Volkswagen - Diesel Gate

Company Background

Volkswagen, also known as the Volkswagen group, is a German automobile manufacturer founded by the German government in 1937. The German government originally commissioned Volkswagen to mass-produce inexpensive “people’s-cars”, which is the English translation of Volkswagen. The organization’s industry classification is the International Standard Industrial Classification of All Economic Activities (ISIC). The headquarters is located in Wolfsburg, Germany (Volkswagen Group. n.d.).

In 2015, Volkswagen was shaken by a scandal that nearly crippled it as a leading automotive manufacturer.

Thousands of cars were recalled all over the world due to an installed software mechanism that reported lower emission in many of the diesel vehicles produced by Volkswagen. The false emission standards were a cause for concern because they lead consumers and government agencies to believe their vehicles were more environmentally friendly then in actuality. This crisis meant that Volkswagen had to change the way they envisioned their future. The last three years have played a significant role in rebuilding the image of Volkswagen.

Volkswagen’s initiative to meet the needs of consumers is an important part of securing its future role as a leader in the automotive industry. This report highlights many of the deviations in policy and processes by Volkswagen over the past three years that have allowed it to ensure brand strength and security in an ever changing market.

Issues, Problems, & Stakeholders

As Volkswagen continued to grow as an organization, they began to add more vehicles to their product line. By the 1980s, Volkswagen mass-produced passenger vehicles, vans, and other commercial vehicles.

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These vehicles were built in several plants, located in: China, Mexico, Brazil, and the United States. In addition, Volkswagen also acquired several smaller automotive companies, such as: Audi, Porsche, SEAT, Bentley, Lamborghini, and Bugatti (Volkswagen Group. n.d.). Business was good, and it only continued.

By the mid-2010s, Volkswagen was the world’s largest car manufacturer, by volume, after Toyota Motor Corporation for a short period. Which, for the lack of a better term, is where Volkswagen began to face some troubles. Spanning the years between 2008 and 2015, the United States Environmental Protection Agency, discovered that Volkswagen’s diesel vehicles contained software that purposely altered the engines emission performance in order to pass emission regulations set by the EPA (Volkswagen Group. n.d.). As a result, Volkswagen publicly admitted to installing the software, and had to recall billions of diesel vehicles worldwide. Volkswagen accrued over $4 billion in fines— just in the United States (Hotton, R. 2015, December 10). To make matters even worse in regards to Volkswagen’s public relations and public image, several executives were found guilty of various violations related to the Diesel Scandal. However, despite the fraudulent software in Volkswagen diesel vehicles, sales worldwide, even today, continue to increase (Wehrmann, B. 2018, September 18).

Alternate Solutions

In order to prevent another incident such as the diesel emission scandal, a few solutions have been drafted. The first recommendation, and perhaps the most important recommendation, is to implement more thorough risk assessments. A risk assessment is a process to identify potential hazards and analyze what could happen if a hazard occurs (Risk Assessment. n.d.). In the case of Volkswagen, a risk assessment should have been conducted before conducting business activity that is not only unethical, but incredible illegal. For example, imagine that Volkswagen decided to assess the risk before falsifying their data. It would be expensive to recalibrate the diesel engines, yes, but the cost would be worth the investment, considering that Volkswagen is legally obligated to pay out billions of dollars in fines. In addition to the expense, Volkswagen will have to essentially build back their brand image with their: stakeholders, investors, and their consumer base. Hard to believe that such an incident could have been prevented with something as simple as a risk assessment. Considering the recent events, Volkswagen’s risk was definitely not worth the reward.

The second recommendation that is being proposed is hiring a team of ethics officers. An ethics officer is an individual, or group of people, who are responsible for looking at every single aspect of an organization’s procedures to make sure that they are consistent with the code of ethics of the organization (Ethics Officer. n.d.). Essentially, ethics officers exist to ensure that little to no unethical activity is being conducted at an organization. When considering the market share of Volkswagen, it is likely that they have already hired ethics officers. However, just the fact that “dieselgate” occurred in the first place is evidence enough that the current ethics officers are one of two thing. Either not doing their job effectively, or they were just completely unware anything unethical was happening. Either way, the outcome is not good.

If Volkswagen’s ethics officers were aware of the unethical behavior that was being conducted, then it is very apparent they should be replaced— without a doubt. If Volkswagen’s ethics officers were left unaware of the situation, that, unfortunately, is where things would get complicated. If there are transparency issues from an organizational standpoint at Volkswagen, then it is likely additional unethical activities are being conducted. For simplicity sake, it will be assumed that Volkswagen needs to hire more ethics officers to ensure a situation such as “dieselgate” will not happen again.

The third recommendation that is being proposed is discontinuing the diesel engine production line altogether. This, of the three recommendations, is the riskiest and will needs its own properly conducted risk assessment. There are advantages and disadvantages to this recommendation. An advantages would be just getting rid of what initially caused the problem. Volkswagen is a massive organization, but they specialize in gasoline powertrains (Volkswagen Group. 2018, August 23). Perhaps a situation, such as “dieselgate” is likely to happen again, because the capital, time, and resources are not being properly allocated to support their diesel engine production line. That being said, just getting rid of that line altogether may hurt at first, but if their diesel engines are an active detriment to their organization, then by all means, get rid of it.

