Dieselgate: VW Emissions Scandal Ethics and Leadership

The Dieselgate Scandal: What Happened

The situation examined in the Schuetz (2016) case study focuses on Volkswagen Group and the emissions scandal that erupted in 2015, just as the company was approaching a significant milestone in its long-term development plan. VW had been working to become the largest automaker in the world — an ambitious goal for a company that had started out of a bombed-out factory in post-war Germany. In the 21st century, it had taken on a bold new objective and was counting on advanced diesel emissions technology to produce cleaner cars that would be better for the environment. This environmental commitment was a central pillar of its corporate social responsibility program, for which it received numerous awards in the years leading up to the scandal.

The scandal involved the revelation that VW was using a cheat device on its diesel cars. The device was a piece of software that could detect when an emissions test was being conducted and would ensure that emissions readings appeared clean by running the cleaning mechanism at full capacity. Under normal road conditions, however, emissions were far more polluted because the cleaning mechanism did not operate at full capacity. In other words, VW had the technical ability to produce clean emissions during a test — but its cars were not designed to operate that cleanly day-to-day on public roads (Schuetz, 2016).

The scandal quickly became a massive multi-billion-dollar crisis. VW's stock value plummeted by 40%, and stakeholders began questioning the company's ethics and transparency. The sitting CEO initially attempted to apologize his way through the controversy before ultimately resigning. The company's long-tenured CFO and veteran leader took over, promising to leave no stone unturned in identifying who was responsible for the installation of the cheat device. After an internal investigation, however, he concluded that no single individual or group was responsible, attributing the failure instead to a "chain of errors" stemming from a loosening of organizational culture — one in which creativity had been prioritized over a more disciplined, structured approach.

The main challenge then fell to incoming CEO Matthias Mueller, formerly the CEO of Porsche, who had to confront a severe branding crisis. VW had been at the top of its game before the scandal and now needed to reassure the public and regulators that it was a trustworthy brand. The damage extended beyond the core VW nameplate: the entire German lineup was now under scrutiny, including the luxury brand Audi and the iconic sports car range under Porsche. VW had seemed on the cusp of becoming the world's greatest automaker — and now it faced the prospect of falling to the back of the pack over an emissions scandal it had engineered itself.

Mueller had to navigate the crisis, reassure stakeholders that VW genuinely cared about the environment, and find a way to sustain sales momentum. The company also faced fines exceeding $17 billion as a direct consequence of the cheat device being installed in millions of vehicles. VW Group had presented one image to customers and investors, and was now being exposed as something else entirely. Compounding the problem, the new CEO appeared tone-deaf on the matter of accountability, preferring to attribute the scandal to a series of questionable calls by unnamed parties rather than to specific failures of leadership or ethics.

Why the Scandal Mattered

The Dieselgate situation matters because it cuts to the heart of what accountability means in a fiercely competitive industry like automobile manufacturing. With profit margins as low as 6% for much of VW's history, there was very little room for error. In the 21st century, however, VW's new cost-cutting and efficiency strategies had pushed pre-tax margins to 8% — a substantial achievement that had positioned the company as a genuine rival to industry giants like GM and Toyota (Schuetz, 2016).

Yet that surge in performance had been built, in part, on a promise to stakeholders: VW was embarking on a bold corporate social responsibility program in which its environmental impact would be a defining priority. VW Group had read the cultural mood of the era correctly, recognizing that climate change and environmental responsibility were concerns that consumers genuinely cared about — particularly when purchasing a car. VW positioned itself as a brand that could be both cool and conscientious, allowing consumers to feel good about their choice whether they were buying a standard VW or stepping up to the Audi luxury lineup.

The emissions scandal exposed that positioning as fraudulent. VW performed well in the lab — but on the road, where it actually mattered, the controls came off and the cars were, as the EPA determined, dirty and polluting machines. Regardless of what other manufacturers may have been doing to skirt emissions regulations, VW now had a serious public relations problem. Its organizational culture was being questioned. Its ethics were a glaring question mark. Commentators began comparing the company to Enron — seemingly at the top of its game, but for all the wrong reasons. VW's stock responded in ways reminiscent of Enron's collapse when that company's fraud was exposed.

The CEO of VW had to ask difficult questions: Who would be held accountable for the failure? Did the scandal actually matter to ordinary consumers, or was it primarily a story for the press? What did ongoing sales figures suggest about real consumer demand? Based on the CEO's public statements following the internal investigation, it appeared he believed the scandal would eventually fade and that stakeholders would recover without lasting damage. He attributed the crisis to a general chain of errors and declined to single out any individual — even though, given VW's widely acknowledged authoritarian culture, accountability might reasonably have been expected to flow from the top.

This raised an uncomfortable question: had the CEO been misleading stakeholders when he credited a new culture of openness and innovation — and then blamed that same open culture for the scandal? Was all of the talk about environmental responsibility and corporate social responsibility simply a public relations exercise? If so, why should the VW brand retain any credibility going forward? And critically, did credibility even register as a priority with the typical car buyer? Dieselgate had imposed a crippling new debt burden through fines, but losing consumers over the scandal would represent an even larger long-term threat — one that demanded the CEO find precisely the right tone with the public.

References

Schuetz, M. (2016). Dieselgate — Heavy fumes exhausting the VW group. ACRC.