Background of the Volkswagen Emissions Scandal

The Volkswagen emissions scandal is also known as “emissionsgate” or “dieselgate”, and this scandal is initiated in September 2015, when notice is issued by the United States Environmental Protection Agency (EPA) German automaker Volkswagen Group for the contravention of provisions of Clean Air Act. Agency further stated that group used program named as Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines for the purpose of activating their emission controls only at the time of testing of emissions in laboratory. This program is deploy in almost eleven million cars worldwide, and 500,000 in the United States during the period of 2009 to 2015.

In other words, EPA detect defeat device in number of VW cars sold in America, and this software is installed in diesel engines which is detected at the time of testing and because of this software performance is changed as per the better results. The German car giant has sine admitted cheating emissions test in America.

During the period of 2014, California Air Resources Board (CARB) initiates study on emissions inconsistencies between the models of US and European vehicles from the International Council on Clean Transportation (ICCT). In this study they collect the data related to 15 vehicles from three different sources. For this purpose 5 scientists working at West Virginia University conduct live tests and detect additional emissions while testing two out of three diesel cars.

Structure of this paper includes three sections; first section defines the global economic, social and environmental consequences because of the scandal. Second section evaluates the impact of scandal on the interpretation of “corporate social responsibility. Third section of the paper defines the combination of inadequate corporate governance and poor ethical management behavior because of which this scandal happen. Lastly, paper is concluded with brief conclusion

In US, EPA stated that air includes high concentration of NO2 which result in different health problems.

In UK, relevant authority stated that issues related to specific matter in context of emission has been result in reduction of expectation of life in the UK by six months. This department further report that death rate in UK is 4% higher because of the NOx pollution, and this result in 23,500 extra deaths per year (VW Emission action, 2016).

Recent study conducted by Environmental Research Letters stated environmental consequences of this scandal, and as per this research team almost 2.6 million exaggeratedvehicles are sell in Germany. Generally, nitrogen oxides released from the car engines and combine with other pollutants in air, and when this air is consumed by the humans it results in cardiopulmonary and respiratory issues in the body. Pollution does not recognize any boundary, and health issues because of the emissions cross the boundaries of Europe and result in other 700 early deaths in other countries. Research team gets this result by combing the data available on German driving habits on-road emissions, and atmospheric conditions. In fact, excess of emission results in more severe public health effects in Europe as compared to U.S.

Global Consequences of the Scandal

Same research team previously conduct one study, and as per this study almost482,000 compromised cars sold in the U.S and because of these cars almost 60 premature deaths happen between the period of 2008 and 2015. However, in this study authors further stated that number of VW cars sold in Germany is 440 percent higher in comparison of VW cars sold in U.S and this means German drive VW cars 20% more in comparison of U.S. drivers. In Europe, combination of atmospheric conditions and its higher population density make the conditions more severe and increase the effects of pollutants. This team further stated that, each and every unit of nitrogen oxides released in Europe caused 5time more number of premature mortalities in comparison of U.S (Wheeling, 2017).

While proposing the regulations related to air quality, analysis is conducted by EPA for the purpose of assessing the advantages of improvements in air quality. The regulations provide the advantage of reducing the damages result from the pollution. Team further stated if reduction of pollution save money then adding a unit of pollution spends the money.

There are number of economic researchers who conduct studies in context of expressing health damages caused because of the air pollution and other risks related to the environment in dollar terms. One section of this considers the amount spends for illness that includes cost of treating the illness and it also includes the loss of time at work because of that illness (Selin, 2015).

While making efforts for the purpose of monetize the health impacts can be controversial in nature, and for this EPA used the method of value of Statistical Life (VSL) to determine the economic effects of burden related to health. In this willingness of individuals is measured to pay for the purpose of avoiding the risk of deaths. Current approximation of VSL for every year is almost $9 million (Hermes, 2017)

These assumptions are used by BenMAP for determining the financial guesses related to burden on health because of the air pollution. The study conducted by EPA already used BenMAP for determining the value of the health problems released from on road sources at $7,300 by using its estimates related to VSL.

Recently, wider automotive sector does not perform well in the market, and the main reason behind this is the spillover into the European market, and it also affects because of the future of diesel for the industry and the car sales in general (MacLennann, 2015).

Impacts on Corporate Social Responsibility

Volkswagen not only affects the climate and economy, but it also affects the society in adverse manner. It is very difficult to attach the exact figure of the health damage result from the Volkswagen scandal. But knowledge related to NOx in the climate is clear and every excess amount of NOx result in harmful effects on the health of the people and this result in high cost to the society.

