BUSINESS ETHICS

BGS:ERB
Term 3, Session 14
March 2nd, 2023
Bad management theories are destroying good
management practices

• Why do we feel surprised by Enron, Global

Crossing, Tyco who granted themselves
excessive stock options?
• Propagating amoral theories, business schools
have actively freed their students from any
sense of moral responsibility
• Social scientists carry an even greater social and
moral responsibility than those who work in the
physical sciences because if they hide ideology in
the pretense of science, they can cause much
more harm
• From pretense to the substance of knowledge
• The role of business school governors is more of
stewardship – involved, supporting, and
challenging rather than detached and controlling
Business Ethics: The Next Frontier for Globalizing Indian
Companies
D V R Seshadri, Achal Raghavan, and Shobitha Hegde

• The fast-changing nature of the global business

landscape is the most perceptible than on the
ethics front- thus they have become risk averse
on ethics front
• No Indian company that hopes to globalise can
afford to ignore these changes
• Business ethics encompasses much more than
mere compliance with laws and regulations.
• Research suggests that it makes good long-term
business sense to be ethical.
• Globalizing Indian companies essentially have two options.
– Reactive: wait for the tightening of regulatory and societal screws on
them
– Proactive: proactively herald the new era of business ethics by
becoming torch bearers of the new order of things.
• It’s in the organization’s interest to be proactive in this
• Steps that Indian Companies Must Take to Develop An Ethics Policy
– Establishing a code of ethics
– The code is contemporary.
– Communicating the code
– The company leadership adheres to the highest ethical
standards.
– Going public with the ethics statements
– Establishing robust processes for handling ethical issues
– Providing support structures
– Reviewing the codes
Obedience to Authority

• Stanley Milgram Experiment

Milgram Obedience Study

Milgram started his experiments in 1961, shortly after the trial of the World
War II criminal Adolph Eichmann had begun. Eichmann’s defense that he was
simply following instructions when he ordered the deaths of millions of Jews
roused Milgram’s interest.
In his 1974 book Obedience to Authority, Milgram posed the question, "Could
it be that Eichmann and his million accomplices in the Holocaust were just
following orders? Could we call them all accomplices?“

"Ordinary people, simply doing their jobs, and without any particular
hostility on their part, can become agents in a terrible destructive process.
Moreover, even when the destructive effects of their work become patently
clear, and they are asked to carry out actions incompatible with
fundamental standards of morality, relatively few people have the resources
needed to resist authority" (Milgram, 1974).

http://psychology.about.com/od/historyofpsychology/a/milgram.
Lecture 17 & 18 htm
What lessons can one draw from it?

• Question the authority's legitimacy.

• Is this something I would do of my own

accord?

• Don't even start to comply with commands

you feel even slightly uneasy about
Dirty-Hands Problem

“characterizes right-versus-right dilemmas as

“dirty-hands problems,” where managers often
have to “get their hands dirty” by making tough
choices between competing virtues such as
honesty, fairness, respect, objectivity, and
responsibility.” (Christensen & Boneck 2010)
Kinds of dilemmas

• Right vs. wrong

• Right vs. right

• Legal / ethical & illegal / unethical

Example 1:

• A young analyst, Sheela, is suddenly invited to attend an

offshore prospective client meeting. She is surprised as it
was clear company policy not to have young analysts
attend presentations – due to lack of experience.
• She finds out that her presence is required to signal
inclusion and diversity to the client who values such efforts.
• The senior member who normally would have attended is
busy on that day. Hence, the request to Sheela. If she
cannot, the senior member will make adjustments to her
schedule.
• Sheela is conflicted on several grounds -- what should she
do?
Example 2:

