Case Exercise 1: Volkswagen Emission Scandal

In 2006, under the direction of CEO Bernd Pischetsrieder, Volkswagen (VW) created a
10-year plan to triple US sales. The plan relied on the sales of Clean Diesel vehicles (Parloff,
2018). Clean Diesel was based on the fact that diesel engines produce little to no C02 and
greenhouse gasses.
Therefore, the use of diesel engines may reduce the effects of climate change. However,
diesel engines emit nitrogen oxides (NOx) which is one of the primary causes of smog
(Forsgren, 2019). One method to clean diesel exhaust is to mix it with a substance called
AdBlue. When the NOx and AdBlue react nitrogen and water are formed. The tradeoff in the
addition of AdBlue lies in the increased maintenance and weight of the vehicle. This tradeoff
exists because an extra tank to contain the AdBlue must be added to the car and can either be
large to lessen the number of refills or smaller in order to cut down on size and weight (Flender,
2019). The ambitious plan developed by Pischetsrieder sought to minimize this tradeoff and
maximize sales.

Environmental Standards
The environmental standards throughout the world varied in both restriction and focus.
European emissions standards focused on reducing the effects of global warming by limiting
greenhouse gasses. In these locations, a diesel engine seemed a perfect solution. In contrast,
in the US environmental regulation focused on clean air. In particular the Environmental
Protection Agency’s Clean Air Act (CAA). The CAA required all light-duty vehicles to satisfy
tailpipe emissions standards for air pollutants, including NOx (EPA, 2019). This standard set the
bar high for VW engineers to create a diesel engine that was low maintenance, low weight, and
clean. Even stricter standards existed within the California Air Resource Board (CARB) as
California sought to limit the smog in Los Angeles. These environmental standards exacerbated
the need to find a middle ground between NOx emissions and maintenance requirements.

Employee Perspectives
In order to create a clean diesel vehicle, VW placed tremendous pressure on
employees. In 2007, Martin Winterkorn took over the company as CEO. Winterkorn has been
described as a demanding boss who abhorred failure. Former executives have described his
management style as authoritarian and aimed at fostering a climate of fear (Glazer, 2016). From
these reports, one can begin to see how the culture incubated the scandal. The culture of fear
that existed limited the number of employees willing to step forward and act as whistleblowers.
However, it was not just executives who felt this growing pressure engineers faced the
largest challenge. As early as 2007, Wolfgang Hatz, a high-level VW supervisor was captured
on video saying, “The CARB is not realistic. We can do quite a bit, and we will do quite a bit. But
the
impossible we cannot do” (Parloff, 2018). This testimony displays the culture within the
company made employees reluctant to speak out. Further, this quote encapsulates the
seemingly impossible task the executives and marketing team placed on engineers. A former
employee Walter Groth said the pressure put on an engineer in such an environment can be
enormous. He
also mentioned that if one fails the expectation is to either be reprimanded by a manager or
fired.
Further, it has been reported that VW had a code of conduct that requires employees to follow
local and international laws and regulations. However, when VW engineers requested the
addition of AdBlue tanks to lower NOx emissions their request was denied (Flender, 2019). The
rejection of AdBlue tanks made the task of clean diesel impossible for the engineers tasked with
living up to the promises of the CEO.

The Creation of the Defeat Device

The software later named the defeat device was created in order to cheat testing. The
created software was extremely sophisticated; it monitored speed, engine operation, air
pressure,
and even the position of the steering wheel in order to determine if the vehicle was being tested.
If the program determined the car was in a testing scenario then it would enter a safety mode
with decreased power and performance effectively decreasing NOx readings (Hotten, 2015).
News of the defeat device within the company reached Audi managers in 2008.
Members of the engineering team sent news of the software to the head of the group Zaccheo
Pamio warning that the software was illegal and highly problematic in the US. However, no
actions were taken to rectify the situation (Forsgren, 2019). The lack of action on the part of the
managers suggests that cheating in such a way was not viewed as more important than the
potential of increased sales. This culture was only reinforced by the authoritarian rule driven by
Winterkorn.

The Scandal Breaks

The advertising of a Clean Diesel car achieved the original goal of tripling US sales.
However, in 2014 West Virginia University published a study in which two models of diesel-
powered VWs were studied in the lab and on the road. The results of this study displayed that
on the road the vehicles emitted 35 times more NOx than in the lab (Forsgren, 2019). After this
study was published, the EPA and CARB began pressuring VW.

Initial Response
When news of the WVU study reached VW executives they adamantly denied any
wrongdoing. VW’s response to the crisis was led by Oliver Schmidt. At the time, Schmidt
worked as the General Manager in charge of the Environmental and Engineering Office and his
main responsibility was communicating and coordinating with the EPA and CARB. For more
than a year, Schmidt dismissed concerns with promises of recalls and simple software fixes
(Forsgren, 2019). Schmidt was well aware of the defeat device but continued to hide it. This act
suggests within VW the defeat device was not viewed in the same unethical light as it was
outside the company. Additionally, Schmidt’s actions could imply that he was afraid to admit the
truth of the discrepancies in the published study.
Further, Winterkorn encouraged Schmidt’s actions. When Winterkorn and Schmidt met
in 2015, Schmidt told Winterkorn in unmistakable terms that VW had been cheating. Instead of
reporting this, Winterkorn told Schmidt to meet with the EPA and lie. In August of 2015, Schmidt
met with EPA officials and recited a script crafted by high-level VW officials detailing upgrades
and hiding all cheating. The continuation of blatant lying in response to the scandal further
suggests the cultivation of a culture in which lying is not abnormal.
As meetings with the regulators continued, one VW engineer stepped forward. In a
meeting between CARB and VW on August 19th, 2015 Stuart Johnson the head of VW’s
Engineering and Environment Office in the Auburn Hills revealed the existence of a defeat
device (Vellequette, 2017). In this case, Johnson was the first whistleblower. It is clear from
Johnson’s actions that he was aware VW was using unethical means to advance so why did he
wait so long? One explanation for the lack of immediate action comes from the fact that
admitting the fault within the vehicles directly violated the orders Johnson received from his
superiors. Further, the culture within the company promoted fear. From other employee
perspectives, it seems VW employees were directly influenced to hide any wrongdoing. This
culture of cheating and lying may have been seen as acceptable within the cooperation;
however, when exposed to public VW employees felt uneasy. This suggests employees knew
the vehicles they were producing contained illegal technology but did not blow the whistle until
later when questioned about irregularities in emissions data. After Johnson’s admission, the
news of the defeat device was released to the public on September 18th. Five days later,
Winterkorn stepped down from the position CEO (Forsgren, 2019).

Corporate Consequences
Initially, Michael Horn America’s VW CEO asserted that the defeat device was created
by a group of rogue engineers. However, the number of managers charged and investigated
suggests many more than a rogue group knew about the defeat device. This widespread
knowledge further exposes the number of employees who did not expose the truth until faced
with criminal charges.
On the corporate side, VW tried to appease the public by recalling the affected vehicles
which totaled to about 11 million cars worldwide (Hotten, 2015). Within the US, consumers were
given the option to trade in their car for cash to get another car. However, in Europe VW insisted
the affected cars could simply have the software tweaked to meet the less rigorous emissions
standards (Phys.org, 2018). Volkswagen reluctance to provide compensation to European
consumers suggests they only sought to meet minimum requirements rather than truly create
clean vehicles. This displays that the true reason VW created the so-called clean diesel engines
was only for marketing purposes not advancing sustainable transportation. Therefore, VW
intentions further created a company culture based on overtaking its main competitor Toyota
rather than truly providing consumers with a clean vehicle.
In 2017, VW was charged by the US Department of Justice and plead guilty to 3 felony
counts: Participating in a conspiracy to violate the Clean Air Act, Obstruction of justice for
destroying documents related to the scheme, and Importing these cars into the US by means of
false statements about vehicles’ compliance with emissions limits (Kennedy, 2017). In the
aftermath of the scandal, it has been reported that VW has paid more than 26 billion euros in
fines and is still under investigation in the UK, Italy, France, South Korea, Canada, and
Germany (Phys.org, 2018).
Further, the scandal had larger impacts on the diesel industry as a whole. Although still
popular in Europe due to a favorable tax regime, the sales of diesels have plummeted.
Additionally, the product is now highly scrutinized (Kool, 2015). Additionally, the discovery of
VW's defeat device has encouraged further investigations into other makers' diesel vehicles. For
example, France is now investigating Renault, Peugeot, and Fiat.