Analysis of Volkswagen Emission Scandal - Case Study Example

Stakeholder Management: A Case of Volkswagen Emission Scandal Name Institution Course Date Stakeholder Management: A Case of Volkswagen Emission Scandal Introduction Effective stakeholder management is critical to the success of any business. Every organization small or large has stakeholders that are affected by the activities of a business or have an interest in the business operation (Carroll & Buchholtz, 2014). Examples of stakeholders of a firm include customers, suppliers, investors, the government, sponsors, environmentalists, the media and the community among others. Szwajkowski (2000) proposes that a company must ensure that the needs and interests of these stakeholders and met or safeguarded to ensure business success and this is possible through effective stakeholder management. Volkswagen’s 2010 emission scandal highlights a case that required effective stakeholder management. This report will describe the Volkswagen 2010 emission scandal and proceed to analyze the issue using two stakeholder management principles. Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations” and Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation (Morsing & Schultz, 2006). Volkswagen Emission Scandal Volkswagen (VW) is one of the German leading carmakers. The company had enjoyed strong performance and good reputation for developing that are fuel efficient with minimal emission until recently in 2010 when the automaker engaged in a mega emission scandal that has badly damaged the reputation of the automaker. According to Stern (2015), the executives of VW colluded with the company engineers to cheat on emission from its diesel-powered engines. This saw the company engineers install software that has been dubbed the “defeat device” that had the capacity to detect when the engines were being subjected to nitrogen emission testing and immediately minimized the amounts of emission from the engines (Rhodes, 2016). As soon as the emission test was over, separate software reverted the process that saw the cars emits up to 40 times of nitrogen above the threshold allowed in the United States (Milne, 2015). This way, VW managed to dubiously pass all the emission tests conducted in the U.S. affecting more than 11 million VW cars. In the U.S. it is estimated that up to 600,000 VW cars were involved in the scandal (Cavico & Mujtaba, 2016). Some of the VW cars that were involved in the cheat include VW Passat, Golf, Toureg, Jetta and Beetle. The emission scandal has been very costly to VW. Following the discovery of the scandal, VW was forced to recall all the 11 million plus cars that were affected by the scandal so that they can be redesigned to adhere to the standards (Milne, 2015). This was a costly process for the automaker as the cars had to come from different parts of the world at the automaker’s cost. The company has since been fined approximately $15 billion in the U.S. and could rise considering that VW still has a case in court over the issue (DeBord, 2015). Besides, VW has suffered reputation damage that would take it a long time to repair. Volkswagen has a number of stakeholders that were involved in the issue. Friedman and Miles (2006) define a stakeholder as any person, group of persons or organizations with an interest in the operations of a company. The Clarkson Centre for Business Ethics (1999), however, defines a stakeholder as any person or organization that is affected either directly or indirectly with the operations of a firm. The key stakeholders that were affected by the VW 2010 emission scandal include customers, suppliers, managers, employees, government, environmentalists, EPA, and the community (Stern, 2015). The customers as stakeholders expect VW to provide them with quality cars with good performance. The suppliers expect VW to ensure that the company remains financially viable to ensure that they have a market for their products and that the customer is able to fulfill its obligations (Cavico & Mujtaba, 2016). Investors expect VW to generate high returns on investment. The Government expects VW to continue operating so that it can generate revenue in the form of taxes. The Environmental Protection Agency (EPA) expects VW to ensure that it adheres with the emission standards by minimizing pollution so as to ensure environmental sustainability (Milne, 2015). Lastly, the community expects VW to adopt business practices that promotes the wellbeing of the community, such as minimizing pollution to prevent adverse health effects of gases. Analysis of How VW Handled Communication with Stakeholders Principle 1 Stakeholders are a key component of an organization and an organization that hopes to succeed in a market must ensure that stakeholders are actively engaged and that their concerns and interests are addressed in the best way possible (Clarkson Centre for Business Ethics, 1999). The first principle