WOLFSBURG, GERMANY - APRIL 19: A general outside view of the Volkswagen Arena is pictured prior to kickoff during the Bundesliga match between VfL Wolfsburg and FC Schalke 04 at Volkswagen Arena on April 19, 2015 in Wolfsburg, Germany. (Photo by Dennis Grombkowski/Bongarts/Getty Images)
VfL Wolfsburg's football stadium, the VW arena

This time I am truly shocked. As a professor of business ethics, I have become somewhat inured to corporate crimes and misdemeanours, especially in the banks of late. But surely not at Volkswagen?

Like many others, I thought we could have trust in German engineering and environmental concern. I thought we could trust this brand — with its values of quality, reliability and responsibility. VW and Audi (part of the group with one model also implicated) just didn’t need to cheat to compete.

After all, it was Audi that brought us “Vorsprung durch Technik”. As explained by an Audi executive: “Besides the literal translations of jumping ahead through technology or advancement through technology, Vorsprung durch Technik means the art of engineering, technological and administrative innovation, credibility in marketing and care for the individual with brain, heart and character.” Ironically, Audi’s US advertising slogan is: “Truth in Engineering”. It turns out “Engineering the Truth” would have been more accurate.

The relevant details have still to emerge in full, but the facts, as we currently know them, show the US Environmental Protection Agency caught VW cheating emissions tests — something long-suspected by environmental NGOs. The companies used clever software to detect when certain diesel models were subject to emission tests and to send the engines into a special low-emissions mode. It is not known how exactly as yet, but it seems likely that the sophisticated engine management software could detect road wheel rotation speeds, steering inputs, and use of the accelerator to make this determination.

"Convincing emissions test figures - but where are the lie-detector test results?"
"Convincing emissions test figures - but where are the lie-detector test results?"

Under pressure of not having its upcoming new model year vehicles approved, VW eventually came clean and admitted that 11 million vehicles worldwide were affected. Some €6.5 billion was set aside, although there was talk of maximum fines in the US reaching $18 billion (based on a half-million affected vehicles). The chief executive’s head rolled. Criminal investigations began. And VW shares have plummeted by more than 40 per cent. The new chief executive is moving swiftly to address the problem, with guidance already available to VW owners to determine if they have an affected vehicle.

The plunging share price reflects speculation by the market about the price the company will pay in the future: not just in fines and compensation, but also in lost sales due to its tarnished reputation and increased costs. Unclear as yet is how VW can remedy the situation if the vehicles are recalled. It seems quite possible that if they fix the vehicles to conform on the road to US legal requirements on emissions, the performance of the vehicles will be impaired — including poorer acceleration and higher fuel consumption. While this is somewhat speculative, if correct it means there is no fix that would enable VW to meet its promises to customers (and regulators) on both performance and emissions. VW might have to buy back all the half-million vehicles and provide further compensation.

My own speculations are a little different. They focus on the past and on the unethical behaviour of those concerned. How could this have happened? At VW of all places?

It seems safe to assume that the cheating was not the act of one rogue coder — just as rogue traders in banks are rarely entirely to blame for their misconduct, despite the protestations of the banks. Many VW engineers and executives must have known something was going on. No doubt, most of these men and women considered themselves upstanding members of society. They attended church, donated to charities, paid taxes, helped neighbours, followed rules, volunteered, parented, cared.

Then they went to work and knowingly cheated. Maybe even (as seems increasingly likely) broke the law.

How did they live with themselves? Or, as a psychologist would ask, how did they overcome the cognitive dissonance? They most likely relied on rationalisations — a way of making excuses to ourselves and others to justify misconduct. This is clearly speculation based on academic research into unethical conduct in organisations, but it is the best explanation I have to offer for VW’s ethical failure as of now.

Here, then, are some common rationalisations used when businesses go bad — and some ideas about how they might have translated to the situation at VW:

•“Everybody is doing it.” Hyundai and Kia were each fined $100 million for test-fixing only last year. Everybody is cheating to some extent on the fuel consumption tests

•“If we don’t do it, someone else will.” Using software to rig tests may have been a VW ‘innovation’, but all our competitors have the technical know-how to do it

•“No one’s getting hurt.” So what if our non-rigged emissions are 40 times the limit? Diesel is only 1 per cent of the gas-guzzling US market. That’s a drop in the ocean. Americans don’t care about the environment anyway

•“It’s for the greater good.” Pollution may be up slightly in the US because of our actions, but diesel produces less CO2, so we’re benefiting the world as a whole

•“They deserved it anyway.” Those US regulations were far stricter than necessary — and much more strict than European regulations. Perhaps they’re just designed to protect American manufacturers from the competition generated by great European diesel engineering

•“I was only doing my job.” Chief executive Winterkorn says he wants us to be the global market leader, so I’m just doing what I’m told to help hit the company’s targets

•“The end justifies the means.” We did it! We beat Toyota to the world number one spot earlier this year. So maybe we’ll be able to stop rigging the tests soon

•“It’s just the way we do things round here.” VW is a highly centralised organisation, so my team can’t change anything, even if we want to

•“It’s not really cheating, anyway.” After all, our cars really can produce those results

As I tell my MBA students, if you hear any such remarks in your own workplace, then alarm bells should be ringing. And if you hear yourself saying them, perhaps you deserve all you get. Researchers may still be struggling to find compelling evidence that ethical business is universally more successful business. But VW appears to have demonstrated very effectively that unethical business can lose you respect, reputation — and a great deal of money.

Craig Smith is professor of ethics and social responsibility at Insead

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