• Abdul heads a marketing dept of Micro, distributor of computer

products. He reports to the VP, oversees 50 employees including 3
senior managers who report to him directly.
• It is an insanely busy time at work; everyone is putting in 10-12
hours and this is expected for another 6 months at least.
• One of his senior manager, Lisa, who is excellent, hard working and
produces great results wants Abdul to fire Sundari as she is not
pulling her weight adequately.
• Sundari had joined 3 months ago, was very good at her work,
putting in long hours (not as much as Lisa) due to her being a single
parent with a young child. Lisa knew the situation and was
frustrated because Sundari was constantly behind schedule.
• Lisa is waiting for a green signal from Abdul. What should Abdul do?
Diesel gate: heavy fumes exhausting the Volkswagen
group

• Installed software in diesel engines to rig the

test stand to pass emission standards (activate
TDI to control emission during tests)
• Across brands, about 11 million of its diesel
vehicles worldwide were discovered to have
the cheating device installed
• Emitting while on the road as much as 40
times the level of nitrogen oxide and dioxide
(NOx)
• In 2008, VW found itself a unique position in the
market with its clean-diesel technology, which it
claimed could meet US emission standards.
• It claimed that this breakthrough technology was able
to reduce emissions and trap and destroy residual NOx
pollutants without sacrificing vehicle performance.
• Instead of installing the costly and clunky treatment
system used by others in the industry, VW diesel
engines could fit in small, affordable cars.
• This technology had since then enabled VW to account
for majority of the US demand for diesel cars
Corporate Social Responsibility
• Group’s Strategy 2018 set the goal of becoming “the most
successful, fascinating and sustainable automobile manufacturer in
the world by 2018,” while simultaneously aiming to achieve
economic, social and environmental sustainability.
• In the 1970s, the Group had already engaged in promoting
education and health at its sites in less-developed regions, such as
Brazil and South Africa.
• The Group had been involved in the United Nations’ Global
Compact since 2002, supporting sustainable and inclusive global
economy.
• A CSR (Corporate Social Responsibility) and Sustainability steering
group, had been set up since 2006 to facilitate strategic planning of
CSR activities (e.g., community-infrastructure development
projects, health-promotion projects).
• In 2009, a Group-wide CSR Committee was formed to strengthen
regular interaction with the CSR coordinators of its brands and
different regions
• To support the Group’s Environmental Policy, an energy
management system was established in 2010 to enhance the
environmental efficiency of its products.
• Following the internationally recognized 2009 GRI (Global Reporting
Initiatives) guidelines, the Group’s sustainability reports disclosed
impressive data on performance indicators related to social (e.g.,
local community engagement and employee compliance training)
and environmental performance (e.g., energy consumption and
CO2 emissions) aspects.
• Over the years, the Group had received several sustainability and
environmental awards from external independent parties,
including, in 2014, the recent “Gold Medal Award for Sustainable
Development” from the US-based non-profit World Environment
Center for its contribution to sustainable development and
environmentally conscious business practices.
• VW was ranked by the Reputation Institute, a
world-leading reputation research firm, as
being a top ten “Global CSR Reputation
Winner” in 2014, reflecting its outstanding
performance in citizenship, governance and
workplace practice.
• It was awarded Governance Best Practices.
Some questions

• Why would a leading corporation in social

responsibility, link itself to such a scam?
• What are the causes of such corporate
misbehavior?
• Had VW responded to the crisis well enough?
– What else it should have done?
• How should VW ensure that crisis of similar
nature doesn’t occur in the future.
Leadership

• Ferdinand Piëch, the Chairman and Chief Executive Officer

(CEO) of VW Group since 1993. He retained the position of
CEO until 2002.
• Piëch was known for his aggressive approach to growing
VW on the world stage. One of the technologies Piëch
promoted was turbocharged direct injection (TDI), which
was VW’s trademark technology for diesel engines. The
technology was claimed to significantly improve diesel’s
practicality for passenger cars.
• Under his leadership, he set the goal for VW to become the
world’s top automaker by sales and outplay its long-time
rivals, General Motors and Toyota. He was known for his
toughness and willingness to demote or dismiss
underperforming employees.
• Martin Winterkorn, became CEO of VW in 2007, adopted an
aggressive, demanding leadership style, and would not accept
failure, was often seen as Piëch’s executive hand.
• One of Winterkorn’s initiatives was the introduction of the MQB
(modular transverse toolkit) platform, which allowed different
models of its various automobile brands to be built from a large
proportion of shared components, thereby in principle reducing
development costs, driving up profit and increasing design flexibility
in the rest of the car.
• Winterkorn formulated an aggressive plan for the Group, Strategy
2018 (coined “Mach 18”), aiming to make VW not only the highest-
selling automaker in the world, but more profitable than before.
• He envisioned VW producing 10 million vehicles worldwide
annually by 2018
• He was even more ambitious in the US market, targeting one
million unit sales annually by 2018, triple the 2008 volume.
Media Reports

