For a company that made such an explicit commitment to environmental awareness and sustainability, the accusation by the U.S. Environmental Protection Agency (EPA) in September 2015 that Volkswagen (VW) had installed sophisticated software on 500,000 U.S. vehicles to cheat on emissions tests was the beginning of a true corporate catastrophe. In VW’s 2014 Sustainability Report, reviewed by consulting firm PricewaterhouseCoopers, the word environment was mentioned 335 times over 156 glossy pages—an average of twice per page. VW, the world’s largest automaker, had built its reputation on cleaner-burning diesel engines that were allegedly better for the long-term sustainability of the planet, attracting tens of thousands of environmentally conscious customers in the process. The initial estimate of 500,000 cars quickly proved to be far removed from the truth, when VW admitted to “discrepancies” affecting 11 million vehicles worldwide. Chief Executive Martin Winterkorn resigned in the wake of the growing scandal, and VW announced that it would be setting aside over $7 billion to manage the situation, warning that the final figure could be much higher. The software, as VW admitted, was designed specifically for the Type EA 189 diesel engines installed in four-cylinder versions of the VW Jetta, Beetle, Golf, Passat, and Audi A3, vehicles that accounted for over 25 percent of the company’s global sales. Its purpose was to trick regulators into believing that the engines complied with all current emissions standards while, as was soon discovered, actually emitting harmful pollutants, specifically nitrogen oxide, at rates of over 40 times the required standards. As the case progressed and further evidence was discovered, any potential defense argument of a “miscalculation” or “computer error” was quickly dismissed in the face of hard data that the software was purpose-built for the task. While VW continued to refer to the issue as “discrepancies” and “deviations” in their frequent communications to stakeholders and the media, the U.S. Department of Justice (DOJ) announced that it was opening a criminal probe into VW’s actions related to what the DOJ termed “defeat devices.” The potential criminal penalties, over and above anticipated EPA fines of up to $37,500 per vehicle—a maximum fine of $18 billion—made the announcement of a $7 billion set-aside seem naively optimistic at best. The response from financial markets was swift and severe, with a stunning 17 percent drop in share price for VW on the day of the announcement, wiping out almost $15 billion in corporate value in one day. The prompt departure of Martin Winterkorn was followed by the immediate appointment of Matthias Müller, the chief executive of Porsche, who promised “maximum transparency” during the upcoming investigations and stated: “My most urgent task is to win back trust.” By January 2016, less than four months after the scandal broke, the sincerity of Müller’s commitment was already being questioned by DOJ investigators. While VW claimed to be actively complying with German regulators under the confines of strict German privacy laws, the company was citing the same privacy laws for its inability to comply with information requests from U.S. regulators. Citing Germany’s Federal Data Protection Act, which limits access to data, particularly outside the European Union, VW took the position that it was still committed to “maximum transparency” but was obligated to abide by the laws of its home country. VW’s most vocal critics argue that while Müller may be concerned about winning back the trust of VW customers, the company’s actions will have far-reaching consequences for sustainability and corporate social responsibility. British Petroleum, for example, made an explicit commitment to changing “BP” to mean “Beyond Petroleum’ before the reputation of the company was irreparably damaged by the Deepwater Horizon oil spill in the Gulf of Mexico. It is argued that VW’s deliberate actions to hide emissions of a pollutant that has an impact on atmospheric warming of 300 times that of carbon dioxide will make it much harder for investors and consumers to believe any company that states it is committed to environmental sustainability. In the six months following the EPA announcement, the situation had not improved for VW. Since the “defeat device” was designed to beat emissions tests while maintaining the fuel efficiency that VW marketed so aggressively, there is no software solution to the problem. The vehicles do not meet emission standards, which means that buyers will have to be compensated for an outcome that has yet to be decided. Should buyers receive financial compensation or a replacement vehicle? What about EPA fines and DOJ penalties? All of that remains to be resolved in what will most likely be a lengthy series of lawsuits. In March 2016, VW failed to meet a court deadline to present a plan to resolve the scandal. The presiding judge gave the company an extension until late April, but expectations among all interested parties were that the extension would be missed, leading to a civil trial.

QUESTION

1. Why did VW develop the software in the “defeat devices”?

2. Has Müller’s commitment to “maximum transparency” helped or hindered the situation? Explain your answer.

3. Would you buy a VW car based on the information in this case? Why or why not?

4. What should VW be doing to recover from this scandal?