that is appropriate for analyzing VW 2010 emission scandal is principle 1 that states, “Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision making and operations” (Morsing & Schultz, 2006). This principle is appropriate for the analysis of the VW scandal because it highlights the importance of stakeholder engagement in the successful running of an organization, which VW failed to adhere to, thus resulting in the scandal that has since damaged the reputation of this German automaker. This stakeholder principle suggests that, because stakeholders have different interests, the managers should take the interest of every stakeholder (investors, suppliers, customers, employees and the community) at heart by listening to their concerns and factor them in the decision making process, argues Szwajkowski (2000). Unfortunately, analysis of the events that transpired at VW indicates that the management of VW’s behaviors did not conform to this principle. First, VW has many investors both individual and institutional investors that expect the company to behave ethically so as to ensure that the company build good reputation and to maximize returns on their investments. Unfortunately, VW management failed to take the interests of its investors into account when making the decision to cheat that has since resulted in reputation damage and affected the performance of the company, thus resulting on low return on investors (Milne, 2015). Although the aim of VW was to maximize profits from the cheat, the discovery of the scandal has had a blow on the shareholders. Second, VW’s behavior did not conform to the principle of stakeholder management that requires a company to acknowledge the concerns of stakeholder and take their interest into account when making decisions considering that VW appears not to have bothered about the interest of its customers (Ruddick, 2016). VW has millions of customers spread across the world that expects it to produce cars with good performance and those that adheres to the emission standards. Therefore, cheating by installing a “defeat device” that resulted in VW cars producing large amounts of nitrogen gases to the environment clearly indicates that the automaker neither acknowledged the concerns of customers nor taken their interests at heart when making decisions. Third, the actions taken by VW also indicates that the company had no concern for its employees and did not take their interest at heart when making decisions as employees of the company have suffered irreparable reputation damage as a result of the decision. Investigations indicate that the company used the company engineers to do the dubious and unethical act that has put the employees of the company in limelight for bad reasons (DeBord, 2015). Besides, the losses that VW has suffered since the discovery of the scandal has put the jobs of hundreds of employees at risk, which indicates that the company’s behavior did not adhere to principle 1 of stakeholder management. Additionally, the behavior of VW indicates that the automaker did not acknowledge the concerns of the environmentalists and neither did it take their interests into consideration when making decisions that have turned out to be disastrous to the environment (Branco, & Rodrigues, 2007). EPA which is an agency responsible for environmental protection expected VW to adhere to the US emission standards for purposes of minimizing greenhouse pollution that is responsible for climate change. Unfortunately, Stern (2015) notes that VW management did not listen to this, and instead, having been motivated by the need to maximize profits, ignored the interest of EPA and environmentalists by installing “defeat software” that allowed VW cars to pass the nitrogen emission test irregularly and subsequently allowing the cars to emit large amounts of nitrogen that is destructive to the environment. Principle 2 The other principle that is appropriate for the analysis of the VW case is Principle 2 that states, “Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation” (Ayuso et al., 2014; Carroll, 2004). This principle suggests that communication, be it internal or external is an important function of management. This is to imply that the management of a firm should ensure that there is effective communication with the stakeholders so as to ensure mutual understanding as it ensures that the management understands the needs and concerns of the stakeholders that needs to be addressed to ensure good relationship. This argument has been supported by Mervyn King, who is the current chairman of the International Integrated Reporting Council who says that communicating with the organization’s key stakeholders is important because it helps the management find out their legitimate interests, needs and expectations (Cuff, 2015). Friedman and Miles (2006) also suggest that every board meeting should have stakeholder relationship as part of the agenda