• Winterkorn had made a promise in an auto show in 2012 that CO2

emissions from the company's vehicles would be 30% lower by
2015 compared to 2006. Such a goal was viewed as impossible
within legal means by VW engineers, but they were afraid of not
meeting expectations, and decided to rig the tests and compiled
data with no relation to real-life results into official reports for use-
of-type approvals and vehicle-tax calculations.
• Since Germany's Federal Motor Transport Authority relied on data
provided by manufacturers' own tests, VW got away with it.
• Confessing engineers also told the media that they had doctored
CO2 emissions tests in several ways, including using artificially high
tire pressures and mixing diesel fuel into engine oil to improve fuel-
economy figures.
• Another German magazine reported that VW was well-
known for its culture of “anticipatory obedience”
(vorauseilender Gehorsam). "In that system, one isn't
obedient -- and worthy of being promoted -- if one simply
follows orders.
• You obey by not having to have explained what the guys on
top desire."
• Many company departments, especially the sales
department, were said to have worked in a climate of fear.
• Some former VW executives interviewed by media also
described the top management style within the company
as authoritarian.
• By combining the risk-management, internal-control and compliance
management systems, the Group adopted a single governance, risk and
compliance strategy to ensure all potential risk areas were covered.
• The Group declared itself to have continually complied with the German
Corporate Governance Code, as required by the German Stock
Corporation Act, with some exceptions. For example, the self-regulated
governance code required the independence of the Audit Committee
Chairman, but the Group expressed ambiguity about the meaning of
independence and believed that it “did not constitute a conflict of interest
or impair the Audit Committee Chairman’s ability to perform his duties,”
even with the possible absence of independence in this aspect.
• Based on the goals set out in “Mach 18,” internal management was based
on seven core performance indicators: 1) deliveries to customers; 2) sales
revenue; 3) operating profit; 4) operating return on sales; 5) capital
expenditure/sales revenue in the automotive division, 6) net cash flow in
the automotive division; and 7) return on investment in the automotive
division.
• Reuters cited two German newspapers in reporting
that VW’s supervisory board had received internal
reports from a VW supplier and a VW employee as
early as 2007 and 2011 to warn the company about the
software designed to cheat emissions testing. However,
the matter was not addressed then.
• In February 2016, the German media once again
revealed that VW’s internal memos and emails
suggested that senior executives knew about the
cheating in early 2014, long before they admitted it to
regulators. The news was confirmed by the New York
Times, which had reviewed the documents.
Widening of Scandal

• VW further received a notice from the USEPA and CARB in early

November 2015 that certain 3.0L V6 engines were also found to
have the defeat devices.
• Six more models were affected, including the 2014 Volkswagen
Touareg, 2015 Porsche Cayenne SUV, 2016 Audi A6 and A8 sedan,
A7 hatchback and Q5 SUV.
• Even though VW expressed confusion over the allegation about
these six models, which VW claimed to be legal, it instructed
dealers to stop selling them.
• With at least 10,000 vehicles affected, such a revelation also meant
that VW might face an extra US$375 million in penalties in addition
to US$18 billion if found guilty.
• As the Porsche model was caught up in the diesel scam, Mueller,
the former Porsche executive, faced questions about his credibility
in cleaning up the VW Group.
• While Mueller expressed his determination to
change the culture within VW during the
December press conference, in a media interview
in January 2016, he was quoted as disagreeing
that there was ethical problem within the
company and said this was rather a technical
problem and misinterpretation of US law.
• On the next day, Mueller requested a do-over and
apologized for mishandling the situation the
evening before. He once again admitted the
violation and apologized to all stakeholders.
Group’s Response

