978-1337614436 Cases VW Case Note

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CASE 1

The Volkswagen Scandal: An Admission to

Emissions Fraud

CASE NOTES FOR INSTRUCTORS

This case highlights the Volkswagen (VW) emissions scandal, a case so notorious because the

German company purposefully deceived government officials. In 2017 VW pled guilty to three

criminal felony charges that included defrauding the U.S. government, violating environmental

regulations, obstructing justice, engaging in wire fraud, and violating import regulations. It

agreed to pay $2.8 billion in criminal charges, only a small portion of the total costs it will have

to pay to resolve this scheme.

Until recently, VW was known for its strong reputation for sustainability. It became the first car

manufacturer to adopt ISO 14001 principles, international environmental principles that act as

standards for global firms. It adopted a number of sustainability goals in 2002 at a time before

sustainability became a hot topic. VW began investing in vehicles that would reduce carbon

emissions early, including electric and diesel vehicles. In 2014 VW introduced the VW XL1,

which it claimed to be the most fuel-efficient car in the world at the time. The later scandal

showed just how misleading these claims really were.

The scandal involved VW’s diesel vehicles, which it claimed were more

environmentally-friendly. During lab testing, the vehicles released fewer emissions, satisfying

regulators. What they did not know was that VW had installed defeat devices that could detect

whenever the vehicle was undergoing emissions testing. During the test, the vehicle would run

below performance, thereby giving off more emissions. On the road, however, these vehicles ran

at maximum performance and gave off 40 times the allowable limit of emissions in the United

States.

European testers noticed that these vehicles did not perform as well on emissions tests on the

road as they did in the lab. They asked U.S. testers to perform similar tests as the U.S. has some

of the highest emission laws in the world. Using a portable emission system measurement device

on the road to detect the emissions, the testers obtained scientific proof that the emissions given

off on the road were not nearly as low as those given off during lab testing.

VW admitted to installing defeat devices in its diesel vehicles to fool testers and regulators. A

whistleblower at VW came forward and stated that VW immediately began destroying

documents that could implicate the firm. VW’s CEO resigned. The company agreed to pay up to

$17.5 billion to compensate consumers affected by its defeat devices, which included retrofitting

and buying back impacted vehicles. Those who knew about or were responsible for the defeat

device’s installation could face jail time. Six executives and employees have been indicted for

knowing about the conspiracy. Charges were also filed against German parts supplier Robert

Bosch GmbH as it designed the defeat devices and seemed to know that VW was using them to

violate laws.

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In total, criminal and civil fines and settlements are estimated to cost VW $22 billion in the

United States. However, truly restoring its reputation will require VW to incorporate ethics and

appropriate practices into the organization from the inside-out, something that was severely

lacking in the firm’s corporate culture prior to the scandal. What is most surprising about this

scandal is the blatant use of deception to deceive consumers, governments, and testers. Students

can learn from this case how deeply a firm can fall into an ethical scandal once it begins

compromising its principles and substituting short-term results over long-term longevity.

QUESTIONS AND 0DISCUSSION

1. Explain how the culture of Volkswagen created this ethical scandal.

VW clearly had a toxic corporate culture that placed short-term gains over long-term

profitability. Since several executives knew of the defeat devices, it is clear that this culture

of short-term results was spread throughout the firm. In this particular case, VW blatantly

Additionally, the firm took a very short-term attitude. It did not seem to consider the serious

repercussions it would face should it be caught. For many VW employees, it all depended on

2. While Volkswagen claimed to support ethics and sustainability, how can they recover from

this ethical disaster?

Probably the best way for VW to recover from this disaster is to prove that its culture has

changed. It must take steps to demonstrate that it is fully embracing an ethical orientation and

that misconduct of any sort will not be tolerated, no matter if the misconduct is committed by

an executive or a lower-level employee. The first step is accepting responsibility for the

disaster and trying to make amends with consumers and governments. It will not be enough

3. Do you believe this scandal will lead to tougher scrutiny of companies’ environmental

claims in the future? Why or why not?

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Students’ answers will vary. Most likely it will lead to some distrust of environmental claims

of automobile companies, at least in the short term. To ensure that they are not fooled again,

regulators and testers are likely to spend much more time verifying vehicles’ environmental

claims. This may require greater investment on the part of automakers. A scandal like this

ADDITIONAL RESOURCES

The scandal explained: http://www.bbc.com/news/business-34324772

VW executive pleads guilty:

https://www.usatoday.com/story/money/cars/2017/07/25/jailed-volkswagen-exec-plead-g

uilty-u-s-diesel-scandal/508525001/

How a West Virginia lab detected the VW scandal:

http://www.npr.org/2015/09/24/443053672/how-a-little-lab-in-west-virginia-caught-volks

wagens-big-cheat

The scandal’s impact on VW’s long-term future:

https://www.wired.com/story/vw-diesel-scandal-future-automakers/

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