Much like the good aspect of this recommendation, there is a bad side. Volkswagen may specialize in gasoline engines, but their diesel powered vehicles are fairly popular, even after all of the recent controversy. They may not be as desirable as they use to be in the past, but the demand is still there. That being said, Volkswagen’s diesel production line actually makes up quite a bit of their revenue (Statistics & Facts on Volkswagen. 2015, September 30). Considering that, it would also seem irresponsible to discontinue a product that still manages to make a decent amount of revenue. On one hand, the problem could disappear if the diesel production line is discontinued, but a substantial portion of Volkswagen’s market share would also disappear. As mentioned, a very thorough risk assessment must be conducted for this recommendation.

Recommendations

Selected Solutions

When selecting the best recommendation that is suitable for an organization such as Volkswagen, a few things needed to be accounted for. Firstly, each of the three recommendations, at least in theory, are viable options. Risk assessments is an assessment that every business should be conducting, regardless of size. However, risk assessments should always encompass the entire organization, not just a specific division, such as Volkswagen. Next, ethics officers can be, and are, extremely useful to all types of businesses. To have an individual, or team, support the integrity of an organizations code of business conduct, can make all the difference (Leonard, K. 2018, June 29). This can prevent unethical activities from ever arising at an organization, which is exactly what did not happen at Volkswagen. Finally, more often than not, getting rid of a problem altogether essentially resolves the issue almost immediately. However, sometimes it is in the organizations best interests not to shut down a segment that is responsible for vast market share. This all being said, the recommendations that have been selected are more thorough risk assessments and ethics officers.

These recommendations have been chosen specifically, because they offer the opportunity to prevent similar events, without having to restructure. As previously mentioned, Volkswagen is a large company, employing thousands of people, and making up a vast majority of the automotive industry. If Volkswagen were to discontinue their diesel production line altogether, surely a competitive edge will be lost with their competitors, and the loss in revenue would be substantial. That being said, that would not be a viable option. It would work in the short-term, but its long-term effects are questionable at best.

Implementing more thorough risk assessments will definitely have its advantages. When properly conducted, a risk assessment should indicate whether a certain risk is worth the reward (Carroll, A. B., Brown, J. A., & Buchholtz, A. K. 2018, p. 158). Doing a simple risk assessment right now about the diesel emission issues would reveal that it would be wise to fix the problem, not lie about the problem. It is quite apparent that there was an oversight in regards to transparency about the whole diesel emissions problems, but nonetheless it happened anyway. If these risk assessments are conducted properly, with an ethical mindset, scenarios, like “dieselgate” would likely cease to happen.

Implementing a team of ethics officers would essentially reinforce the first recommendation. Simply put, especially considering the diesel emission scandal, Volkswagen needs to operate that would be considered ethically and morally correct to their consumers (Carroll, A. B., Brown, J. A., & Buchholtz, A. K. 2018, p. 195). Ethics officers exist to ensure ethical business practices. That being said, either the previous ethics officers were not doing their job, or were completely unaware of the issue. Whichever actually happened, it is still unacceptable either way. Volkswagen is a big company, these ethical behaviors should not happen in the first place, regardless of the cost savings, or the time savings.

Implementation Timeline

Getting Volkswagen back to an ethically abiding organization will take some time, but with the selected recommendations, this will get things moving back in the right direction. Luckily enough, implementing more thorough risk assessments and hiring a team of ethics officers should not technically take too much time. The tricky aspect of these implementations falls in regards to the order of importance. Unfortunately, updating the risk assessment procedure (likely found in the code of business conduct), will require the efforts from human resources and the ethics officers (Leonard, K. 2018, June 29). So, as a technicality, a team of ethics officers should be hired first before updating the policies and procedures of Volkswagens risk assessments. It is not completely necessary, but should be done to ensure it is being enforced.

In regards to the implementation timeline for having a team of ethics officers would likely take at least six months. A hiring process will need to be initiated, and it will take time to seek out the qualified candidates, go through human resources, and pick a start date (Doyle, A. 2018, May 3). Of the six months, at least three months will be needed to find and hire the individuals. The additional three months will likely be dedicated to training and other human resource procedures and activities. After the initial six months, it would likely take an additional six months to become fully efficient and effective. In total, considering everything, it should take about one year to fully implement a group of ethics officers into Volkswagen. The time and money commitment in doing this will hopefully prevent unethical activities from occurring in the future.

In regards to updating the risk assessment process, it, unfortunately, is all dependent on the ethics officers. As previously mentioned, the ethics officers will likely be the individuals to update the risk assessment procedure. That being said, it will probably take three months after the ethics officers have been hired, which would be a total of nine months. These timelines do seem kind of extreme, but the idea is to prevent unethical behavior from happening in the future. A quick fix is something that should not be done. Serious time and effort will need to be put into these recommendations to ensure they remain efficient from the day they are implemented and ten years from now.