• Group outlined a five-step plan to remedy the crisis:

– Conducting a worldwide probe to find out how the
problem occurred and to hold responsible parties
accountable
– Reassuring the public the vehicles were safe to drive
– Developing fixes for all affected vehicles that used the 2.0-
liter diesel engine.
– Reviewing VW's compliance, processes and standards, and
adopting preventive measures
– Adopting regular and open communication systems with
customers, dealers, employees and the public, including
designated hotline, website, and letters to each affected
customer
Impact

• Almost 80 years of proud VW history went up

in flames
• The Group’s US sales fell 24.7% for the month
of November, after the US$2000 loyalty bonus
expired.
• Being the market leader in Europe for over
two decades, the core VW brand market share
in the region tumbled from 13.5% in
November 2014 to 12.2% in November 2015
• Overall in 2015, VW Group reported a decline
of 2% in its worldwide deliveries, falling from
10.1 million in 2014 to 9.9 million.
• Toyota regained the world’s top seller status.
• The Group was expected to suffer a slowdown
in future vehicle sales—not to mention the
possible impact of its tainted reputation on its
future sales worldwide.
• On January 4, 2016, the USEPA announced it had filed a lawsuit
against VW for polluting the air illegally. VW also faced a record-
breaking lawsuit from investors for €40 billion in losses due to the
scandal.
• While VW’s solution of fixing the affected cars across Europe had
been approved by European regulators, American VW owners were
still operating vehicles that emitted 40 times over the limit. As
USEPA was pushing VW for an acceptable solution, there was news
that VW might have to buy back at least 115,000 diesel cars in the
USA (one-fifth of the 580,000 cars affected there, including Porsche
and Audi), or offer a new car to affected American owners at
significantly reduced prices.
• The USEPA might make VW produce electric cars in its US factories
as part of the settlement agreement, and help build a network of
electric-vehicle recharging stations in the country.
• As some European countries, such as Germany and Britain, set vehicle tax
rates according to their CO2 emissions, vehicles with lower CO2 emissions
contributed lesser tax. Therefore, if VW rigged the CO2 tests, it would
need to repay governments and affected car owners for misstating the
vehicles’ fuel economy.
• VW estimated the cost of the CO2 problem was €2 billion, while market
analysts believed the total in fines and lost sales could be much more.
• The widespread scandal also prompted Moody's Investors Service to
downgrade VW's debt rating, making it more costly for the company to
borrow money.
• The Group recorded a third quarter operating loss of €3.5 billion, and it set
aside a total of €6.7 billion to cover costs related to the diesel and CO2
scandal. This was its first quarterly operating loss for 15 years.
• Mueller told the media that VW would have recorded a profit of €3.2
billion if the scandal had not happened.
• As of 1 June 2020, the scandal had cost VW $33.3 billion in fines,
penalties, financial settlements and buyback costs
Apple iPhone: national security vs. privacy

• Tim Cook challenged US Federal Court order

to assist FBI to access encrypted data on an
Apple iPhone (2016).
https://www.wsj.com/video/tim-cook-defends-
apple-encryption-policy/7EA9F3A9-2502-4169-
A187-09CABF33DDCA.html
HTTPS://WWW.YOUTUBE.COM/WA
TCH?V=ZJVX5ZQ7BXG
Housekeeping

• Presentations:
– March 15 and 16
– 12 min approx per group (6 groups per session)
– Random order
– Who presents?
• Report due: 30th March 2024, Moodle
submission.
– 30% weightage
Presentation

• Problem statement
• Why is it important from a BGS perspective?
• Background – secondary research, lit review
etc
• Methods
• Preliminary findings, analyses,
End Term

• Case-based
• 72 hour window to go through the case
• 35% weightage
• Exam on 20th March 2024
• 2 hours exam starting at 10 am
THANK YOU