THEORIES OF ETHICS

MM 5001 – Business Ethics, Law and

Sustainability

YP59C

Michael Steven Adrian (29118037)

Lecturer :
Andika Putra Pratama MSM,Ph.D

Master of Business Administration

School of Business and Management
Bandung Institute of Technology
2019
 Volkswagen’s Diesel Emissions Control Scandal

Case Summary

In 2015, the U.S. Environmental Protection Agency (EPA) issued a notice of violation to German
automobile company Volkswagen. The company’s vehicles met emissions standards when tested
in indoor lab environments but failed when tested outside of the lab.

It was reported by EPA that in an ample number of Volkswagen vehicles, sold in worldwide,
a defeat device or software was embedded in diesel engine with the purpose of changing vehicle
performance to improve required result. Volkswagen aimed at pretending that its vehicles follow
emission standards; therefore, conducted emission test in the lab instead of on the roads.

Volkswagen cars were programmed to detect the situation where cars with TDI diesel
engines experience emission test and then take information from brakes, accelerator, and steering.
Subsequently, the program made slight changes to engine setting with the purpose of diminishing
nitrogen oxide level emitted by Volkswagen diesel cars. Volkswagen emission test scandal has
created a dramatic consequences having impact on ample number of authorities.

The defeat device was installed on 482,000 vehicles in the U.S. resulting in a potential
$18billion in fines, penalties, and criminal and civil ligation (Spector & Harder,2015). The
admission also resulted in the resignation of CEO Winterkorn, prompting an apology from its U.S.
President Michael Horn at a contentious U.S congressional subcommitee investigation. Because
of that, the German automaker announced in early October 2015 that it would cease selling diesel-
powered vehicles in the U.S. for tje foreseeable future due to its failure to receive U.S. certification
for carbon emissions standards (Spector & Boston,2015).

By early 2017, VW’s U.S. bill for the emissions scandal posted at $15.3 billion and was
still rising. In all, analysts and researchers estimated the entire U.S. and European settlement
charges and penalties would be a record $50 billion (McGee,2017). The scandal resulted in
Volkswagen reporting its largest ever annual loss in 2015, with the prospects for 2016 equally
gloomy. The scandal also caused VW’s stock to lose 35% of its value in the week following the
announcement with a continued underperformance months afterward.
Factor Driving VW’s Emission Scandal

 Ambitious Revenue and Vehicle Goals

Volkswagen struggled to remain profitable under Winterkorn and Mullers leadership. VW had
been plauged with high labor and manufacturing costs, an excess of unprofitable or low margin
cars, too many brands and models, and unbrindled spending as it raced to overtake Toyota and
GM in sales and profitability. VW’s trouble only multiplied with fluctuating currency exchange
rates and significantly higher operating costs – particularly in Germany – compared to its arch
rivals Toyota and GM.

 High Labor and Manufacturing Costs

Early attempts at rationalizing and restructuring VW labor and manufacturing costs did not
produce the desired resluts. VW manufacturing plants also made most of its parts as separate
component units for each of its 12 brands. Previous plans to consolidate manufacturing plants
and add more efficiency to its development and manufacturing of components were blocked by
strong work councils and board members, particularly the State of Lower Sacxony. Cost cutting
efforts included job reductions, internal and external biddings across its internal component
manufacturers, and outsourcing more components to external suppliers. VW required cost
reductions to boost profitability due to the astronomical material cost at VW plants, rising from
€80 billion in 2010 to €144billion in 2015 (Smith&Parloff,2016).

 The Volkswagen Group’s System

The emission scandal revealed a complete system failure, accoring to Richard Milne. He blames
the emissions scandal on the VW System, a structure that fosters a dysfunctional culture in which
company ploticis block real change. VW’s Board of Directors, unlike U.S. companies, operates
under the principle of co-determination. For local politicans, the union, and Saxony, the VW
System proved crucial for protecting jobs. For investor and non-workers, critics claimed the
Board had no independent outside members. They also cotended that the Board was dominated
by family ownership intertwined with a complex company culture and structure making it
difficult for members to exercise their fiduciary responsibilities.
Case Analysis

There are 4 Theorities of Ethics occured in this case :

 Deontoligical Ethics

This ethics is based on the rightness or wrongness of the actions themselves, inherent in the
actions themselves. According to this case, Volkswagen lie to customer espicially Volkswagen’s
shareholders to protect the company’s reputation. At that time, VW engineers experienced
difficulty in developing a diesel powered engine that could deliver on both its carbon emmissions
and MPG (miles per gallon) efficiency goals.

Early attempts at rationalizing and restructuring VW labor and manufacturing costs did
not produce the desired results that making Volkswagen spending high labor and production
costs. If Volkswagen did not lie, the company will loss its profit, and it will harm its
shareholders. Muller infuriated U.S. regulators when he stated in a National Public Radio
Interview that the emission testing software installed in the U.S. cars was an honest mistaked. He
blame technical error and stating, “We had not the right interpretation of American Law.. We
didn’t lie”.”We didn’t understand the question first”.

 Consequentialism-Utilitarianism

This ethics is based on the consequences of one’s action and/or the utility of the actions.
According to this case, VW carries out cost-cutting efforts including reducing work, internal and
external offers across its internal component manufacturers, and outsourcing more components
to external suppliers. VW needs a reduction in costs to increase the company’s profitability.

 Ethical Egoism

This ethics is based on reasonable self-interest. According to this case, Martin Winterkorn as
CEO of Volkswagen Group have ambitious sales goals to become the number one global brand
in total units and revenues. The cheating scandal may have been prompted by cost pressure at
home and abroad in the U.S, and also prompted by his amibitous goals.

 Stakeholder Theory

This ethics is based on consideration of multiple stakeholders.

Four Uses of Stakeholder Theory
1. Descriptive Use (stakeholders to identify and research)
2. Instrumental Use (stakeholders as instruments to achieve organizational goals)
3. Normative Use (stakeholders having intrinsic value)
4. Managerial Use (stakeholders to be taken to account when making decisions)

Instrumental Use

There are several parties involved like BoscH (supplier of defeat device), Winterkorn (Former
CEO of Volkswagen Group), senior engineers Ulrich hackenberg, Audi’s chief engineer; etc.

Managerial Use

Volkswagen’s politic in higher-ups has bad influence toward the company (Board of Director).
The Board of Director was dominated by family ownership intertwined with a complex company
culture and structure making it difficult for members to exercise their fiduciary responsibilities

 Divine Command Theory

This ethics based on what God commands human beings to do. The divine command theory says
that an act is moral if it follows the command of God. God's commands dictate right and
wrong—what He says to do is right, and what He says not to do is wrong. According to this case,

o VW will causing the global warming effect,

God requires us “to do justice, to love mercy, and to walk humbly…” Because we of the
industrialized nations created the increase of greenhouse gases, and because global
warming will affect the world’s poorest communities with much more severity, we have a
special responsibility to do something about it.

o VW lying and cheating to public about a defeat device or software was embedded in
diesel engine with the purpose of changing vehicle performance to improve required
result.
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