Corporate governance and ethics are interrelated concepts, closely connected in terms of their significance to effective and environmentally friendly operations of any company, as well as the complexity and ambiguity of the terms themselves. When speaking of the environment of operation, it is critical to understand that this goes beyond the natural environment; this concept instead incorporates several vital constituents, including political, legal, social, and economic environments.
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Therefore, ethics and corporate governance determine whether an organisation or company is designed and driven in a way that does correspond with the requirements of these environments and does not violate their wholeness. Nevertheless, regardless of the importance of developing adequate corporate governance mechanisms and adhering to ethical principles, numerous scandals have been reported related to failing to follow the established rules of play and seeking ways to avoid the laws of the systems.
Some discrepancies go unnoticed due to the insignificant scope of company’s activities, while others are impressive – even astounding. The main objective of this paper is to review several corporate governances and ethical issues belonging to the second category – those that garner special attention because the company itself maintain high visibility in the international business environment. The company under consideration here is Volkswagen, known for several critical ethical issues.
Before identifying main corporate governance and ethical challenges faced by Volkswagen, as well as strategies deployed by the company to cope with them, it is essential to understand the concepts of corporate governance and ethics because they are foundational to the planned analysis. Corporate governance is an individually developed system that aims to control and direct the activities of a specific company or corporate organisation.
It involves all procedures, laws, practices and even internal and external institutions that affect the operation of the company and may be used to help shape and manage activities and to drive corporate development. At the same time, corporate governance is commonly associated with management of the company that is perceived as the function of the organisation’s board and the connection between external and internal stakeholders, as well as the unique bonds held with company shareholders.
As a complex concept with several dimensions, corporate governance can be viewed from two specific perspectives, namely a narrow and a broad approach to defining the concept. According to the narrow approach, corporate governance is perceived as a set of procedures and activities for governing the company in order to remain accountable to major shareholders’ interests (Zenzo & Howell 2006). In this case, a company’s corporate governance performance is analysed through the bonds with shareholders, toward managing to wholly satisfy their needs and to meet their interests.
The broad approach, on the other hand, reaches beyond relations with shareholders, even though this aspect is critical and definitely still considered when developing frameworks for management and accountability (Mallin 2016). In this case, additional attention is paid to accountability to internal and external stakeholders, society as a whole and even to future generations. It means that according to the broad approach to corporate governance, companies, and enterprises are held responsible for all their activities that affect people and should act appropriately in order to contribute to improving overall societal and communal well being, instead of downgrading it.
Another concept under consideration is ethics. This concept is, of course, ambiguous. It depends on the individual perception of the world and on company operations. Nevertheless, there are several generally acknowledged ideas regarding the concept. To start, ethics determine the way people to react to particular activities. Even though these reactions are emotional, they are based on both the objective and subjective idea of what is right and what is wrong—what is good versus evil.
These concepts are commonly homogenous in separate societies or social groups. However, they differ when viewed from different theoretical approaches to defining ethics. In this way, the two concepts mentioned above will be viewed from different perspectives in order to analyse issues faced by Volkswagen that are commonly raised in media and serve as matters for criticising the company’s activities and corporate governance decisions.
Identifying Primary Ethical and Corporate Governance Issues
As mentioned above, the company selected for the given analysis is Volkswagen. The rationale for making this choice is the fact that the media commonly criticises this organisation for making unethical decisions in carrying out its business activities, each of which can be reviewed from the perspective of different constituents of environment mentioned above, as well as several theoretical approaches to corporate governance and ethics. For these reasons, this company choice proves appropriate.
Diesel Emission Scandal
In the case of the selected company, there are several issues to consider. The first one is the recent scandal regarding lies about gas emissions in the atmosphere. To introduce the challenge, it is essential to point to the fact that Volkswagen cars, just like most of the modern cars defined as environmentally friendly, are technologically developed in a way to signal when gas emissions exceed the established level.
It is achieved by setting up a specially designed technical device that calculates the volume of emissions. The device and measurement are used during the tests in order to check on whether automobiles are environmentally friendly (that is, they do not send undesirable gas emissions into the atmosphere and thereby pose a significant negative impact on the natural environment). At the same time, these devices are among the car components offered to customers so that they know just exactly how their vehicle impacts the natural environment.
This device functions on various levels in response to embedded software. The novelty is becoming increasingly popular, especially keeping in mind that environmental awareness – the so-called green awareness – is one major recent trend in the global business environment that greatly affects customer choice. In particular, people tend to choose environmentally friendly products when they have the option to do so.
