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Corporate Culture at VW Responsible for “Diesel Dupe”

Analyzing the Blame for Emissions Disaster at VW

It's been dubbed the "diesel dupe". Last September, the Environmental Protection Agency (EPA) found  that many VW cars being sold in America had a "defeat device" - or software - in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The German car giant has since admitted cheating emissions tests in the US.

The EPA said in November that it had found the same test-cheating software on additional VW and Audi diesel models and on a Porsche model. The agency said it covered about 10,000 cars sold in the US since the 2014 model year. But, in meetings with the EPA back on November 19 and 20, the company admitted that all model years since 2009 with its 3.0-liter diesel engines contained the software as well. The latest disclosure covers an additional 75,000 vehicles.

"We've totally screwed up," said VW America boss Michael Horn, while the group's chief executive at the time, Martin Winterkorn, said his company had "broken the trust of our customers and the public". Winterkorn resigned as a direct result of the scandal and was replaced by Matthias Müller, the former boss of Porsche.

It will take time for VW to regain the public’s trust, I believe, because the public’s confidence in the VW brand must first be restored before sales can reach their pre-scandal heights. I have my doubts whether VW’s corporate culture can be changed, at least in the short run.

Financially, VW will be recalling millions of cars worldwide and has set aside €6.7bn (about $7.2 bn) to cover costs. That resulted in the company posting its first quarterly loss for 15 years of €2.5bn ($2.7) in late October.

But that's unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards - a maximum fine of about $18bn. Moreover, the costs of possible legal action by car owners and shareholders cannot be estimated with any certainty at this time.

How could this disgraceful act happen to such a heretofore well respected auto company? The answer is the company cultivated a culture of fear and deceit that led to its unethical actions: scare tactics imposed on employees; self-interested decision-making; and a total disregard for the driving public.

Let’s look at VW’s corporate culture. Reports about the incident show that Winterkorn was a demanding boss who didn't like failure. That’s not unheard of in and of itself. Many CEOs are hard charging. But critics say the pressure on managers at VW was unusual, which may go some of the way to explaining the carmaker's crisis. No doubt the pressure was linked to a desire to maximize revenue and produce financial results that met or exceeded financial analysts’ earnings expectations.

It is important to understand that all German companies have two boards: the management board, led by the CEO, runs the business day-to-day, and above it the supervisory board, to which the CEO reports. The supervisory board can hire and fire management board members and must sign off on major strategic decisions.

It has been reported that staff members in engine development felt pressure from the management board to find a cost effective solution to develop clean diesel engines for the US market. Rather than telling VW’s management board the rules could not be adhered to, staff members in engine development decided to push ahead with manipulation, according to a German publication, Sueddeutsche Zeitung.

"Within the company there was a culture of 'we can do everything', so to say something cannot be done, was not acceptable," Sueddeutsche Zeitung said, quoting the VW internal report which included testimony from a staff member who took part in the fraud. "Instead of coming clean to the management board that it cannot be done, it was decided to commit fraud".

Let’s examine the company’s initial reaction after publicly admitting its faux pas. Müller, VW’s current CEO, and Hans Dieter Pötsch, chairman of VW’s supervisory board, admitted publicly that the technological evasion began in 2005, earlier than originally reported. Nine executives were suspended, even though VW maintains that management was not aware of any wrongdoing, and has since said that a small group of engineers was responsible for the breach.

There you go. Blame a few rogue engineers for the failure of management to properly oversee all aspects of its development, production, and sales activities, and for establishing its culture of fear and intimidation. This indicates a lack of integrity by management.

What about seeking out whistleblowers to get to the bottom of the story and prevent wrongdoing going forward? This is an important part of corporate culture. Well, back in November VW said it would not sack workers for what they might reveal, but they might be transferred to other duties, so long as they report to the company by November 30, 2015. Why set a deadline? Is this part of the fear culture at VW?

Ferdinand Piëch, the immensely powerful former chief of VW's supervisory board, has been “credited” with establishing the culture of fear and intimidation. When asked how he managed to achieve a certain level of results he said that he basically gives marching orders to body engineers, stamping people, manufacturing, and executives. In the case of the Golf VW model body fit that was the envy of many in the industry, he explained that he got results by saying, “I am tired of all these lousy body fits. You have six weeks to achieve world-class body fits. I have all your names. If we do not have good body fits in six weeks, I will replace all of you. Thank you for your time today."

Well, it would scare the you know what out of me. But, do the ends justify the means? Is fear and intimidation an ethical long-term strategy or a short-term solution to a larger problem? My guess is such a culture wears down over time as key production people can’t meet expectations, as happened with the emissions devices, and then the company is left picking up the pieces of a failed culture.

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 9, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: