Stakeholder Management - Volkswagen Emission Scandal - Case Study Example

Stakeholder management: Volkswagen Emission Scandal Name Institution Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Description/summary 3 2.1 Issues 3 2.1 Stakeholders 4 3.0 Analyse and evaluate 5 3.2 Principle 1 5 3.3 Principle 2 7 3.3 Principle 3 9 3.4 Principle 6 10 4.0 Conclusion 11 5.0 References 12 1.0 Introduction Knowledge of a company’s diverse stakeholders and their unique interests and expectations is a vital prerequisite for successful business. The knowledge determines how a company approaches its markets, adapts to diverse regulatory frameworks, as well as builds its reputation. Stakeholder management can assist a company to carry out dialogue with its stakeholders in order to balance corporate objectives and stakeholders concerns (Volkswagen, 2014). The key objective of principles of stakeholder management is to suggest guidelines essential for balancing corporate objectives and stakeholders concerns. They also enable businesses to be more conscious of the diverse stakeholder they serve, as well as promote the efficiency of management processes. This report covers the issue of “Volkswagen Emission Scandal.” The case scenario is analysed using four principles of stakeholder management apply to the scenario: principle 1, 2, 3, and 6 2.0 Description/summary 2.1 Issues In the case scenario, Volkswagen had rigged vehicle software to cheat emissions test, leading to emissions that were nearly 40 times more than the permissible levels for driving. As a result, Volkswagen’s cars sold in the United States had contrivances in their diesel engines that designed to sense if they were being tested. In turn, they would alter the performance of the cars to provide misleading results. Volkswagen had also claimed that the vehicles met Tier II/Bin 5 emission, which implies that the vehicles were permitted to emit 0.007 grams of nitrogen oxide and nitric oxide per mile (Volkswagen, 2014). Volkswagen also carried out false advertising and misrepresentation of facts. This was unethical. The carmaker had engaged in huge marketing campaign to flaunt the diesel cars’ trademark low emissions. However, the advertisement was a façade intended to cheat the customers, as the cars had no low emissions as indicated in the ads (Volkswagen, 2014). Volkswagen later made an open admission that it had cheated the emission test. It also revealed that some 11 million cars worldwide had been fitted with the device. This had potential hazardous effects on humans and the environment at large, as the cost of the damages caused by the emission are said to have been more than US$100 million (Volkswagen, 2014). 2.1 Stakeholders The key stakeholders include the US Environmental Protection Agency (EPA), which oversees the activities of Volkswagen in the United States, specifically the environmental implications of Volkswagen products. In the case study, the EPA regulates the amount of nitric oxide and nitrogen dioxide gas that diesel engines can emit. The EPA also had the powers to fine Volkswagen for the violations. It is said that EPA may fine a firm up to $37,500 for each vehicles in the event that such breaches of standards occur (Volkswagen, 2014). Customers are also major stakeholders of Volkswagen. In the case study, they bought diesel cars from Volkswagen and as result sustained Volkswagen’s business. It is said that globally, 11 million cars had been fitted with the controversial software. This may mean roughly 11 million Volkswagen customers had been affected. Volkswagen was initially concerned with its possible damaged reputation after the scandal made negative headlines. The resale value of the diesel cars had depreciated, as more customers underrated them. Scandals lead to loss of reputation and profitability (Jeurissen 2007). Other stakeholders include the shareholders of the Volkswagen. Essentially, they are the owners of the company and expect profits from the sale of cars. However, they had suffered the most from the scandal. By levying the huge fines, the shareholders suffer significant losses. It is indicated in the case study that shareholders and customers considered taking a legal action against Volkswagen. According to Heath and Norman (2004), the proponents of the ‘‘stakeholder theory,’’ shareholders are merely a small component of vital stakeholder groups, just like employees, customers, and local communities that are affected by and maintain a stake in the company’s prosperity or failure. Another stakeholder is the local communities. The huge emissions from the diesel have a burden on the public health. As a result, the public were at risk of heart attacks, asthma, coughing, and bronchitis due to the gases emitted by the Volkswagen vehicles. 