Recent similar high profile case is defective air bags which result in eight known deaths. While impact on health evaluation is not able to identify the particular affected individuals, and the lives of people reduced because of the actions of Volkswagen and those also whose health is affected are the real fatalities.

Any postponement from the VW side in addressing this issue may result in more deaths each year, but the good news in this regard is that when this problem is solved, air pollution and health of individuals get better (Politico, 2015).

In other words, CSR reporting is used as tool by the organizations for the purpose of building positive image in the public. There are many other circulating concerns which usually stated the engagement in activities which validate these criticisms, and the recent example for this is the scandal of Volkswagen. This scandal can be considered as good example of difference between the reality and the reporting. In 2015, EPA discovered defeat device in various cars of Volkswagen in America and this device is located in the diesel engines and detected at the time of testing. These devices change the performance of vehicles in context of improve NOx emissions levels (Hotten 2015; Dubbink, Graafland, Liedekerke, 2008)). Volkswagen admitted that there are number of cars worldwide were equipped with this software (Russell 2015; Dudovskiy, 2012).

This emission scandal is considered as disturbing and high profile case of CSR fraud and this fraud affects various stakeholders such as customers, governments, society, community, etc. The effects of this scandal are long lasting. Because of this scandal, Volkswagen group also face severe consequences as market value of the company dropped by 23% in September 2015. A sale of the company in U.S. alone is reduced by 25% almost in the period of November 2015. The projected cost related to this scandal is more than$8 billion. However, it is problematic to determine the damages occurred to the company in long run such as undesirable impact on the organization and reputation of the company, satisfaction of customer, employee morality and loyalty, and confidence of investor. Once trust is lost, it is hard to regain the trust.

Corporate Governance and Poor Ethical Management Behavior

Some external effects are also there such as this scandal not only destroy the reputation of Volkswagen but also destroy thereputation of other automakers and even corporations in unrelated industries but they also breach the public trust in the corporations (Ewing & Mouawad, 2015).

This organization provides important lesson regarding the approach of business in terms of CSR approach. Cheating stakeholders by misrepresenting them in context of CSR activities never provide in positive results for the company or for the society. However, it results in heavy cost for the organization. Various researches are conducted in this context and these researches stated that value for business is only created when CSR activities are included in the culture and main strategies of the company. When company follows the approach of CSR, then it provides various benefits to the company such as positive reputation, customer satisfaction, higher employee morals, and profitability in the organization. It is also beneficial for society, as serves the organization as good example for others (Zhakypova, 2016).

There is clear requirement of corporate governance in the organization and VW scandal is the clear evidence of this fact. This scandal clearly shows that the lack of the appropriate control system results in the failure of management to ensure appropriate interest of the shareholders. In this case, it is clear that organization has defective system of checks and balances and because of which management system prevailed (Financial times, 2017).

There are number of experts who raise doubts on the corporate structure of VW, and this can be understood through example, corporate Governance quality index is developed by the MSIC and this index asses the profitability of the company on the basis of sustainability of CG structures. In this context score of VW is very less in comparison of one of its competitors.

Sustainability in context of current economy stands for ability of the organizations to solve the issues related to the climate and other issues faced by human beings. Corporate Social responsibility and sustainability mainly referred as CSR and it includes power of the business organizations to improve the conditions of environment and society. This concept is considered as biggest and most important obligations of business management and other stakeholders of the organization, and this obligation is the central approach of CSR (Maguire 2011). However, sometimes this concept is considered as week concept (Okoye 2010), but it mainly ensures that activities of the organization conduct in more responsible manner (Nwagbara and Reid 2013).

Lessons for Corporate Social Responsibility, Governance, and Control Systems

Agency theory is part of the biggest topic of CG and it mainly includes the issues related to the directors while controlling the company at the same time when company is owned by the shareholders. In context of CG, it must be noted that if company is owned and managed by same people then dedication of work is more (Kaplan, n.d.). Any different in the shareholding and ownership creates conflict of interest between the two and this conflict is the most serious topic which must be considered in CG. This theory states that directors of the VW must work as the agent of the shareholders and interest of the shareholders must be in their top list.

VW followed rules based CG but there is need to follow the principle based CG which defines the principles on the basis of ethical standards and law. Principle approach of CG provides more certain approach to the directors and it automatically creates the link between the corporate governance structure and CSR activities of the organization. It is possible for organizations to improve their business practices by indulging in different social obligations, and it also helps the organization to improve their profit earning activities. Now, organizations conduct their activities responsibly and also report their CSR activities to their stakeholders through different reports. There are number of organizations which inform their stakeholders in context of performance related to social and environmental issues through different reports or through websites (Herzig and Schaltegger 2011). For this purpose, there must be accurate monitoring system which continuously monitors the activities of the agent (Kaplan, n.d.).

