Hypocrisy and Accountability at Volkswagen

Dieselgate Case Analysis

What?

The situation presented in the case study by Schuetz (2016) focuses on VW Group and the emissions scandal that occurred in 2015 just when the company was about to reach a significant milestone in its long-term development plan. VW had been working to become the largest automaker in the world, an intrepid plan for a company that started out of a bombed-out factory in post-war Germany. However, it had taken on an ambitious objective in the 21st century and was counting on new diesel emissions technology to produce cleaner cars that were better for the environment. This was a big part of its corporate social responsibility program, for which it received numerous awards in the years leading up to the scandal.

This scandal involved the revelation that VW was using a cheater device on its diesel cars: the device was software that could detect when a test for emissions was being conducted and would ensure that emissions came out clean by running at a high rate; but on the road under normal circumstances emissions would come out much more polluted because the cleaning mechanism would not be going full throttle. In other words, VW had the capacity to clean up emissions during a test—but its cars were not designed to run that way all day every day on the road and be as clean as they were for the tests (Schuetz, 2016).

This scandal became a huge multi-billion dollar problem for the company. Its stock value plummeted by 40% and stakeholders questioned the ethics and transparency of the company. Its CEO at first tried to apologize his way out of the scandal, but then he resigned and the company’s long-term CFO and veteran leader took over. He promised to leave no stone unturned in order to get to the bottom of who was responsible for the installation of the cheat device on VW’s diesel cars. But at the end of the day, he determined that no one individual or group of individuals was responsible and that instead it was the result of a “chain of errors” caused by a loosening of the organizational culture in which creativity had been emphasized over a more rigid, structured by-the-books approach.

The main problem now faced by the new CEO and key player, Matthias Mueller (former CEO of Porsche), was that VW faced a branding problem: it had been at the top of its game prior to the scandal, and now it needed to reassure the public and regulators that it was a brand that could be trusted once more. Its image had been tarnished, and, moreover, the entire German lineup was now in question, from VW’s luxury brand Audi, to the classic German sports car lineup of Porsche. VW had seemed on the cusp of success as the world’s greatest automaker—and now suddenly it was finding itself at risk of ending up at the back of the pack over an emissions scandal that seemed like something from a bad dream.

The CEO had to find a way to navigate this scandal and reassure stakeholders that VW cared about the environment, that it was a brand that could be trusted, and that sales would continue to climb. It also had to find a way to deal with the huge penalty it was now facing of more than $17 billion in fines due to the installment of the cheat device in millions of cars. VW Group had painted itself as one way to customers and investors, and now it was being exposed as something else altogether. Plus, the new CEO (but old leader within VW Group) seemed tone deaf on the matter of accountability, preferring to place blame on no one in particular but rather on a serious of questionable calls.

So What?

The situation is important because it gets to the heart of what it means to be accountable in a cut-throat industry like auto manufacturing. With margins as low as 6% for much of VW’s life, there was not much room for error—but in the 21st century, its new approach at cost-cutting had enabled the company to increase margins to 8% pre-tax, and that was a huge deal (Schuetz, 2016). It meant that VW was becoming a powerhouse to rival the biggest brands in the world, like GM and Toyota.

Yet that surge in sales had come on the back of its promise to stakeholders that it was embarking upon a bold new corporate social responsibility program in which it would view its environmental impact as the most important thing. VW Group had read the tides of trending concerns in the modern era and had discerned rightly that climate change and the environment were issues that people wanted to feel good about, especially when it came to buying a car. VW could come across as cool and hip with its own brand as well as with its luxury brand Audi and also give people a bit of reason to celebrate as they would be driving a car that would be clean for the air.

The only problem, the emission scandal seemed to show, was that VW was not that company at all: it tested well in the lab—but on the road where it really mattered the controls came off and VW was a dirty, polluting machine—so the EPA found in the US. Now regardless of what other companies were doing in terms of cheating EPA tests or getting around emissions regulations, VW had a PR problem on its hands. Its culture was being questioned by the public. Its ethics were also a big question mark. People were wondering if this new VW was like the old Enron—suddenly great but for all the wrong reasons. Its stock responded similar to the way Enron’s did when the public found out that company had been committing fraud. If VW didn’t want to go belly up like Enron, its leaders were going to have to act fast and make tough decisions. Who would be held accountable for the failure? Or did the failure even really matter that much to consumers? What did the sales seem to suggest? Other than for the fact that dealers had held back cars, was demand really drying up over the emissions scandal? Did it perhaps matter more to the press than to John Q. Public? The CEO of VW had to ask these and other questions. It appeared that, based on his statements made after an internal investigation had been conducted, that he was of the opinion that the scandal would probably go away and that stakeholders and investors would be none the worse for wear. He blamed the scandal on a general chain of errors and did not place blame on anyone specifically—although he himself might have been the main one to be blamed, since it was well known that VW had an authoritarian culture.

So had the CEO been lying when he said that a new culture of openness and innovation had been applied in VW and that this new culture had been to blame for the scandal? Was all of the talk about being environmentally friendly and having a corporate social responsibility program just hot air for certain stakeholders, PR to make the company look good, virtue signaling for the 21st century? If so, why should the VW brand continue to have any credibility from that point forward? That is, if credibility is a going concern for consumers.

Dieselgate certainly put a huge new debt burden on VW due to fines, but if it lost consumers over the scandal, that was an even bigger issue and the CEO needed to determine the right line to take with the public in order to make things right. If he went too far in either direction he might risk alienating consumers.

What Now?

The CEO decided to make the decision to avoid accountability by blaming the emissions scandal on a chain of errors instead of on any person (least of all himself—even though he had been high up in the hierarchy of leadership). He made this statement in a press conference, effectively absolving the company of all blame and dismissing the notion that there was a problem of ethics at the company: “It was a technical problem. We made a default, we had a…not the right interpretation of the American law. And we had some targets for our technical engineers, and they solved this problem and reached targets with some software solutions which haven’t been compatible to the American law. That is the thing. And the other question you mentioned—it was an ethical problem? I cannot understand why you say that” (Schuetz, 2016). In other words, the company knew it had to pass the emissions testing but also knew it could not expressly give its engineers an order to install a cheat device, so instead leaders “opened” the culture and invited engineers to be “creative” and then asked no questions and received no answers—or applied a “don’t ask, don’t tell” policy—and then got caught. For the CEO, this was not an ethics problem—it was routine business practice. And for some in the public it smacked of hypocrisy and double speak.

Obviously, this was not the correct decision on the part of the CEO, and even he sensed that the next day when he requested a do-over, whereupon he admitted the violation and apologized to stakeholders—but there was no word about accountability or ethics. It was simply the same old tune that BP had played after the Deepwater Horizon oil spill: “I’m sorry.” This was the common refrain of CEOs of major corporations anytime something bad happened and the bad decisions made ended up blowing up stakeholders’ faces: it was as if they collectively decided that no one would hold them accountable and all they really had to do was say, “Oops, sorry.”