Ethics and the Volkswagen Emissions Scandal - Assignment Example

Applied Ethics: Business Ethics Part A: Ethics and the Volkswagen Emissions Scandal An Introduction to the VW Emissions Scandal Ethical Dilemma Description Volkswagen Groups’s recent scandal- based on the US’ Environmental Protection Agency’s allegations and the company’s own grudging admissions- with regard to the use of defeat devices in a variety of car models led to the resignation of the Group’s CEO, Martin Winterkorn, and public outcry as to the daring and intentional deception that was perpetrated the company’s ranks. Due to deep and systemic corporate failure, software-based ‘defeat devices’ were installed in 2-litre TDI diesel engines in over 11 million vehicles, particularly the VW Passat, VW Jetta and BMW X5 models. The ‘device’ in question constituted a parallel set of binary instructions that modulated the engine control unit’s (ECU) emission controls, covertly but deliberately turning them on when it detected laboratory emissions tests and turning them off when the vehicle resumed regular activity. While these vehicle models had passed regulatory tests in the United States and the European Union, the EPA changed its emissions testing procedures and begun employing on-the-road emissions testing. Furthermore, due to widespread automation of engine controls, the regulators also begun auditing the ECU’s software to definitively ascertain total emissions. These double factors eventually led to the discovery of the defeat devices. Vehicle emissions compliance is increasingly being emphasized by governments around the world due to the contribution of vehicular traffic to overall pollution. To encourage compliance and manufacturer innovation towards reduced emissions, auto and tax legislation provides for significant green car subsidies and tax exemptions. In addition, designation as a ‘green’ car is desirable from the consumer’s perspective. Consequently, the market share of environmentally progressive vehicles in mature markets such as America and Western Europe is accelerating. These factors may have served as the financial rationale for installing the ‘defeat devices’ with the goal of beating emissions tests. This is not unlike the justification provided for a number of previous corporate scandals: maximizing shareholder value. Surprisingly, top management was warned on a number of occasions about the legal violations involved with the use of defeat devices and, once the decision had been made to install the software, the device was in actual use in VW diesel engine models. Management did not pass on this information to the board and continued dismissing allegations of the device’s existence. This represented a failure in leadership and a breakdown in compliance mindset. Ethical Dilemma Analysis Emissions test ‘defeat devices’ have traditionally been illegal. In fact, the EPA had already fined General Motors US$11 million for employing such devices to beat carbon monoxide emissions testing in 1995. However, such devices are not entirely new to the auto industry. Auto manufacturers exploit loopholes in the various testing regimes and environmental agencies have ‘discovered’ as much: in a number of cases, vehicles have registered different laboratory test and ‘real-world’ emissions outcomes. Indeed, on-the-road CO2 emissions are, on average, 40% higher than official fuel economy figures (ICCT, 2014). Nitrous oxide (NOx) emissions- the specific talking point in the Volkswagen scandal- in the ‘real-world’ can be up to x0.6 higher than in the lab conditions (ICCT, 2015). In VW’s case, the ‘real-world’ emissions were at least 40 orders of magnitude higher than those legally allowed by the EPA. To further illustrate the scale of the problem, the devices mirrored EPA’s testing conditions by taking note of the vehicle’s speed, changes in barometric pressure, movement of the steering wheel and the duration and extent of engine use so as to produce the desired results. By so doing, VW demonstrated that not only were its efforts at beating the system insidious, but that they were also centralized and well coordinated. It is difficult to imagine that such an effort were the result of a rogue employee or a compartmentalized attempt at subterfuge. It certainly represents a system-wide failure in operationalizing corporate ethics. The following were the primary stakeholders responsible for the breakdown: i. Research and Development (R&D) staff from whom the designs for the devices may have originated, ii. Software engineering professionals including software auditors and security analysts who would build out the devices, iii. Frontline supervising staff who would be in charge of ensuring deadlines of product development were met, iv. Quality and Assurance (Q&A) software engineers with whom rests the decision to ship the product, v. Legal advisory staff that would be required to provide legal opinion on the use of the devices and who, once the allegations of their use emerged, would conduct the year-long campaign of discrediting them in conjunction with the public relations (PR) staff, vi. Compliance staff that would provide subject-matter expertise on EPA’s ‘anti-diesel’ testing regime and the differences from that of the EU’s that may have been viewed as pro-diesel, vii. Corporate leadership that made the final determination that would lead to allocation of R&D and product development funds and provide cover for implicated