed governance and missing compliance.

“Indirect blindness comes in when I, the executive, do not actually participate in the unethical behavior but rather, someone on the lower rungs of the organization actually creates the transactions necessary for the unethical behavior to succeed,” Hood says.

This can be either a conscious act or a realization. Either way, both can end up being used as a defense by leadership in behavior and a response when wrongdoing is exposed and scandal is underway, even if considered unprofessional, unconvincing and a failed attempt at absolving oneself of responsibility.

“As an example, the CEO of VW did not sit in on the meetings talking about falsifying the codes, nor did he create the software code that accomplished the mission. This leads to indirect blindness since ‘I did not take part in the mechanics of the process,’” Hood says, as an example of how this works.

The cold and difficult truth is investigators, the law, the media and the public don’t buy this type of defense. The evidence trumps the corporate or legal spin.

“Despite this, the CEOs of all these organizations had an active hand in the unethical behavior by what they said or didn’t say,” Hood says. “In the VW case, an engineer went up to an executive and said, ‘We don’t have the technology to accomplish this.’ The executive responded by saying, ‘Maybe it is time I get another engineer.’ While there was no specific unethical message, there was clearly an implied message.”

The blame-shifting and attempt at exonerating oneself organizationally or individually is not just poor form; it is considered contemptuous to throw your team into the fire, given that the professionals are doing as expected – and uncertainty or fear is a very real component of psychological safety.

“Since people need their jobs, they interpret the exec as saying ‘do whatever it takes and I will tacitly approve,’” Hood says. Another factor is the competitive nature of business in general and the natural personality of leadership or a leadership team.

“Competition and rivalry can certainly lead to unethical behavior as the perception of rivalry creates in (and out) groups,” Hood says. “This usually leads to advantageous comparison wherein you look at yourself and say ‘what I am doing is not nearly as bad as what my competitor is doing’ or ‘I have to do this in order to make this a level playing field.’”

VW has survived its scandal and reputation crisis, but has VW learned from it? Or will the company repeat its errors, as other organizations do?

Are leaders in other organizations paying attention to and learning from this story and similar scandals – from the psychological errors, belief systems, natural competitive tendencies and compromise or failures of ethics, decision-making, governance and compliance?

Some, maybe. The wise ones. However, not all organizations and leaders will pay attention and correct the course they are currently traveling.

Scandals are not closely dissected and examined, but they really should be. Organizations that choose to do so – that regularly test and question their own mindset, practices and weaknesses and make critical adjustments – will be taking significant steps toward critical, protective improvements and risk management, therefore protecting mission, shareholders, reputation, the board and executive careers.

When coupled with humility and a growth mindset, intellectual honesty is a safety precaution critical to prevent embarrassing, costly and career-damaging scandals and to keep your organization from becoming the next cautionary tale.

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VW Emissions and the 3 Factors That Drive Ethical Breakdown

Insights from

Luann J. Lynch

Carlos santos.

Former Volkswagen Chief Executive Martin Winterkorn went on trial this month on charges stemming from the "dieselgate" scandal, almost nine years after the German carmaker admitted to rigging emissions tests.

Winterkorn, who led the company from 2007 until his forced resignation in September 2015, became a figurehead of the scandal. The controversy erupted when it was revealed that millions of Volkswagen cars had been manipulated to pass environmental standards, marking the biggest scandal in the company's history.

As Winterkorn faces trial in 2024, the repercussions of the "dieselgate" scandal continue to unfold. Back in 2016, when the full extent of the scandal was still being uncovered, business schools were already examining the case as a cautionary tale of corporate misconduct. 

At the University of Virginia's Darden School of Business, Professor Luann Lynch peeked under Volkswagen’s hood to determine just how Germany’s premier car maker managed to destroy its once sterling reputation.

Her case study titled  The Volkswagen Emissions Scandal , co-authored with former Darden students Elizabeth Bird and Cameron Cutro (both MBA ’16), suggests that a combination of autocratic leadership and lack of both controls and consequences led to a corporate culture that proved fertile ground for bad decisions.