Returning to the case of Volkswagen, it was revealed that the incorporated software did not represent truthful information about the volume of gas emissions (5 questions about VW’s lies 2015). It means that Volkswagen lied to the public, saying their cars were environmentally friendly when, in fact, they were not. In this case, it is essential to point to the fact that this instance is a matter of corporate governance and ethics because when the problem was identified, the senior management of the company claimed that it was a technical error and the company was not aware of the difference between the standards and the performance of the cars.
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Once the problem was revealed during rigorous testing, the company made no effort to address it by improving the technical configuration of the cars; instead, software to control the representation of the information about gas emissions was installed. Therefore, during the investigation conducted by the Environment Protection Agency (EPA), it was determined that the Blue Diesel cars (those referred to as green vehicles) release emissions that are 40 times higher than the legally acceptable level.
In addition, Volkswagen senior management even made an attempt to avoid responsibility by declaring that these were engineers who made the decision to hide the truth about the environmental performance of the vehicles and that they never informed senior management of the identified problems (VW blames engineers2015). Nevertheless, later, the senior management representatives recognised that the activities were deliberate and that pollution control software remained switched off when testing automobiles (Bocsi2016).
This issue led to significant financial problems, as the company was sued for failing to correspond with environmental standards. It is especially critical because these were the so-called green cars under consideration – those that should boast a minimal negative impact on the natural environment (Matthies 2015). In this way, revealing the truth regarding the ineffectiveness of the green cars may have destroyed the image of the Volkswagen green car. As a result, consumers who selected the green cars demanded compensations as did states across the United States. All in all, Volkswagen was forced to pay around $13 billion in compensation, not to mention add on the provision of free road assistance to customers who were affected by the corporate lie as a form of individual compensation (Bocsi 2016).
Culture of Pressure
In addition to the challenge with environmentally friendly cars, there are other vital issues to consider in this scenario. For instance, it is believed that the culture of pressure proved to be one of the main causes leading to the emergence of the ethical scandal mentioned above. To clarify the point, it is imperative to review the history of the company. In 2007, it obtained the new CEO, Martin Winterkorn, an executive who dedicated himself to changing the face of the company and to make it more successful and powerful.
Here, it is critical to recollect that it was the beginning of the green awareness era that resulted in the growth of customer demand for hybrid cars perceived to be environmentally friendly. In order to compete with other automobile manufacturers, Volkswagen was forced to correspond with the demand requirements – and to introduce the green car.
It may have coped with the task, but the 2008 financial crisis affected the exports of the cars, thus having a direct influence on sales and on obtaining resources for tests and innovations. In this way, moral and corporate pressure, along with the lack of financial resources, pushed the new CEO to the decision to install cheating software, thus hiding the truth about the real level of gas emissions released into the atmosphere (Lynch & Santos 2017).
Beyond that, it is also critical to remember that the company already faced a similar scandal back in the 1970s, when defective devices were installed to comply with the newly developed emission standards (Lynch & Santos 2017).
Because the sum of compensations was insignificant in the first round, senior management believed that the situation would not prove critical. Therefore, they used the opportunity to lie to customers and to legal entities. In addition, the issue of the culture of pressure is evident in the attempts to make engineers responsible because, in the 1970s, it was actually the decision of those engineers to hide the truth from the society. That is why senior management wanted to use the already known story to cope with the emerging ethical and corporate governance scandal by putting additional pressure on its engineers.
Analysing Determined Issues
As shown above, the main issue faced by Volkswagen is that connected to the diesel emissions scandal, accompanied by the culture of pressure. Still, even though there are only two challenges presented, there is still an opportunity to analyse them from the perspective of different approaches to ethics and corporate governance. The following subsections, then, aim to provide a careful and in-depth analysis of the existing matters of concern, as well as to speculate about how the company should have acted in order to avoid the emergence of the ethics scandal or, at least, to minimise its serious consequences.
Reviewing the Scandal Within the Company’s Environment
Before analysing the ethical scandal from the perspective of different theoretical approaches to ethics, it is essential to understand the ways to review it within the environment and its constituents. As mentioned above, there are different elements of any company’s environment, including natural, legal, business, economic, and social. In the case of Volkswagen, all of these relate specifically to the dire issues faced by the company.
The first element – the natural environment – is the most visible one because hiding the truth about the green performance of the Blue Diesel cars is directly associated with the increased negative impact on the natural environment. To avoid the emergence of the scandal, the company should have either continued work on the project or terminated it in order to act ethically. However, the decision to act unethically has led to several challenges associated with other elements of the company’s environment.