3.0 Analyse and evaluate Four principles of stakeholder management apply to the scenario. They include principle 1, 2, 3, 6 and 7. 3.2 Principle 1 Principle 1 requires that businesses should consider stakeholder concerns in their decision-making. To ensure this, it stipulates that management need to recognize and aggressively keep track of the concerns that stakeholders raise, and as a result consider their interests in the business decisions and operations (Clarkson et al., 1999). Clearly, however, Volkswagen violated this principle. The EPA was concerned with the amount of nitric oxide and nitrogen dioxide gas that diesel engines can emit. The EPA demands that diesel cars can emit 0.007 grams of nitrogen oxide and nitric oxide per mile. However, Volkswagen breached the standards in its decision to manipulate vehicle software to cheat emissions test. It appears that Volkswagen concentrated in fulfilling the needs of the shareholders, than that of other stakeholders like government regulators, local communities, and customers. This is the reason Volkswagen had engineered a controversial vehicle software that could cheat emissions test and lie to stakeholders (environmental regulators and customers) that the vehicle was eco-friendly, as it anticipated more profits. Shareholders expect profits from a company’s activities. However, this was wrong. According to Heath and Norman (2004), a company and its management have a unique obligation to make sure that the shareholders are provided with a ‘‘fair’’ return on their investment, as well as that stakeholder needs are addressed in addition to those required by law. Therefore, Volkswagen failed to acknowledge and monitor EPA concerns. Customer concerns were also overlooked by Volkswagen in its decision. In the case study, customers who went for the Volkswagen vehicles were particularly interested in buying eco-friendly cars. They were, therefore, concerned about the amount of damage that their cars would cause to the environment. By neglecting Principle 1, Volkswagen exposed itself to huge expenses resulting from huge fines from EPA, as well as additional costs associated with car recalls. Volkswagen will also need to contend with losing key stakeholder, including shareholder and employees due to loss of reputation. Consequently, it is possible that Volkswagen may further lose its market share to competitors. Already, this has happened. For instance, evidence provided in the case study show that Volkswagen experienced a significant decline in shares by up to 30 percent immediately after the scandal was exposed in the media. Here again, Volkswagen failed to recognise and monitor customers’ demand for eco-friendly models in their decision. Instead, Volkswagen decided to lie to its customers by engaging in false advertising, which was actually an unethical practice. Volkswagen had engaged a huge marketing campaign to flaunt the diesel cars’ trademark low emissions. This misled customers into thinking that Volkswagen had considered their concerns. In fact, the advertisement was a lie intended to mislead the customers into buying the cars. Therefore, Volkswagen should have acted differently. First, it should have researched the US market to gain knowledge of the stakeholder diversity and their divergent interests. However, this might have been a challenge, particularly as Volkswagen’s diesel car project is a huge project that serves a diverse global market. This implies that serving the needs of each individual stakeholder would have been tricky for Volkswagen. In fact, Volkswagen should have, at a minimum, evaluated stakeholder interests to understand their unique impacts on the project. It would then have prioritized stakeholder interests and consider the major stakeholders (Lyons, 2015). 3.3 Principle 2 Principle 2 provides that businesses should engage in open and effective communication with stakeholders (Clarkson et al., 1999). Therefore, managers are required to listen to the stakeholder concerns and to communicate openly with them regarding their particular concerns and demands, as well as about the risks that they anticipated due to the activities of the company (Kennedy, 2010). However, Volkswagen seems to have violated this principle. Volkswagen failed to communicate effectively and openly with government regulators, particularly EPA. The EPA’s major concern was the environmental impacts of Volkswagen’s cars. Rather than listen to EPA concerns, Volkswagen installed software in its cars to cheat the regulators that the cars were consistent with their