Her study shows the company’s goal was both ambitious and simple. Martin Winterkorn, who took over as Volkswagen’s CEO in 2007, planned to transform his company into the world’s largest automaker by selling over 10 million cars a year, relieving Toyota of the crown. Besides bolstering the bottom line, the strategy would also help Germany ameliorate the effects of the 2008 global financial crisis by exporting more cars. Winterkorn saw the neglected U.S. market as a target to success, though the company would need to triple its car sales in the U.S. to meet its goal. Upping sales meant its engineers had to conjure up a near miracle — powerful, fuel efficient diesel cars whose emissions passed the test of America’s increasingly stringent pollution regulations. And the engineers — who had made German engineering a world renowned brand — had to make the miracle happen quickly.

The company had dismissed the idea of competing in the hybrid market, instead electing to build diesel cars, which held just 5 percent of the U.S. auto market in 2007. Winterkorn believed that diesel promised high fuel efficiency without sacrificing power. However, diesel cars generate significantly more pollutants than gas powered cars. VW engineers faced a huge challenge.

The company had known success under the autocratic leadership of Winterkorn and his mentor, Ferdinand  Piëch,  both of whom kept VW under tight control. The company’s leadership set aggressive goals, and senior executives involved themselves in even minor decisions. Former employees described a workplace in which subordinates were afraid to admit failure or contradict superiors. Company leaders bullied employees. Piëch bragged that he forced superior performance by “terrifying his engineers” and at times fired engineers or executives who displeased him. Winterkorn didn’t like bad news. “Before anyone reports to him, they make sure they have good news,” said one industry analyst.

After Winterkorn took charge, he tossed the idea of teaming with Daimler, a competitor whose BlueTec invention used a substance called urea (essentially cat urine) to neutralize nitrogen oxide, a major pollutant in car emissions. So VW engineers were starting from scratch and under deadline to meet a tough goal set by demanding company leaders who insisted on success.

VW engineers solved the daunting challenge by installing cheating software in cars exported to the U.S. The software recognized when a car was being tested for emissions in a lab because only two of its four wheels were used, at which point it activated emissions-controlling devices that would have inhibited performance in on-road conditions. In lab testing, the cars met U.S. emission standards. On the road, where the defeat device automatically turned off, testing in some cases showed emissions 35 times higher than allowed.

The discovery of the defeat devices was made in 2014 by researchers curious about why diesel technologies appeared cleaner in the U.S. than in Europe. The fallout was fierce. Regulators across the world opened investigations and VW halted sales of its 2015 models. Winterkorn resigned. Senior managers were suspended or put on leave. VW stock plunged.

Lynch says the presence of three factors contributed to the catastrophic decision made by the VW engineers — pressure, opportunity and rationalization. When those three factors (known by some as a “dangerous triad” or a “fraud triangle”) are present simultaneously, we often see employees act unethically.

• Pressure : The pressure from the top was intense. VW’s 25-page Code of Conduct, on which every employee was ostensibly trained in ethics, seemed irrelevant when contrasted with management’s autocratic leadership style and single-minded goal to succeed at any cost. What’s more, the company’s engineering reputation was at stake, and the consequence of failure for the German economy and reputation around design and manufacturing would be substantial
• Opportunity : The opportunity to cheat was present, too. Coinciding with the directive the engineers received to come up with a new solution, Bosch sold VW the diesel-engine-management software that could detect when a vehicle was being tested and turn on emission-controlling devices — on the understanding that it would be used for internal testing, as use was illegal in vehicles sold to the public. And modern cars operate with about 100 million lines of software code, making it easy to hide cheating software code amidst the complexity
• Rationalization : The engineers knew that in the 1970s, VW engineers had installed in Volkswagens “defeat devices” that allowed the company to cheat on newly enacted emission standards. The consequence then was minimal — a mere $120,000 fine. Even if they cheated, the punishment would be light, they may have rationalized. How else might they have rationalized such a feat?  Perhaps they thought it was in the best interest of the company and, as a result, management would approve.

“When all three parts of this dangerous triad are present, you have a situation in which employees can begin to engage in unethical behavior,” says Lynch.

Changing corporate culture can be difficult, she says, but not impossible. Outside leaders with new ideas and new leadership styles can be brought in, internal oversight can be put in place and consequences for unethical behavior can be clearly stated and acted on when the situation warrants.