Long-Term Monitoring Tools & Strategies

Maintaining the proposed recommendations is very important for Volkswagen. They may not sound all that special, but fixing the internal issues within Volkswagen is what caused “dieselgate” to occur in the first place. Fixing Volkswagen from an internal standpoint should definitely be done first before doing anything externally. That being said, there needs to be certain quality and performance management methods to ensure the recommendations are working effectively. One of which will be doing regular quality performance checks. This will involve monitoring and evaluating the ethics officers and the new risk assessment procedures over periods of times. At first, these performance checks will occur bi-weekly for the first three months. After three months, then every month for an additional six months. After that, the performance checks will occur every quarter (i.e. three months).

In terms of corporate governance, Volkswagen has an obligation to fulfil the needs of themselves and their stakeholders (Carroll, A. B., Brown, J. A., & Buchholtz, A. K. 2018, p. 102). This is one of the main reasons why Volkswagen should implement these recommendations. Considering recent events, it is very apparent that Volkswagen has not been fulfilling the obligations to themselves or their stakeholders. If anything they have been nothing but dishonest, which is a problem. With these recommendations doing their job, hopefully the integrity of Volkswagen’s corporate governance will remain between themselves and their stakeholders.

If Volkswagen manages to salvage their corporate governance, which is seems likely, Volkswagen will then need to worry and focus on their triple bottom line. This includes their economic, social, and environmental sustainability (Carroll, A. B., Brown, J. A., & Buchholtz, A. K. 2018, p. 61). For a lack of a better term, this is the real issue. Not only has Volkswagen had to pay billions of dollars in legal fines, but they also tried to hide the fact that their diesel emission standards are not suitable for the environment. There is a reason why these emission regulations are put into place, to preserve the environment (Krok, A. 2016, February 4). When Volkswagen has to falsify their emission statistics, it does not fare well with their economy or society. If these recommendations are put into place, Volkswagen will hopefully follow the emission standards that are set. However, they will need to work on gaining the trust of their consumers (i.e. society) back, which will intrinsically help Volkswagen in regards to their economy. All in all, these recommendations can only help so much. It will take time, trial, and error to make up for the mistake that were made in the past. It can only get better from this point.

Conclusion

A plethora of information has been stated. What happened at Volkswagen was incredibly irresponsible, unethical, and unforgettable. The “dieselgate” scandal may have happened a few years ago, but there is plenty of ground to make up before Volkswagen become the automotive “powerhouse” as they were prior to this incident. In order for an organization to be successful, they must operate with honesty and integrity. Without honesty and integrity, unethical problems, such as “dieselgate” begin to occur. For a number of years to come, Volkswagen will be slowly building their trustworthiness back with society. It can be very difficult to be loyal to an organization that lacks any level of corporate governance. Nothing good can come out of an organization that disregards their stakeholders, and worst of all, themselves. Since the diesel emission scandal, many members of the board of the directors have been replaced, and improvements have already happened. Perhaps the implementation of a team of ethics officers and thorough risk assessments are already active. In any case, Volkswagen is paying for their own wrong doing; time will only tell if they have learned from their mistakes.

References

1. Carroll, A. B., Brown, J. A., & Buchholtz, A. K. (2018). Business & Society: Ethics, sustainability, and stakeholder management (10th ed.). Boston, MA: Cengage Learning.
2. Doyle, A. (2018, May 3). Recruitment and Hiring Process. Retrieved from https://www.thebalancecareers.com/recruitment-and-hiring-process-2062875
3. Ethics Officer. (n.d.). Retrieved from https://www.bestjobdescriptions.com/education/ethics-officer-job-description
4. Hotton, R. (2015, December 10). Volkswagen: The scandal explained. Retrieved from BBC News website: https://www.bbc.com/news/business-34324772
5. Krok, A. (2016, February 4). What is the environmental impact of Dieselgate? Retrieved from https://www.cnet.com/roadshow/news/what-is-the-environmental-impact-of-dieselgate/
6. Leonard, K. (2018, June 29). What Is the Code of Business Conduct? Retrieved from Chron website: https://smallbusiness.chron.com/code-business-conduct-2732.html
7. Risk Assessment. (n.d.). Retrieved October 10, 2018, from https://www.ready.gov/risk-assessment
8. Statistics & Facts on Volkswagen. (2015, September 30). Retrieved from https://www.statista.com/topics/1574/volkswagen/
9. Volkswagen Group. (2018, August 23). Retrieved from https://www.britannica.com/topic/Volkswagen-Group/dec/30/vw-raising-profits-forecast-cleared-air-dieselgate
10. Wehrmann, B. (2018, September 18). ‘Dieselgate’ – a timeline of Germany’s car emissions fraud scandal. Retrieved from https://www.cleanenergywire.org/factsheets/dieselgate-timeline-germanys-car-emissions-fraud-scandal