demands. Volkswagen went to the extent of claiming that the vehicles met Tier II/Bin 5 emission, which implied that the vehicles were permitted to emit 0.007 grams of nitrogen oxide and nitric oxide per mile. In such a case scenario, it appears the communication was one-sided, as EPA had stipulated its demands while Volkswagen failed to respond accordingly to the demands. The likely consequences include long-term losses that result from having to pay huge fines from legal litigations or having to refit and recall the faulty cars. Consequently, Volkswagen may lose the goodwill of its key stakeholders, mainly customers, shareholders, and employees. For instance, eco-conscious customers are likely to desist from buying Volkswagen products. This may further contribute to a significant loss of market share. In addition, Volkswagen may lose some of its shareholders due to the resultant losses. In the case scenario, Volkswagen had experienced a decline in shares by nearly 30 percent, during the first few days after the scandal broke (Gecrisk, 2015). Principle 2 demands that while open communication with stakeholders is crucial for a successful project, it is vital that the communication is two ways (Clarkson et al., 1999). Therefore, for an effective communication with stakeholders, Volkswagen should have acted differently, including by listening to the concerns, needs, and demands of the EPA. Volkswagen should also have sent its representatives to EPA to jointly take part in dialogue and express their individual concerns. 3.3 Principle 3 Principle 3 requires businesses to adapt communication to meet unique stakeholder needs. It demands that managers should assume modes of behaviour and processes that are responsive to stakeholders’ concerns and capabilities (Kennedy, 2010). Volkswagen appears to have taken consideration of this principle, as it adapted its communication to diverse stakeholders. In the cases of the customers, shareholders and stakeholders, Volkswagen was quick to issue a public apology through the newspaper. It appears Volkswagen was convinced that a majority of the stakeholders would notice and read its apology in the newspaper. The company apologised through an ad campaign, which addressed the emissions scandal. It used an understated full-page ad that was published in more than 30 newspapers in the United States. However, it appears Volkswagen was more interested in communicating with the customers than the shareholders and regulators. In an earlier communication, it had adapted an advertisement to fit the communication needs of the customers. Earlier, Volkswagen had used a marketing campaign to show off the diesel cars’ ingenious low emissions capability. However, the advertisement misrepresented facts and cheated the customers, as the cars had no low emissions as claimed in the ads. This may have been Volkswagen’s unmaking, as it failed to consider the diverse stakeholder types. Possible implications include long-term losses due to huge fines and car refits and recalls. The company may also end up losing favour with a majority of its stakeholders, including customers, shareholders, and employees (Maclean, 2015). The eco-conscious customers may refrain from buying cars from Volkswagen. This is likely to lead to significant loss of market share. Additionally, the company may lose shareholders because of losses. Indeed, it is indicated in the case study that Volkswagen had experience a decline in shares by nearly 30 percent, during the first few days after the scandal broke. According to Carroll and Buchholtz (2014), stakeholders are often diverse, as some groups of stakeholder are large, as well as have diverse needs even as other stakeholders may be small with precise needs. Volkswagen should have handled its communication differently, if it had to adapt communication to shareholders and regulators. The managers should have identified the needs of diverse stakeholders in order to adapt communication to unique stakeholder type (Smith et al., 2011). Despite this, while methods of communication and the type of audience would vary, the core message should be consistent. While Volkswagen’s project manager may alter the details when they communicate the objectives of their diesel car project, the actual central message has to be consistent across diverse communication channels. 