Companies should have a clearly articulated values statement that spells out the fundamental core beliefs that should guide all behavior in the organization. And top management must live those values every day.  “Those values statements and stated core beliefs are worthless if top management doesn’t walk the walk,” says Lynch. “Those in the senior positions need to be living those core values in addition to having put them on paper, or these statements of core values are valueless.”

This article was first published in October 2016 and is based on the case  The Volkswagen Emissions Scandal  (Darden Business Publishing), by Darden Professor Luann J. Lynch, Elizabeth Bird and Cameron Cutro. 

A summary of the case also appears in the article “ Volkswagen’s Lax Ethical and Emissions Standards ” in the Darden School of Business/ Washington Post  “Case in Point” series.

Almand R. Coleman Professor of Business Administration

Lynch’s expertise and research interests are primarily in how to best pay or otherwise give incentives to bosses that will make their companies succeed. The focus of her work can be broadly characterized as an exploration of how incentives and compensation systems are structured to encourage the desired behavior by the individuals or organizations. Her work has examined incentive issues such as stock options, compensation in post-merger integration efforts and the effect of financial reporting, accounting and regulation on incentive compensation.

Before joining the Darden faculty, Lynch was assistant vice president at Roche Biomedical Laboratories Inc. and held positions in finance and accounting at Roche, Northern Telecom (NorTel) and Procter & Gamble.

Lynch is author and co-author of several articles published in leading accounting and finance journals.

B.S., Meredith College; MBA, Duke University; Ph.D., University of North Carolina

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The Volkswagen Emissions Scandal: an Ethics Case Study