staff and viii. The C.E.O. with whom ultimate responsibility lies for the group’s operations. Using a consequentialist approach, VW as a corporate individual has a right to deservedly pursue higher profits. This is a just and reasonable need and is, by and large, the purpose of a for-profit organization. In turn, shareholders reward the publicly-owned company with a higher valuation for achieving higher profits. In doing so, the company simply choose to install the defeat devices and justified the decision afterwards, practicing a form of pessimistic ethical conduct where stakeholders other than its stockholders need not be convinced of the rational foundation of its decisions. To this end, VW’s leadership may view higher market share such as in the American vehicle market as the ends and the installation of defeat devices as the means. In light of market competition, the corporate leadership may have seen the need to act with finality to override the demands of the law so as to meet its shareholder-mandated ends. In doing so, the company may have estimated that it will maximize its benefits and ensure that it has sufficient capital to compete and innovate going forward. This is in agreement with the principle of egoism- acting in one’s self interest. Furthermore, VW’s financial gain may also positively impact its charity and sustainability efforts, organized within the framework of ‘people, planet, and profit’ and this is of noteworthy utility. Table 1. Consequences of VW’s Emissions Scandal Positive Consequences to VW Weight Negative Consequences to VW Weight Increased revenue leading to higher profits, stock valuation and stock compensation 7 Loss of hard-won consumer confidence 8 Maximization of shareholder value 7 Damage to a well-cultivated brand image as the “people’s car” 9 Increased access to funds that can be used for further benevolence/charity/philanthropy 1 Loss of stock market value 8 A better competitive profile due to acquisition of market beachhead in the American market 8 Allocation of monies to fund crisis management, recalls, software updates, legal representation, compliance and staff re-training 6 Stability for employees, suppliers, vendors and partners 5 Enactment of stringent emissions legislation that may be broadened to include independent/agency safety audits 9 Competitors reclaim market share 8 TOTAL 28 TOTAL 48 From a consumer’s consequentialist point of view, however, VW deliberate deception is a sordid betrayal. Consumers have a right to honest and reliable advertising. They do not expect corporations, to whom they have surrendered a number of their personal rights, to prioritize their own profits over consumer welfare. There is an expectation to do the just and right thing by providing quality products and services in exchange for a reasonable fee. VW’s scandal is a betrayal in several ways. Firstly, it is harmful to the environment upon which both she and VW- its staff- depend on. While the consumer does seek out environmentally progressive vehicles, it is likely that it is just a means to an, for example, environmental protection or fuel economy. In the larger effort to combat climate change, such corporate malficience is a significant step backward. The tricks that the company used to pass emissions standards also had negative health effects on consumers due to the higher pollution. Secondly, this scandal will undermine consumer confidence in green car designations, leading to a boomerang effect on the environment and company profits. Already, the scandal has been referred to as “Dieselgate” and bears negative connotations to its brand and association with sustainability. This peripheral damage to diesel-powered and environmentally conscious engines, for which there are in existence, is a genuine and lamentable disaster as it delays the adoption of vehicles with lower emissions. As governments attempt to seal regulatory gaps, tighten emissions standards and enact stricter laboratory and ‘real-world’ testing, the resultant compliance costs for auto manufacturers are likely to be passed on consumers. Ethical Dilemma Solution Deontological ethics assert that the imperatives of ethics are applicable to all rational beings in spite of the position they hold within society (Crane & Matten, 2010). Kantian ethics are, therefore, ethical imperatives and must be consistently abided by if they are to have meaning and are to treat people as an end as opposed to the means towards and end. In VW’s case, the corporate leadership selectively applied ethics, pursuing an egoistic goal with its consumers (people)as the end to a means (higher profits). Although consequentialist ethics contradicts Kantian ethics in their assessment of universality, there is subtle agreement as to need to achieve good. Consequentialism asserts that decisions must seek achievement of a greater good. Indeed, ethicists have provided the basis for merging the two theories to formulate business codes of conduct. VW failed this ethical test by optimising for the benefit of one set of stakeholders (stockholders) over that of others (consumers). Using a deontological approach, it would seem that there is a moral imperative for the management to have changed its strategy with regard to meeting emissions tests. There are various justifications for this approach. Firstly, the management should have been alive to the possibility of its deception being discovered by regulators and researchers. Such a ‘discovery’ would obviously be problematic and, as has already been demonstrated, would lead to leadership change, legal prosecution and other forms of regulatory actions such as fines. Furthermore, the discovery of the defeat device would all but certainly affect the company’s brand and reputation. To this end, it would be difficult for the company to be competitive going forward. Another justification would be the effect on the company’s staff and vendors. A degradation of a compliance mindset would provide a crucible for accelerated corporate malficience. Such habits would ultimately handicap the corporation’s ability to compete in the marketplace and would undoubtedly prove difficult and expensive to remedy. Vendors would also be wary of conducting business with VW lest their image suffer as a consequence. There may be short-term benefits to the company, but over the long term, the company would likely suffer potentially irreparable damage. The management seems to enforce a focus on self to the exclusion of others. This, according to Kohlberg’s six stages of moral development, orients itself as preconventional/premoral stage. As is already evident, the management is preoccupied with the question of how the company can enforce its will upon others, regulation notwithstanding. This naively egotistic approach prioritizes self-gain. Staff is motivated by the gain they will make once they conform to the demands of executive leadership. In turn, the executive leadership is beholden to the demands of its stockholders, who are united by a solitary pursuit of higher of profits. Concessions are only made up to the point that they are necessary, such as meeting laboratory emissions test standards. It is everyone’s duty at the company to undertake change, but of grave importance is ensuring that employees have humanized working environment where their basic rights are protected. To vacate the temptation of cheating regulators and consumers alike, the company should pursue technology acquisition from other companies as had been initially suggested by the company’s engineers. This will buy time for the R&D to come with innovative interventions. This is in line with the utilitarian demand to create happiness to the greatest extent possible: consumers are not tricked, regulators are not infuriated with violations and profits gradually increase. Secondly, incentives within the firm must be aligned with the responsibility to ensure compliance. This applies broadly, but can have a particularly strong effect on non-executive employees. VW should revise its reward program to include more than just financial rewards for performance. Rewards should not be linked purely on stock performance or market share, but sustainability and increase in customer trust as well. Thirdly, the company should re-train its engineers on the value of a compliance mindset. Regulation should not be seen merely as a stumbling block nor should technology be regarded as a means to chip away at it. Where there are deficiencies with a particular technology, as is usually the case with diesel-powered engines that have a reputation for emitting nitrous oxides, there should be a pragmatic approach to finding solutions as opposed to blatant illegality. VW should de-emphasize the anti-diesel vs. pro-diesel debate among engineers in favor of greater pragmatism. Another valuable intervention would be an ongoing engagement with environmental regulatory agencies and academics. Such an engagement would build transparency and collaboration that could potentially yield greater innovation around the topic of emissions control. The organization should also assign senior leadership with the authority to speak on the group’s behalf in its major markets. Such an individual(s) would be available to legislative and regulatory bodies in the event of irregularities and potentially prove valuable in resolving arising issues in real-time as opposed to running the organization from its central German headquarters. This increased form of accountability would be a great service to the company and its consumers. Q 1. Can you imagine a DECISION-MAKER somewhere in the VW supply chain who failed to WHISTLEBLOW about this? It is all but impossible that single engineer, or a cabal of non-executive employees, schemed and executed such a company-wide scam. While this is plausible, all evidence points to the involvement of top decision makers to make the scheme a reality and bring it to the market. Q 2. What Moral Intensity did they feel when deciding to keep quiet? Ethical decision-making is a complex process influenced by a phenomenon referred to as moral intensity. Moral intensity refers to the various components that influence the moral imperative of a dilemma or situation: concentration of effect, social consensus, magnitude of consequences, probability and proximity of effect, and temporal immediacy. Corporate culture can also affect the ability of an individual to appraise the moral situation and construct judgements and actions. References Crane, A., & Matten D. (2010). Business Ethics Oxford University Press (3rd Edition) International Council on Clean Tranportation (ICCT) (Sept 2014). From laboratory to road. A 2014 update of official and “real-world” fuel consumption and CO2 values for passenger cars in Europe. ICCT (Sept 2015), NOX control technologies for Euro 6 Diesel passenger cars: Market penetration and experimental performance assessment. Read More