item. However, analysis of the Volkswagen scandal indicates that the company did not listen to the stakeholders nor communicated to them openly. Instead, the company cheated the stakeholders about what was going on in the company. Ruddick (2016) reveals that, when contacted by stakeholders, such as EPA, investors and customers, VW lead by its chief executive officer who has since resigned deceived its stakeholders that the company was producing green cars while the company was cheating and emitting large quantities of nitrogen dioxide illegally. After colluding with few engineers, the executive board of the management kept the cheating secrete from the stakeholders despite questions that were being asked regarding how all the company’s cars were passing the U.S. emission tests (Rhodes, 2016). VW management’s lack of open communication with stakeholders also came into the fore when the company first denied cheating on its emission, calling it a witch-hunt. Besides, even after EPA had raised questions regarding the installation of the defeat software on the 3 liter diesel engine on Audi, Porshe and Volkswagen models, VW vehemently denied the claims despite knowing that more than its 11 million cars were indeed fitted with the defeat device so as to cheat on the automaker’s emission (Stern, 2015). VW press release statement read, “Volkswagen AG wishes to emphasize that no software has been installed in the 3-litre V6 diesel power units to alter emissions characteristics in a forbidden manner” (Milne, 2015). This information was not just misleading to EPA, but to all the stakeholders of the company, including customers, investors and suppliers. In fact, investors were concerned by the misleading information provided by VW stating that the German automaker was engaging in a fight with the U.S. regulator that has the power to impose heavy fine on the company (Goel, 2015). These communication problems that reportedly started even before the emission scandal became public is an indication that the behavior of VW and its management did not conform to the stakeholder management principle 2 that require managers to listen and openly communicate with their stakeholders regarding their concerns and contributions. Short and Long-term Consequences of VW Behaviors The failure of VW to conform to the stakeholder management principles highlighted above has had serious implications on the company. First, the behavior of the company to engage in emission cheat and fail to address the concerns of the stakeholders has saw the company incur huge losses that has adversely affected the company performance. The company has already been fined heavily by EPA for its behavior and has accepted to pay $15 billion in fine to the United States (Kollewe, 2016). These are amount that the automaker could have saved and used to increase shareholder value if the company had adhered to the stakeholder principles of acknowledging and addressing stakeholder concerns. The company is still expected to pay more fines following the court cases that have been filled by different stakeholders and this is likely to affect the long-term performance of the company. The behavior of the company has also damaged the reputation of VW to a level that will take the company many years to repair. Immediately the scandal was made public, stakeholders, including investors, customers, suppliers, environmentalists and the community lost confidence in the automaker as they perceived it as unethical company that has no concern to the wellbeing of the people and the environment (Ewing & Mabuchi, 2016). Accordingly, this has seen the company lose a large number of customers from the United States and in many countries across the globe that no longer want to associate with the company for its involvement in an illegal and unethical behavior. Because of this, VW’s share performance has plummeted by about 3% Frankfurt Stock Exchange and this is expected to continue unless the company restores the confidence of investors (Kollewe, 2016). The behavior of the management has also had a biting effect on the company sales and profits that have declined significantly since the scandal. Boston (2016) report indicates that VW’s second-quarter profits declined by 56% largely because of the costs resulting from its emission scandals. This is after its profits fell from €2.7 billion to €1.2 billion. Additionally, the behavior of VW is also expected to have serious health effects on the people. Nitrogen dioxide is a highly poisonous gas and is responsible for many cases of respiratory problems. At the same time, the gas is linked to more than 23,500 premature deaths in the UK every year (Stern, 2015), As such, cheating to allow large quantities of nitrogen dioxide into the atmosphere is expected to have long-term health effects on the people, especially in the countries where the 11 million vehicles had been sold. Moreover, the behavior of VW is expected