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• The Volkswagen Beetle – a Success Story The Volkswagen Beetle – A Success Story Table of Contents Page Feature – Beetle melancholy 1. Volkswagen Beetle – the sound, the humor, the smell, the feel, the l`mdtudq`ahkhsx, the image 2 VW Beetle, the real miracle 2. How it all began 6 3. Success story without end 7 4. VW Beetle ...and runs and swims and flies 11 5. Volkswagen – an international partner 14 VW Beetle through the years 6. Engine technology 16 7. Design and equipment 18 VW Beetle - Facts and figures 8. Chronology 22 9. Global production 26 10. Production locations 28 11. Sales figures by markets 29 12. Price development in Germany 30 Volkswagen Beetle – the sound, the humor, the smell, the feel, the maneuverability, the image The Sound. The typical sound of a Beetle. People of the Beetle Generation sit up and take notice when they hear it today. They are strangely touched, experience melancholy, as though remembering something long since lost. It is a sound as unmistakable as the Beetle's silhouette: it buzzes, it putters - all against a background of soothing fan noises – a feeling of euphoria which has underscored our mobility for decades and which was the accompaniment for our independence and for growing prosperity during those years. Beginning in the late 1940's and continuing into the early 1980's, the unmistakable noise of the Beetle left its mark on the sound backdrop of German streets. And in other places, as well, the air-cooled Beetle Boxer was the lead instrument in the noisy traffic concert. This is why Volkswagen advertising from the Doyle Dane Bernbach (DDB) agency at the end of the 1960's, advertising that is already legendary today, was titled „What the world loves about Germany"; it included a colorfully mixed collection of pictures: Heidelberg, a cuckoo clock, sauerkraut with dumplings, Goethe, a dachshund, the Lorelei – and a Beetle. [Show full text]
• Download PDF, 19 Pages, 505.25 KB VOLKSWAGEN AKTIENGESELLSCHAFT Shareholdings of Volkswagen AG and the Volkswagen Group in accordance with sections 285 and 313 of the HGB and presentation of the companies included in Volkswagen's consolidated financial statements in accordance with IFRS 12 as of 31.12.2019 Exchange rate VW AG 's interest Equity Profit/loss (1€ =) in capital in % in thousands, in thousands, Name and domicile of company Currency Dec. 31, 2019 Direct Indirect Total local currency local currency Footnote Year I. PARENT COMPANY VOLKSWAGEN AG, Wolfsburg II. SUBSIDIARIES A. Consolidated companies 1. Germany ASB Autohaus Berlin GmbH, Berlin EUR - 100.00 100.00 16,272 1,415 2018 AUDI AG, Ingolstadt EUR 99.64 - 99.64 13,701,699 - 1) 2019 Audi Berlin GmbH, Berlin EUR - 100.00 100.00 9,971 - 1) 2018 Audi Electronics Venture GmbH, Gaimersheim EUR - 100.00 100.00 60,968 - 1) 2019 Audi Frankfurt GmbH, Frankfurt am Main EUR - 100.00 100.00 8,477 - 1) 2018 Audi Hamburg GmbH, Hamburg EUR - 100.00 100.00 13,425 - 1) 2018 Audi Hannover GmbH, Hanover EUR - 100.00 100.00 16,621 - 1) 2018 AUDI Immobilien GmbH & Co. KG, Ingolstadt EUR - 100.00 100.00 82,470 3,399 2019 AUDI Immobilien Verwaltung GmbH, Ingolstadt EUR - 100.00 100.00 114,355 1,553 2019 Audi Leipzig GmbH, Leipzig EUR - 100.00 100.00 9,525 - 1) 2018 Audi München GmbH, Munich EUR - 100.00 100.00 270 - 1) 2018 Audi Real Estate GmbH, Ingolstadt EUR - 100.00 100.00 9,859 4,073 2019 Audi Sport GmbH, Neckarsulm EUR - 100.00 100.00 100 - 1) 2019 Audi Stuttgart GmbH, Stuttgart EUR - 100.00 100.00 6,677 - 1) 2018 Auto & Service PIA GmbH, Munich EUR - 100.00 100.00 19,895 - 1) 2018 Autonomous Intelligent Driving GmbH, Munich EUR - 100.00 100.00 250 - 1) 2018 Autostadt GmbH, Wolfsburg EUR 100.00 - 100.00 50 - 1) 2018 B. [Show full text]
• Lessons from the Volkswagen Diesel Emissions Scandal∗ Willingness to Pay for Brand Reputation: Lessons from the Volkswagen Diesel Emissions Scandal∗ Xiaogang Chey Hajime Katayamaz Peter Leex December 3, 2019 Abstract In this study, we use the announcement of the Volkswagen emissions scandal on September 18, 2015, as an exogenous shock to measure consumers’ willing- ness to pay (WTP) for brand reputation. Only Volkswagen diesel cars produced in 2009-2015 were announced as emissions violators. Using eBay car auction data, we estimate the impacts of the scandal on the prices of Volkswagen emissions non- violating cars. Our difference-in-differences estimates show that final bid prices decreased by 14% and 9% in diesel and gasoline car markets, respectively, which purely reflected a decline in consumers’ WTP for Volkswagen’s brand reputation. Additionally, the difference in price-drops between the violating and non-violating diesel cars is statistically insignificant. This may be due to the fact that consumers rationally adjust their WTP by expecting compensation which will almost surely be provided by Volkswagen for violating models. Keywords: Volkswagen emissions scandal, willingness to pay, brand reputation. JEL codes: D12, L62. ∗We thank Nejat Anbarci, Anurag Banerjee, Jingnan (Cecilia) Chen, Yiquan Gu, Tilman Klumpp, Georgia Kosmopoulou, Daniel Li, Tong Li, Jingfeng Lu, Justin Marion, Anastasiia Parakhoniak, Leslie Reinhorn, Henry Schneider, Nan Shi, Steven Tadelis, Angel Hernando-Veciana, Le Zhang, and Xiaoyong Zheng for helpful discussions and comments. Early versions of the paper benefited from discussions at the Auction Conference at Lancaster University 2017, the Durham Micro-Workshop 2018, APIO 2019. yCity, University of London, UK. E-mail: [email protected] . zWaseda University, Japan. [Show full text]
