Ethical Business Practices and Sustainable Business Development at Volkswagen AG - Case Study Example

Ethical Business Practices and Sustainable Business Development: Volkswagen AG

• Ethical Business Practices

The business environment, at present time, is highly complex and competitive in nature. With the increasing level of competition in every industry, many companies are resorting to unethical means as a desperate measure to survive in their respective industries. This resort taken companies affect the level of trust that people in them. Customer loyalty is one of the main determinants of success that a company can achieve. Once broken, it is difficult to gain back.

In this paper, an analysis will be provided on the ethical issues that Volkswagen AG (Volkswagen) is facing regarding the violation of environmental protection norms. The efforts that the company can take to gain back the trust of their loyal customers, will also be analysed. The role of stakeholders in ethical decision-making and responsible business functions of the company will also be analysed.

Ethical business practices involve the companies carrying out their activities in a fair manner (Ahner, 2007). Building ethical business practices takes time. It reflects the work culture and value system of the business. It also helps the company to establish a market reputation in regard to the product quality that it offers. The company reflects ethical practices by creating a value in the mind of customers, such that they are able to trust the brand. The company must also watch over the actions of its employees, since they are the company’s representatives, when it comes to serving the customers. Transparency is another important factor that helps a business to grow. It helps the company to gain customer loyalty and establish a strong brand image of itself in terms of quality. Accountability is an important factor that reflects how responsible a company is. Making honest mistakes is forgivable. Owning up to these mistakes and taking its responsibility, will make the company’s relationship with the customer stronger. Corporate social responsibilities (CSR) are another dimension for judging the company in terms of how much it values the society, environment and economy. Rendering its services to the society and the community will also boost its image amongst the customers.

Volkswagen, the German Automobile giant, has always represented itself as a company that takes pride in its socially responsible practices (Volkswagen, 2016a). Contrary to the belief of the general public, the company was caught in an issue which involved the deliberate breaking of environmental norms. Volkswagen was accused of cheating on the environmental protection standards that the industry is expected to maintain (Hotten, 2015). The company is also certified by the standards of ISO 14001 and EC Eco Audit Directive (Volkswagen, 2016b). Breaking the trust of people, even after getting these certifications was indeed quite shocking to the stakeholders and general public, which left a dent in the relationship between the company and the customers.

• Issues that Volkswagen is facing: Sustainable development and Business ethics

Sustainability in business refers to meeting the present needs without affecting the resources that are needed to meet the future needs. Sustainability can be achieved by businesses only by balancing the impact of economy, environment and society (Atkinson et al., 2009). With the increase of social and environmental consciousness among people, businesses are not judged only on the basis of their performance. The responsibility they show towards protecting the interest of the society and environment are also important.

It is difficult to achieve sustainability when it comes to business. The government is taking efforts to make the companies understand the importance of sustainable development. The United Nations has a well-defined set of sustainable development goals that the companies have to follow. These 17 sets of goals provide the companies with a guideline that they can incorporate in their business plan. These goals address many issues related to poverty, climatic change, conservation of energy sources, sustainable economic growth, safety and security of society, etc (United Nations, 2015).

Business ethics forms the basis of sustainable development for any industry (Kain, and Sharma, 2014). There are different sustainable development models that businesses follow. One such model is the triple bottom line model, which aims to achieve a balance between the following factors (Slaper and Hall, 2011):

Social: Social progress that meets the requirements of the society.

Environment: Protection of the environment and efficient use of natural resources.

Economy: Growth of the economy and increasing the level of employment.

Sustainable business development is difficult to obtain. Balancing the environment, economy and social needs of people is not an easy task (United Nations, 2008). There are many problems that the businesses have to face in order to obtain a sustainable business development plan.

For example, there are many verticals that the companies need to focus on, so as to achieve sustainability. Government policies need to clearly be connected to sustainable development. Customers do not always value sustainability. Engaging the main stakeholders and convincing them about the sustainable business development plan is a difficult task. There are no particular rules to achieve sustainability (Laughland and Bansal, 2011).

On September 2015, Volkswagen faced the charge of willingly violating the Clean Air Act, by fixing its diesel-powered cars with a defeat-device (Hepler, 2015; Brodwin, 2015). The device could artificially lower NOx emissions by 10 to 40 percent, when tested by the regulators. The company was highly criticized for this action. The Dow Jones Sustainability Indices revoked the corporate social responsibility rankings of the company. It also destroyed the reputation of Volkswagen among the customers and stakeholders (Hepler, 2015). The two suspected reasons that made the company take extreme step of incorporating defeat devices into its cars are too much pressure of achieving the expected sales figures and keeping up with the expected performance of diesel cars (Hepler, 2015).

The after-effect of this incident was shown in the share prices that dropped by more than 35% and the market capital of the company fell by $25 Billion (Hepler, 2015).

The company has been trying to make up for the damages this incident caused. It has taken full responsibility of the entire ordeal. Ex-CEO of the company, Winterkorn, released a video apology (Hepler, 2015). Efforts are being taken to investigate the issue and penalise the responsible (Sustainability and Responsibility, 2016). The company has also taken care of rebuilding its image by serving the community, such as offering scholarships (News, 2016). It is also taking efforts to make employees achieve work life balance. Though they are taking necessary steps to regain the trust of loyal customers, it will be difficult for the company to gain back the lost market share.

