The Volkswagen Problem: The Nature of the VW Scandal and the Breadth of Its Impact Raise a Number of Difficult Questions for Those Seeking Remediation, Justice, and Assurance That Something Similar Won't Happen Again

By Verschoor, Curtis C. | Strategic Finance, February 2016 | Go to article overview

The Volkswagen Problem: The Nature of the VW Scandal and the Breadth of Its Impact Raise a Number of Difficult Questions for Those Seeking Remediation, Justice, and Assurance That Something Similar Won't Happen Again


Verschoor, Curtis C., Strategic Finance


FOLLOWING THE GENERAL MOTORS (GM) fraud scandal, the revelations that Volkswagen (VW) had installed software on certain cars to cheat emissions testing was yet another example showing the failures of a corporate ethical culture to manage risks properly and limit damage to the company. While the scandals share some similarities, there is a significant difference between the two: Owners of GM cars involved in the recall for ignition switch problems eagerly awaited the opportunity to have a safety violation repaired. VW car owners, however, may not care about a "fix" that will reduce fuel efficiency to minimize polution.

The VW scandal is an almost unbelievable story. With 12 different brands, Volkswagen AG Group is the largest auto manufacturer in Europe and Germany's largest company with 2014 revenue of 202.4 billion [euro]. The Group Management Report portion of the company's 2014 Annual Report touts its superior governance by noting that "transparent and responsible corporate governance takes the highest priority in our daily work." The report claims, "Our pursuit of innovation and perfection and our responsible approach will help to make us the world's leading automaker by 2018-both economically and ecologically (emphasis added)." The Sustainable Value Enhancement Section states, "We run our business responsibly and with a long-term perspective along the entire value chain. Everyone should benefit from this-our customers, our employees, the environment and society."

In 2013, VW said, "We consider responsible and transparent corporate governance to be a key prerequisite for sustainably increasing the Company's value. It helps strengthen the trust of our customers and investors in our work and meet the steadily increasing demand for information from national and international stakeholders." Sadly, these assertions seem to be totally false.

Europe's car makers have worked hard to change the image of diesel autos from their stinky, smoky, and sluggish past. Successful political efforts in Europe have resulted in lower emission standards than in the United States as well as incentives to protect the auto industry, such as generous subsidies to diesel in the form of tax breaks for diesel-guzzling company cars and low duties on the fuel.

VW's strategy aimed to convince customers and regulators that new diesel technology represented the ideal solution to maximize fuel economy and performance while carefully protecting the environment from pollution. VW's German engineering prowess was put to the test but succeeded only by cheating on emissions testing and threatening the health of many citizens of the world, particularly of children and those suffering from respiratory disease. According to Newsweek, "Intense ambition and a rigid corporate culture created the conditions for lying."

VW's handling of the pollution issue has caused immense concern among its owners, dealers, investors, employees, and citizens around the world.

It wasn't EPA regulatory vigor that exposed the VW lies, nor did VW confess it was breaking the pollution rules. Actually, it was a small research group that was looking for research evidence that U.S. diesels actually were cleaner than those in Europe, where standards are lower. The 2014 U.S. tests showed that VW cars passed in the lab but had significantly higher emissions when driven on the road.

It took some time and a lot of pressure before VW finally admitted its products were faulty and endangering the health of millions around the world. After months of discussions between VW and the U.S. Environmental Protection Agency (EPA), the company admitted the results were due to a "technical glitch" and issued a voluntary recall in December 2014 for nearly 500,000 diesel cars that VW attributed to "various technical issues. …

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