One of the interrelated aspects is the legal environment; in fact, Volkswagen violated the requirements of green cars, thus breaking inherent provisions of legal documents in the protection of the natural environment and green manufacturing. This problem affected the legal image of the organisations, especially keeping in mind that the 2015 ethical scandal was not the only instance of environment-related scandals based on violating gas emission standards. This violation pointed to ignoring international standards and one of the common trends in corporate government – convergence toward a universal system of standards and rules of corporate governance (Collier & Zaman 2005).
In addition to the natural and legal environment, the issue is critical from the perspective of the business environment. This is especially relevant to external cases, where the inherent environmental performance of other green cars – those offered by competitors – is now being questioned. In this way, the unethical behaviour and choices made by the Volkswagen corporation affected the whole automobile industry because other manufacturers are now being questioned and monitored when it comes to developing green cars.
More than that, there are severe consequences when viewing the challenge in relation to the company’s economic environment. Except for compensations, the scandal affected the volume of expenditures, as well as the price of shares. In this way, in addition to the possible loss of shareholders’ trust, the scandal is connected to the potential risk of decreased sales because the overall environmental performance of Volkswagen cars –all models, not only green series – is being questioned.
Finally, there is a significant impact on the social aspect of the organisation’s environment. When speaking of the social environment, it is imperative to point to two aspects of this element – internal and external. Internal social environment stands for the relations with the employees. In this case, there are significant challenges when it comes to the ties with engineers, as senior management made an attempt to shift their responsibility to ordinary employees.
In this way, the internal climate in the company is potentially downgraded because senior management demonstrated that they simply do not value their workers and are ready to blame them in order to save the positive image of the company. As for the external social environment, it involves all members of society without any real regard for their geographic location. In this case, the case also proves critical because Volkswagen senior management demonstrated that they are not at all concerned about the future of society, nor with the wellbeing of future generations.
Instead, they seem solely focused on developing new ways to increase sales and personal income, even if they are then accused of violating legal provisions and of threatening people and the natural environment in which they live, not to mention the negative impact they cause to the car industry as a whole.
That being said, when analysing the issue from the perspective of the company’s environment, it is evident that the instance of Volkswagen is the case of ineffective corporate governance; this stands true when viewing the scandal from the perspective of both narrow and broad approaches to corporate governance.
According to the first stance, the issue is unethical because the company was not accountable to its shareholders, as they were not aware of the decision to install illegal software and hide the information about the environmental performance of the green cars. As for the broad approach, the needs of both internal and external stakeholders were ignored, as were the interests of the main shareholders and the wellbeing of society and of future generations. In this way, the issue can also be perceived as unethical.
Human Rights Approach
According to the human rights approach to ethics, all decisions should be made in order to show respect for fundamental human rights. In this case, the rights of both employees and ordinary customers are considered. Speaking of the rights of employees – in particular, engineers – it should be noted that their right to be dealt with honesty was violated because they were accused of installing illegal software without the knowledge of senior management, thus initiating the ethical scandal.
As for the rights of ordinary customers, the same one was infringed because the truth was hidden from the people. Specifically, their purchasing behaviours and choices were affected by the presentation of deceitful information to the public. Even though respecting human rights is commonly perceived as one’s moral choice, they are usually mentioned in the company’s codes of conduct, and preventing the violation of fundamental human rights is promoted by the global community. From this perspective, ignoring even one human right can perceive as wholly unethical. Therefore, Volkswagen’s decision to hide the truth was unethical.
Stakeholdership is the main concept of the stakeholder theory. In accordance with this approach to corporate governance, the major focus is made of different groups of stakeholders. They may be internal (management and employees) and external (consumers, competitors, shareholders, and governments) (Sorour & Howell 2012). In the case of Volkswagen, the scandal is dual. For instance, it definitely had a negative impact on consumers, shareholders, and employees due to the changes in the company’s image.
The same is true for management because their reputation was ruined. More than that, the company was forced to offer compensation that affected the welfare of the company itself. On the other hand, the scandal benefitted the firm’s competitors. Even though it initiated the issues with trusting the environmental performance of all automobile manufacturers, it was still advantageous for increasing the sales of those rival companies who produced vehicles that do indeed comply with the international environmental standards. All in all, even though the impact on stakeholders is ambiguous, costs still outweigh benefits. For this reason, the decisions of Volkswagen were unethical.
It can be explained by the fact that the interest of most stakeholders was ignored while respecting them and making attempts to satisfy them to the maximum possible extent is the foundation of the stakeholder theory (Freeman 1994; Sorour & Howell 2013). In this way, the stakeholder approach is the most comprehensive one because it addresses all aspects of the complex system. It is the most prominent strength of the theory. Still, it does not address different constituents of the environment that may make the approach insignificantly limited (Donaldson & Preston 1995).