to have long-term effect on the environment. EPA project that the emission of large quantities of nitrogen dioxide from VW cars will have adverse effects on the environment, thus increasing the global warming effect and that this will make life unbearable for both plants and animals globally (Ruddick, 2016). Conclusion Volkswagen emission scandal is one of the scandals that highlight the importance of stakeholder management, especially with regards to communication. The scandal that resulted in the recall of more than 11 million cars has severely damaged the reputation of the automaker, something that has resulted in significant loss of investors and customers, as well as caused a huge decline in performance. However, there certain this that VW should have done differently. The company should have adhered to ethics by refraining from engaging in illegal and immoral behaviors. Secondly, after the scandal had been discovered, the automaker should have accepted responsibility immediately instead of denying and issued an apology to the public. Additionally, the company should have used the stakeholder management principles described above to guide decision making. However, it is important to note that the only challenge that could potentially arise from conformity with the principles is conflict of interest and lack of management commitment to adhering to the principles. References Ayuso, S., Rodríguez, M. A., García-Castro, R., & Ariño, M. A. (2014). Maximizing stakeholders’ interests an empirical analysis of the stakeholder approach to corporate governance. Business Society, 53(3), 414-439. 10.1177/0007650311433122 Boston, W. (2016, July 28). Volkswagen reports 56% drop in after-tax profit. The Wall Street Journal p. 1 http://www.wsj.com/articles/vw-shares-fall-on-56-drop-in-quarterly-after-tax-profit-1469695131 Branco, M. C., & Rodrigues, L. L (2007). Positioning stakeholder theory within the debate on corporate social responsibility. Electronic Journal of Business Ethics and Organizational Studies, 12(1), 5. Clarkson Centre for Business Ethics. (1999). Principles of stakeholder management. Toronto: Clarkson Centre for Business Management, Joseph L. Rotman School of Management, University of Toronto. Carroll, A. B. (2004). Managing ethically with global stakeholders: A present and future challenge. Academy of Management Executive, 19(2), 114-120. Carroll, B., & Buchholtz, A. K. (2014). Business and society: Ethics, sustainability, and stakeholder management. London: Cengage Learning. Cavico, F. J., & Mujtaba, B. G. (2016). Volkswagen emissions scandal: a global case study of legal, ethical, and practical consequences and recommendations for sustainable management. Global Journal of Research in Business & Management, 4(2), 303-311. Cuff, M. (2015). Is the VW scandal a wake-up call for investors? Retrieved from http://www.businessgreen.com/bg/analysis/2434599/is-the-vw-scandal-a-wake-up-call-for-investors DeBord, M. (2015). What VW is getting right in the emissions-cheating scandal. Retrieved from http://www.businessinsider.com/what-vw-is-getting-right-in-the-emissions-cheating-scandal-2015-9 Ewing, J., & Tabuchi, H. (2016, July 19). Volkswagen scandal reaches all the way to the top, lawsuits say. The New York Times p. 1 http://www.nytimes.com/2016/07/20/business/international/volkswagen-ny-attorney-general-emissions-scandal.html?_r=0 Friedman, A. L., & Miles, S. (2006). Stakeholders: Theory and practice. Oxford: Oxford University Press. Goel, A. (2015). Volkswagen: The protagonist in diesel emission scandal. South Asian Journal of Marketing & Management Research, 5(11), 1. Kollewe, J. (2016, May 31). VW profits down 20% after diesel emissions scandal. The Guardian p. 2 https://www.theguardian.com/business/2016/may/31/vw-volkswagen-profits-down-20-diesel-emissions-scandal Milne, R. (2015). Volkswagen blunders through communications over emissions scandal. Retrieved from http://www.ft.com/cms/s/0/b9f35440-98ed-11e5-bdda-9f13f99fa654.html#axzz4Je1wpcGP Morsing, M., & Schultz, M. (2006). Stakeholder communication strategies in, Morsing, M. and Beckman, S.C. (eds.), Strategic CSR Communication. Copenhagen: DJØF Publishing. Rhodes, C. (2016). Democratic business ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty. Organization Studies, 2016, doi: 10.1177/0170840616641984 Ruddick, G. (2016, Jun 22). Volkswagen's handling of emissions scandal a shambles, say investors. The Guardian p. 1 https://www.theguardian.com/business/2016/jun/22/volkswagen-handling-emissions-scandal-shambles-investors-agm-german-carmaker Stern, S. (2015, Oct. 1). VW has myopic view of stakeholders. Financial Times p. 2 http://www.ft.com/cms/s/0/54eb7548-636c-11e5-9846-de406ccb37f2.html?siteedition=intl#axzz4Je1wpcGP Szwajkowski, E. (2000). Simplifying the principles of stakeholder management: The three most important principles. Business Society, 39(4), 379-396. Doi: 10.1177/000765030003900403 Read More