The Volkswagen Scandal: A Mucky Business - Article Example

Business Law and Ethics Case analysis Student: Institutional affiliation: Date: Business Law and Ethics Case analysis “The Volkswagen Scandal: A mucky business”. This is the article of an article by “The Economist” journal on 26th September 2015. The article article analyses the scandal that followed the discovery by United States’ Environmental Protection agency (EPA) that Volkswagen had deliberately installed software in it cars that cheated emissions tests. This meant that Volkswagen cars produce less harmful emissions during tests, but were actually big polluters on the roads. The implication of the discovery is that consumers were deceived into buying cars that they believed emitted less harmful gases than it was actually the case. The regulators were also led to believe that Volkswagen was an honest corporation that complied with minimum emissions standards. The scandal exposed Volkswagen to costly fines by regulatory bodies in the United States and the European Union. The company was also exposed to numerous class action lawsuits by consumers in North America and Europe [The15]. However, the greatest cost to the company is the loss of its reputation as a manufacturer of high-quality vehicles that can be trusted by its consumers. Consumers can no longer have full trust in the company’s claims regarding the fuel efficiency and emission reduction in its cars (Löhr, 2015). According to “The Economist”, Volkswagen has invested heavily in diesel technology that has resulted in production of cars that burn diesel fuel more efficiently. This type of cars are link high demand in Europe due to the fact that they produce less carbon dioxide and are cheaper to fuel for consumers. However, diesel cars burn the fuel at much higher temperatures resulting in production of several oxides of nitrogen (NOx). While the oxides do not contribute significantly to global warming and depletion of the ozone layer, they contribute to generation of smog and damage to plants and animal lungs. These harmful effects have attracted the attention and concern of authorities, particularly in North America and Europe. Asia and the Pacific region have also been closely monitoring NOx emission to develop stringent compliance standards. Volkswagen was fully aware of the potential environmental danger that its diesel-engine cars posed to citizens in the markets, where its cars are sold. However, for commercial purposes, the company decided to develop a software function that deceived regulators into believing that its cars emit less NOx emissions. During tests, the software initiates a fuel recirculation process that results in less emission but lower performance of the car. On the roads, the fuel recirculation technology is normally disabled to maintain the vehicles superior performance that is preferred by drivers (Gates et al., 2017). The discovery of this trickery caused Volkswagen to apologise for its behaviour and set aside $7.3 billion a figure that was later raised to $18.3 billion (Johnston, 2016) to cover the costs of the legal costs and recalls. However, according to the article, Volkswagen incurred even greater losses arising from a sharp drop in value of its stocks. As at 22nd September 2015, the company’s stock value had fallen by €26 billion. From “The Economist” article analysis, it seems Volkswagen desire to cheat was driven by two motives: to be the biggest car maker in the world; to reduce the best-performing cars that emit less pollution-a falsehood. The car maker had also lowered its social responsibility standards due to the fact that regulators in Europe were less stringent on enforcing emission standards. This article is a classic case of how profitability and growth goals by a business can lead to clear disregard of its responsibility to being a responsible corporate citizen. As evidenced in the article, the Volkswagen deliberately engages in pollution of environment to achieve its goals of producing cars cheaply and selling as many of them as possible [The15]. The decisions seem to have been sanctioned at the highest level of management in the company considering the fact that software fitted in Volkswagen cars must have been approved by senior managers. Milton Friedman, a prominent critic of corporate social responsibility, famously stated that the sole responsibility of a business is to maximise profit by engaging in open and free completion that is not deceptive or fraudulent [Cra16]. In relation to Friedman’s perspective, Volkswagen did fail even the ethical test that required the least compliance as far as social responsibility is concerned. The company’s shareholders will have to bear the financial burden of the management’s blatant abuse of industry regulations. This will be in form of low dividends owing to the fact that money will have to be deducted from cash reserves and profits to pay fines and compensate consumers. The share price is also likely to tumble as the market becomes sensitive to the long-term financial implication of the scandal. The company will also spend a lot of money in advertisements to drive up sales particularly in markets where the brand image has been tarnished by the scandal. Clearly, this article is an insightful case study into the effects of violation of ethical standards by a successful global company with a reputed and trusted brand. Legal analysis For over a decade Volkswagen cheated regulators buy installing some of its popular models with software that deceptively reduced emission of nitrogen oxides during laboratory tests. This anomaly was discovered by regulators after researchers at West Virginia University noticed huge discrepancy between lab and real-world emissions by Volkswagen vehicles . Apart from the damage