One more commonly met concept is shareholders – the foundation of shareholder theory. In this case, the role of corporate governance is to be accountable to the main shareholders. As a result, protecting their interests and addressing their needs properly is the main objective of ethical behaviours of the company’s senior management. In most cases, shareholders’ proposals are taken into consideration when developing policies or making vital decisions (Gillan & Starks 2000).
The main goal is to focus on them. When speaking of the Volkswagen case, the interests of shareholders were not taken into consideration because, even though the senior management realised that unethical choices are inseparable from financial consequences as the 1970s experience demonstrated, they still installed illegal software. As a result, the drop in share value was around $30 million, a significant amount that could not help but affect shareholders.
Therefore, from the perspective of this approach to corporate governance, it is ineffective, and the decisions made proved unethical. It is associated with the fact that neither the decision nor corporate governance contributes to achieving sustainability – the cornerstone of the theory (Nwanji& Howell 2007). Based on these statements, the main strength of the theory is the fact that it helps assess the impact on shareholders, thus making the speculation of the case from the perspective of shareholders possible. On the other hand, it ignores other critical elements of the system – stakeholders and environment – so it is limited.
Another peculiar approach is teleology that promotes the focus on a reason for a particular choice or decision, not its consequences. One of the related ideas is that stated by Machiavelli who believed that lie (a consequence) is morally appropriate when it is essential to saving the state (a reason). This approach is applicable to the case of Volkswagen because saving the state is related to the inherent desire to transform the company. Therefore, according to this approach, the CEO’s decision to lie is morally acceptable regardless of its outcomes. The strength of this approach is an opportunity to focus on the causes of a particular choice. Still, because it does not incorporate consequences, it is limited and cannot help to really analyse any situation comprehensively.
Social Responsibility Approach
One more related approach is referred to as social responsibility. It is closely connected to the stakeholder approach with only one relevant difference – it focuses on society, not all stakeholders. Even though according to this theory, the main social responsibility objective of any business is to increase profits, thus to potentially benefit society, lying to its members is still perceived as unethical.
In other words, profit increases should be achieved in an ethical way and with respect to stakeholders (Friedman 1970). Returning to the case of Volkswagen: its decision was unethical because, regardless of increasing sales, the end results were achieved by lying to people. Based on the specificities of the approach, its strength is the focus on society – one of the stakeholders. Still, at the same time, it is a limitation because other stakeholders are ignored.
According to relativist stance, rules and norms are affected by the specificities of a particular community. In more general terms, it refers to legal frameworks and universal standards regarding performance or operation. At the same time, even if the universal standards do exist, they remain relative based on an individual perception of a particular situation. When analysing the case of Volkswagen, it is obvious that the CEO was driven by individual values – the desire to transform the company. In his viewpoint, the decision to hide the truth from society was deliberate and may have been ethical.
However, the fact remains, this decision was made regardless of the knowledge of universal environmental standards. It means that these rules were violated. As a result, it is possible to state that the decision was unethical. The main strength of this theory in the case of Volkswagen is an opportunity to understand the connection between individual and generally accepted rules of play. However, it is still limited because the concept of universality is as well relative so that it is impossible to determine the rule that is applicable to managing all issues or arranging all operations across differing environments.
Another approach applicable to Volkswagen analysis is that offered by Kant –the so-called deontology. According to this approach, there are acts that are ultimately right or ultimately wrong regardless of their consequences. For instance, a lie is always wrong, even if it were deployed supposedly for some good cause or objective. In this case, Volkswagen’s lie was wrong and unethical. The main strength of the approach is that it helps shape the perception of what is right or wrong. Still, it is excessively categorical that may make the analysis of cases not similar to that under consideration complicated.
Based on the analysis of the Volkswagen case provided above, it is obvious that the decision to hide the truth was unethical and pointed to the ineffective system of corporate governance. Even though, according to the approach offered by Machiavelli, a lie is morally acceptable, considering other theoretical approaches leads to the conclusion that a lie really is not acceptable. Still, the company may have avoided the scandal if it had allocated additional resources for innovations of green cars development and made them comply with international environmental standards. Another possible preventive measure would have been to re-classify the car so it was not labelled a green vehicle.
Nevertheless, even if the company never altered its positions or decisions, there remained other ways to minimise business, financial and social consequences of this scandal. Timely public excuses and justifications, as well as appropriate compensation, would have been enough to save the reputation of Volkswagen and to demonstrate that the interest of stakeholders and shareholders, not potential personal economic benefits, were the major motivations of the company.
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