3.4 Principle 6 Principle 6 provides that the management should make efforts to outline clearly the risks that their activities have on stakeholders (Clarkson et al., 1999). The principle requires businesses to avoid activities that potentially endanger absolute human rights, such as the right to life. Volkswagen had clearly flouted this principle. By cheating emissions test using software, Volkswagen contributed to green house gas emissions that were 40 times above the tolerable levels for diesel cars. Volkswagen failed to outline implication of the emissions and went to the extent of cheating the stakeholders that the vehicles met the emission standard of Tier II/Bin 5. Volkswagen’s advertisements also lied to the public that the vehicles are eco-friendly, and therefore, cause no risks to public health. However, the implications of the diesel cars’ emission included damage to humans and the environment. By overlooking this principle, Volkswagen exposed customers and the general-public to significant health risks. The negative impacts on humans include increased risks of heart attacks, asthma, coughing, and bronchitis. The EPA had also estimated that one tone of the gases on roads could lead up to 0.00085 deaths. This implies that between 10,000 and 40,000 tons of the gases would lead up to 34 deaths. The manager should have identified all stakeholders who were potentially impacted by the risks of the diesel car project before engaging them in an open dialog regarding the risks. To ensure this, Volkswagen should collaborate with its key stakeholders, such as through market research on consumer behaviours and regulatory concerns to identify possible strategies they could use to reduce the risks, as well as to continue looking for methods for identification and reduction of the health and environmental risks associated with the project (Maclean, 2015). This would ensure that project manager reach a balance between stakeholder rewards and risk. When the manager fail to reach an acceptable balance that stakeholders can agree to, then the project should be delayed or cancelled (Norman, 2004). Indeed, if this principle had been considered from the outset, Volkswagen would have anticipated the risks of huge fines and negative reputation due to the health and environmental risks. 4.0 Conclusion Evidence provided in the case study show that Volkswagen had manipulated vehicle software to cheat green house gases emissions test, leading to emissions that were up to 40 times the acceptable levels for driving. Volkswagen also engaged in false advertising, which is essentially an unethical practice. The evidence further shows that Volkswagen’s communication had failed to follow the principles of stakeholder management, specifically Principle 1, 2, 3, and 6. In compliance with Principle 1, Volkswagen should have undertaken a market research of the US market to expand knowledge of the diverse stakeholders and their contrasting interests. To adhere to Principle 2 so as to make sure that it effectively communicates with its key stakeholders including the government regulators like EPA, Volkswagen should have listened to their key concerns and demands. The company should, therefore, have sent some representatives to EPA to constructively communicate their individual concerns and listen to EPA to concerns. In respect to principle 3, Volkswagen should have identified diverse stakeholder needs in order to adapt communication to them. In principle 6, Volkswagen’s manager should have identified all stakeholders potentially affected by the likely risks of the diesel car project and communicated the risks or mitigated the risks at the same time. 5.0 References Carroll, A. & Buchholtz, A. (2014). Business and society: Ethics, sustainability, and stakeholder management. New York: Cengage Learning Clarkson, M. B. E., Donaldson, T., Preston, L. E., & Brooks, L. J. (1999). Principles of stakeholder management. Retrieved from: Gecrisk. (2015). THE Volkswagen emissions scandal will be one for the books: The long term effect on stakeholder trust. Retrieved from: Heath, J. & Norman, W. (2004). Stakeholder Theory, Corporate Governance and Public Management: What can the History of State-Run Enterprises Teach us in the Post-Enron era? Journal of Business Ethics, 53, 247–265 Hotten, R. (2015). Volkswagen: The scandal. Retrieved from BBC News website. Jeurissen, R. (2007). Ethics & susiness. Assen: Uitgeverij Van Gorcum Kennedy, T. (2010). The PM coach. Retrieved from: Lyons, S. (2015). Road to recovery: How does Volkswagen bounce back from emissions scandal? Retrieved: Maclean, C. (2015). Five crisis management lessons from the Volkswagen incident. Retrieved: Norman, W. (2004). What can the stakeholder theory learn from Enon. Zfwu 5(3), 326-336 Smith, C., Ansett, S. & Erez, L. (2011). What's at stake" stakeholder engagement strategy as the key to sustainable growth. Faculty & Research Working Paper Volkswagen. (2014). Stakeholder management. Retrieved: Read More