to its public image and reputation, Volkswagen exposed itself to numerous legal actions involving governments, regulators and private citizens. In the United States, the Environmental protection agency (EPA) found the company to have deliberately violated the Clean Air Act that sets out the minimum emission of pollutants that a motor vehicle should meet. The violation exposed the company to possible fines [Reu17]. In June 2016 Volkswagen agreed to a $15 billion settlement for engaging in diesel-cheating. The amount includes $10 billion to be spent in removing affected cars from the United States market and compensating drivers. The company also paid $2.7 billion to the federal and California regulators in fines. The company was also expected to spend $0.6 billion in claims with 44 other states in the United States. The company is also expected to incur more legal costs as a result of suits filed in European and Asian courts. Several countries including Italy, Australia, china and United Kingdom have announced investigations into whether the company did violate emissions standards in their markets [Gat17]. The legal costs facing the company are as a result of violation of environmental and consumer protection laws in the respective countries. In the European, North America and Asia-Pacific regions, companies operate within strict legal systems that seek to protect consumers against deception into buying products that do not meet the quoted attributes. Regulators are also committed to ensuring companies comply with minimum standards. The matter is complicated by the fact that regulations vary from one state or country to another [Tre131]. It is also important to note that Volkswagen relationship with dealers and investors is founded on legally binding contractual agreements that have clearly spelt out remedies in case of irresponsible actions by either party. In Germany and the U.S., the company expects to incur significant costs in compensating dealers and settling cases filed by investors in courts. Early 2017, senior Volkswagen officials were arrested by the Federal Bureau of investigation (FBI) in United States to face criminal charges of defrauding the U.S. Government. This means that senior executives could bear individual criminal liability for knowingly engaging in an unethical conduct that involved violation of United States laws [Reu17]. It is likely that the management at Volkswagen understood the possible legal implication of its diesel cheating technology. The company knew that a computer in its cars reduces emission to lead investigators into believing the vehicle meets the minimum emission standards. The same cars emit up to forty times the amount of nitrogen oxides in the environment in the real-world. This is legally unacceptable and a blatant abuse of the law. The business exposed consumers and unsuspecting victims to harmful oxides of nitrogen (Boston, Varnholt & Sloat, 2015). The only justification that Volkswagen can offer is its desire to sell as many cars without incurring significant costs in installing technology that would lower the emission of nitrogen oxides. From a competitive perspective, the motor vehicle industry is characterised by stiff competition and thin margins that may temp manufacturers into devising tricks that reduce the cost of complying with strict standards (Gates et al, 2017). However, such strategies expose a manufacturer into potential legal challenges. Apart from the direct financial costs, the legal proceedings have also lowered the value of Volkswagen shares significantly as investors shy away from the shares due to possible future losses in market share and reduced sales. Indeed, Volkswagen may have to recall millions of cars in global markets to rectify the emissions problem [Joh16]. The problem is complicated further by the fact that leading economies in the global market including China, South Korea and even Germany are exploring possible legal actions to deter future violation of standards by The Company. Volkswagen may also have to sign agreements with state governments that allow regulators to conduct random inspections at its facilities to assess compliance with the law. The company will also find it difficult to convince its shareholders that the top management had taken all the necessary precaution and measures to ensure that it minimizes its exposure to potential financial risks that originate from violation of compliance standards. This may result in shareholders suggesting rules that promote greater transparency and inclusion in the activities of the board (Cavico & Mujtaba, 2016). Significant losses will as well cause the company to review its growth strategies as funds will be dedicated to recalling and rectifying affected vehicles and settling lawsuits. Volkswagen has already announced layoffs at its German plant. The company may further delay implementing expensive projects due to financial constraints and distraction by the legal challenges in various global markets (Ewing, 2015). Ethical analysis According to Grace and Cohen (2014), ethics in business deal with issues that have few or no laws guiding the expected actions of an agent. It is left to the agent to decide what is right, wrong or morally acceptable within a particular society. Grace and Cohen outline several approaches to theorising business ethics including consequentialism, rights-based and virtue ethics. According to Grace and Cohen (2014), consequentialism is a moral approach that evaluates an agent’s actions according to the outcome/consequences that follow. This means that an act can be considered right or wrong based on the beneficial or harmful consequences. The implication of this approach to ethics is that it does not matter whether an agent violates the set norms provided the