• An Inquiry Into How Company Culture Influenced the Volkswagen 2015 Emissions Scandal by Ahmad Ahbab and Matthew Yu Submitted To An Inquiry into How Company Culture Influenced the Volkswagen 2015 Emissions Scandal by Ahmad Ahbab and Matthew Yu Submitted to Dr. D’Arcy Randall and Matthew Chovanec ChE333T Spring 2019 VOLKSWAGEN EMISSIONS SCANDAL 2 Table of Contents Introduction 3 Martin Winterkorn Outlines a New Plan, and a New Volkswagen 6 Volkswagen Launches Strategy 2018 6 Volkswagen Charms the Public to Expand and Gain Recognition Overseas 7 Implications on Corporate Culture 7 Volkswagen Steers Itself into a Precarious Situation 8 Volkswagen Discovered Cheating Emissions Regulations 8 Defeat Devices explained 10 Volkswagen Denies Allegations of Cheating 11​ New Leadership Attempt ​to Chart a New Course for Volkswagen 12​ Impacts of the Scandal on Both Volkswagen and the Public 13​ Volkswagen Changes Policy and Develops a ​More Sustainable Organization 14​ Ethical Analysis of the Actions by the Engineers and Management at Fault 14​ Violations of IEEE Code of Ethics Tenet 1 and 9 15​ Violations of IEEE Code of Ethics Tenet 3 and 7 16 Ethics at Volkswagen Post-Dieselgate 16 Conclusion​ 18 List of Abbreviations 20 Works Cited 21​ List of Tables Table 1: A listing of all affected vehicles identified to contain “defeat devices” 9 Table 2: Tenets 1 and 9 of the IEEE Code of Ethics 15 Table 3: Tenets 3 and 7 of the IEEE Code of Ethics 16 List of Figures Figure 1: Diagram of How VW’s Switch Software Worked 11 Appendices Appendix A: Discussion of NOx Capture Systems (LNT and SCR) 25 VOLKSWAGEN EMISSIONS SCANDAL 3 Introduction Volkswagen is renowned as a global powerhouse in the automobile industry. [Show full text]
• Nitrogen Oxides Pollution Prevention and Abatement Handbook WORLD BANK GROUP Effective July 1998 Nitrogen Oxides Nitrogen oxides (NOx) in the ambient air consist 1994). The United States generates about 20 mil- primarily of nitric oxide (NO) and nitrogen di- lion metric tons of nitrogen oxides per year, about oxide (NO2). These two forms of gaseous nitro- 40% of which is emitted from mobile sources. Of gen oxides are significant pollutants of the lower the 11 million to 12 million metric tons of nitrogen atmosphere. Another form, nitrous oxide (N2O), oxides that originate from stationary sources, is a greenhouse gas. At the point of discharge about 30% is the result of fuel combustion in large from man-made sources, nitric oxide, a colorless, industrial furnaces and 70% is from electric utility tasteless gas, is the predominant form of nitro- furnaces (Cooper and Alley 1986). gen oxide. Nitric oxide is readily converted to the much more harmful nitrogen dioxide by Occurrence in Air and Routes of Exposure chemical reaction with ozone present in the at- mosphere. Nitrogen dioxide is a yellowish-or- Annual mean concentrations of nitrogen dioxide ange to reddish-brown gas with a pungent, in urban areas throughout the world are in the irritating odor, and it is a strong oxidant. A por- range of 20–90 micrograms per cubic meter (µg/ tion of nitrogen dioxide in the atmosphere is con- m3). Maximum half-hour values and maximum 24- verted to nitric acid (HNO3) and ammonium hour values of nitrogen dioxide can approach 850 salts. Nitrate aerosol (acid aerosol) is removed µg/m3 and 400 µg/m3, respectively. [Show full text]
• October 2019 1 OCTOBER 2019 Stealth Missile ISSUE 67/2019 2 Quarterly Newsletter of the Porsche Club of Tasmania A CAMS Affiliated Club Honorary Life Member – Klaus Bischof (2010) Life Member - Leon Joubert (2013) Club Honours - John Pooley (2016) Rob Sheers (2016) CONTENTS Committee…………………………………………… ...............................................3 Editorial………………………………………………. ...............................................4 The Inside Line……….………………………………….............................................5 President’s Report 2019 AGM……………………………...…………………………..6 New Members……………………………………….………………………...…….…...7 Events Calendar.........................………..................................................................8 PCT Club Awards Points 2019………………..………………………...………………9 Club Awards Points Scoring……. ........................................................................10 Karl Ferdinand Piech……………………………………..........................................11 Southern EMR 14 July…..….................................................................................16 Northern EMR 21 July...........................................................................................18 PCT Driver Training Day 28 July ..........................................................................19 N/NW AGM Run 25 August…………….........……………...................................…21 N/NW Run 15 September …..….…..................................................……………….22 Southern EMR To Geeveston 15 September.........................................................24 Porsche Technical: [Show full text]