VW follows the one tier board structure because of which monitoring of board activities is not possible and it also reduce the efficiency of the board. It is necessary for VW to opt for two tier board structure in the organization because it creates different levels of the board and ensure effective management in the organization.( OECD, n.d.)

Two tier includes different levels such as general manager who is directed by the supervisory board and supervisory board is directed by the management board.  This type of structure also includes the executive and non-executive directors of the company. While structuring the board following factors must be considered by the organization:

There must be executive and non-executive directors, and non-executive directors must meet on continuous basis for the purpose of ensuring effective and efficient governance structure in the organization (Valmec, n.d.).

Directors of the organization must possess the knowledge related to proper governance because it helps the director in ensuring good CG approach in the organization.

There must not be any family domination in the organization because increase the chances of fraud in the organization.

It can be said that Volkswagen save itself from scandal but actions of the company still are not adequate. Management of VWmust learn lesson from previous cases such as Nike already bear public distrust and boycotts from consumers because of its sweatshop labor practices, but this company is considered as greatest image turnarounds. Code of conduct is established by NIK for its labor practices and they hire external professionals for the purpose of auditing its suppliers, and increased transparency of its labor practices by providing its performance in its annual corporate social responsibility reports. Therefore, it is necessary for the organization to establish such code of conduct which ensures effective governance structure in the organization.

If Volkswagen wants to restructure its image after this scandal then it is necessary for organization to act decisively. Volkswagen must take whole accountability as an organization and not like individual group. Company must prepare credible plan for reducing the emission and for fulfilling its obligation to compliance with regulatory standards(Du & Sands, 2016).

Reasons behind this Volkswagen scandal are not clear yet and this section of the report states the reasons because of which organization is able to commit this scandal. For the purpose of conducting internal investigation, US law firm Jones Day conduct this investigation and results of this investigation is published in the fourth quarter of 2016. Official line of VW for this purpose is that this was the result of the actions of a few engineers and programmers. However, this device is installed in large number of vehicles from last seven years and it seems that senior management is involved in this scandal.

Whether, this scandal is the result of rogue technicians or management inaction, but it seems that they are motivated by the management of the company. Competitors of VW are selling diesel cars into the US market such as BMW and Mercedes, and they adopt more advanced technology for the purpose of cleansing the diesel fumes of particulates and Nitrous Oxide, known as urea filtering. By choosing not to license this technology from Mercedes, it is estimated by analysts that VW could have saved almost $4.8bn (Gorgen, 2012).

This sum is large but very less in comparison of losses occurred to the company because of this scandal. VW faces a number of legal proceedings across the globe. Details related to estimated quantum provided in late April from VW’s 2015 Annual Report and it also published the announcement of an agreement in principle regarding a settlement with US authorities and also with the class action lawyers. In this agreement VW agreed to repair or buy back the cars sold in the US with the illegal software, and also to pay additional compensation to the purchasers. There are many uncertainties in context of liability, and the agreement also covers the civil litigation in the US. Additionally, US Department of Justice has opened a criminal investigation, and civil, criminal and/or administrative actions initiated in different countries against the VW.

Announcement is made in the Annual Report 2015 regarding the totaling of the provisions, and as per this announcement almost €16.4 billion spends for the clean-up and legal costs, which also include €7.0 billion for “legal risks” and a further €1 billion ($1.2 billion) for contingent liabilities. VW also recall their products in the EU.

Therefore, it can be said that this scandal is not just a mistake but it is the result of unethical practices conducted by the management of the organization (Solomon, 2013).

It is also necessary for the investors of the company to evaluate all necessary aspects of the company before making any investment in the company because it not only protects the investors’ interest but also protect the interest of the society and encourage the company to follow ethical approach in future.

Conclusion:

After considering the above facts, it can be said that Volkswagen scandal is the important lesson for all the organizations who are conducting their activities for the purpose of earning profit. This scandal results in various consequences not only for organization but also for other stakeholders such as for government, consumer, shareholders, society, etc. it affects the complete automaker industry and also result in public distrust in the corporates.

It is considered as important lesson regarding the approach of business in terms of social responsibility and sustainability approach. Deceiving stakeholders by misrepresenting them in   context of CSR activities never provide positive results for the company or for the society. Business value is created when social responsibility and sustainability are included in the culture and main strategies of the company. When company follows the approach of CSR, then it provides various benefits to the company such as positive reputation, customer satisfaction, higher employee morals, and profitability in the organization.

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