• Laws and Frameworks that can be used to encourage business to behave responsibly

Businesses these days undergo a lot of pressure to adopt an approach of sustainable business development. The growing competition, to improve performance and to generate maximum possible revenue from given resources are few of the reasons sustainable business model may not seem to a viable option for the companies. Additionally, the increasing pressure from stakeholders makes the companies think twice before opting for sustainable business model. In such situations it becomes important for the businesses to be controlled by a regulatory body, in order to keep a watch over sustainability of businesses activities. Proactive law is one such a regulatory approach has gained a lot of attention in recent times (Berger-Walliser and Shrivastava, 2015). It holds the law as an enabling instrument. The traditional philosophies, consider law to be a restriction on companies. It makes it mandatory for the companies to abide by the laws without taking into account the costs and other administrative burdens. The Proactive Law on the other hand, is more considerate. It challenges the failure-oriented approach of traditional philosophy. The primary objective of the Proactive Law is to prevent the company from facing lawsuits and creating values for the company. The Proactive Law was created on the basis of the Preventive Law. It was developed in USA during the 1950’s (Berger-Walliser and Shrivastava, 2015). The Preventive Law focuses on human behaviour, stressing on conflicts and understanding of risks.

Based on the framework of Proactive Law, there are various laws classified under the International Sustainable Development Law. Few examples are the United Nations Convention on biological diversity, Economic Commission for Europe Convention on long-range trans-boundary air pollution and its Protocols, the Vienna Convention for protection of the Ozone Layer and its Montreal Protocol, the convention on International Trade in Endangered Species of Wild Fauna and Flora and the United Nations framework convention on climate change and its Kyoto Protocol (Berger-Walliser, and Shrivastava, 2015).

These laws and regulations lay prime emphasis on the value addition of the company, while protecting the environment, people and their surroundings, thereby generating value for the society as well. Even though international laws are more progressive than the domestic laws, the implementations of these laws require particular attention.

Implementing these laws will help the business in following a guideline, based on which they can achieve the sustainability objectives. This will also make them act responsibly towards the cause of sustainable development. Volkswagen serves as a perfect example, where the cheating incident could have been tackled properly, if these laws had been implemented.

• Role of Stakeholders in responsible decision making

The stakeholders play a primary role in business. The objectives of the businesses are formed on the basis of the interests of the stakeholders. In such a scenario, it becomes important for the stakeholders to provide emphasis on the sustainable development plan of businesses. They have to keep in mind the growth and development of the business as a whole. Often managers find it difficult to take decisions when they face a dilemma between stakeholders’ and the community’s interest. In such a scenario, stakeholder culture comes into picture. It represents the values, culture and belief that help in solving stakeholder- related problems (Jones et al., 2007).

Stakeholder culture provides the companies with a structure to handle the stakeholder related problems and maintain a relationship with them on an ethical basis (OECD, 2015). It becomes important for them to understand the importance of companies acting responsibly towards the economy, society and the environment, as a whole. Focusing more on sustainable development methods makes stakeholders question their profitability. There are situations when the sustainable development model of business does not favour the customers’ buying decision. Following sustainable business development method can be an added cost to the business. In such a situation, the stakeholders often raise a doubt about the profitability of business. Providing them with expected returns is also an added responsibility of the business. Such circumstances, may force businesses to take decisions, which may seem to be profitable. These decisions may not necessarily be ethical. Volkswagen had immense pressure to achieve profitability by selling all 11 Million diesel-powered cars fitted with the defeat device (Hepler, 2015).The company was also following a new model of low cost diesel. Contradicting the process of controlling emissions, this model proved to be not so profitable for the company, which finally led to the extreme step of cheating on environmental norms (Hepler, 2015). This incident left a dent on the relationship between the company and its stakeholders. An effective step to aid this problem would have been to involve stakeholders in their decision-making process. This would have saved the company from making the wrong choices.

Close contact should be maintained with the stakeholders. The management can appoint a team that would be in constant touch with the stakeholders and communicate with them on a regular basis. They would have been responsible for finding out the needs of stakeholders, their interests and expectations as well as report their findings to the management. The stakeholders must be responsible enough to maintain a balance between their personal needs of the company. The needs of the society should also be a top priority for them.

For a business to operate responsibly, a balance between the needs of the stakeholders, environmental requirements and economic growth has to be achieved. The stakeholders should make sure that these objectives are met with or without compromising on the benefits of the company.

• Recommendation

Volkswagen can take the following steps in order to address the highly controversial issue of cheating the environmental norms and gaining backs its lost market share:

• The company should try addressing the issue by reforming the structure of the board of directors. Involving stakeholders within the board will give it an idea about the needs and expectations of stakeholders. It will also help the company to stay on the track with the sustainable business development, as the stakeholders will keep a check on the activities of the company.
• The company has to directly reach out to the customers and apologise for the mistake.
• The company should make an effort to address the issue by improving the quality of their products and also by maintaining a complete transparency in the production process. External audits should be performed and quality check certificates should be provided, in order to regain the trust of customers.
• The company should use promotional and branding activities to gain back the trust of customers. Repositioning itself as a brand, will help the company to reach out to the customers and change the image in their minds.
• The company should release a testimonial of satisfied customers and how they have been able to fulfil their needs in an effective way.
• Holding promotional events, addressing the issue and using social media as a tool to get in direct touch with the customers, is another way in which the company can effectively deal with the crisis.
• Conclusion

Ethical business functions help to build trust of the customers, which helps the company to build a strong foundation in the market. Unrealistic expectations of the stakeholders as well as the rising market standards, makes it very difficult for the company to implement the sustainable business development plan. Constant pressure of performing well in the market; leaves businesses with the dilemma of choosing between unethical means and following the sustainable development plan. Stakeholders play an important role in understanding the needs of the company and directing it on the right track. Successful implementation of the sustainable business development plan requires the collective effort of the company and the stakeholders.

• Reference List

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