end results are a benefit or an increment to the welfare of those involved. While it is not generally agreed among the proponents of consequentialism what constitutes a good, its advocates contend that the “goodness” that result from an action justify its occurrence. As noted by Grace and Cohen, one form of consequentialism is utilitarianism. This form of consequentialism advocates for maximisation of pleasure and minimisation of pain. This form of approach to ethics does not indulge into distribution of the consequential good but rather it maximisation at the expense of set norms. Utilitarian thinking is evident in the way that a business justifies its profit-seeking behaviour through an ethical position of surviving in a competitive environment (Peterson, 2013). Volkswagen focused on maximising its dominance in the vehicle manufacturing and sale industry without regard for the harm that its cars caused to people’s health and wellbeing. It seems that the management of the company based their approach to ethics from a utilitarian consequentialism that sought to maximise the best results for the agent at the expense of all the other involved. Applying this approach to ethics exposes the business to possible backlash from the public and legal problems from authorities in case some standards are violated. On the other hand nonconsequentialism or deontological ethics require an agent to engage in the right action simply because it is right and just to do so [Nad10]. This disregards the consideration of whether it results in maximisation or minimisation of goodness. For instance, as noted by Micewski & Troy (2007), it will be ethically right to tell the truth, keep promises, and meet standards and to be fair. This means that if a company that engages in morally wrong activities that enable it to save jobs, pay taxes and pay attractive dividends to shareholders should be considered to be unethical. For example, Volkswagen emissions cheating enabled the company to sell more cars in U.S. thus providing employment for thousands at its plants. The company also paid more taxes to the government and maintained a high value of its stocks. However, its actions were wrong as they deliberately contributed to environmental pollution [The15]. From a deontological approach, Volkswagen should be considered to be an unethical agent. Its intention to maximise profitability and growth cannot justify its violation of the Clean Air Act in the U.S. and other environmental protection laws across the world. The virtue approach to business ethics focuses on the attributes of the individuals/organisations involved. This approach holds that whether an agent’s actions are ethically wrong or right is determined by its morality [Lue13]. According to [Gra13] this approach, the values that an organisation cherishes can play a significant role in determining the kind of decisions that it adopts in ethical dilemma situations. Volkswagen is reputed for its engineering prowess. The company has its set of values and norms that it commits to observe keenly. However, the scandal revealed that the company did not act ethically from a virtue perspective as it failed to uphold high standards of expectations as far as morality is concerned. The virtue and deontological approach to business ethics could have helped Volkswagen avoid any action that could be detrimental to its reputation in the market. Upholding ethics as defined from these two perspectives would have ensured the company only engages in what is good without regard to short-term profitability gains. Additionally, it would have helped the company stay true to its core values and sustainability goals. Stakeholder analysis Stakeholders to a business are individuals or any entity that is directly or indirectly affected by the decisions taken by the management of a business (Micewski & Troy 2007). According to Evan and Freeman (1993) in Crane and Matten (2010) a business has an obligation not to violate the rights of others. The business is also responsible for the implications of its actions to others. Apparently, based on this definition, different companies have different stakeholders. In this regard, Volkswagen stakeholders include its employees, shareholders, government, consumers, competitors and general public. The company’s shareholders are likely to experience loss in value of their investment due to the fact that the company’s share price has fallen significantly. The shareholders may also receive lower dividends as part of the revenue generated in 2016 and 2017 will be used to cater for legal expenses arising from lawsuits and fines. The government will experience increased public pressure due to the assumption that laxity and collusion has allowed such unethical and unlawful practices to thrive. Already, competitors such as Hyundai, Volvo, Renault, Honda and Toyota are being subjected to more stringent compliance tests as it emerges that the problem might be an industry-wide concern (Boston et al, 2015). Consumers are also likely to be mistrust the government and big corporate such as Volkswagen as a result of the exposure. The general public will also be concerned about the governments’ commitment towards protecting public health in the capitalist economy. References Boston, W., Varnholt, H., & Sloat, S. (2015). Volkswagen blames ‘chain of mistakes’ for emissions scandal. The Wall Street Journal. 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. The15: , (The Economist, 2015), Cra16: , (Crane & Matten, 2016), Reu17: , (Reuters, 2017), Gat17: , (Gates, Ewing, Russell, & Watkins, 2017), Tre131: , (Trebilock, Howse, & Eliason, 2013), Joh16: , (Johnston, 2016), Nad10: , (Nadelhoffer, Nahmias, & Nichols, 2010), Lue13: , (Luetge & Jauernig, 2013), Gra13: , (Grace & Cohen, 2013), Read More