The Bottom Line Expert Opinion: The Volkswagen Scandal

The Volkswagen scandal has shocked the business world and general public alike in the last month. Specifically, it was discovered that VW had intentionally been using technology for the purpose of emission rigging. The company, not surprisingly, has suffered a major hit to its reputation and stock price. Only this year, VW had become the largest automaker in the world by sales. Now commentators and the public alike wonder not only how it can stay on top but how it will survive. Yet the case also raises serious questions about the future of corporate social responsibility and governance. In this episode of Bottom Line, industry and finance leaders discuss the implications of this event. As the show reveals, this scandal has a number of different facets. These range from what actually occurred to specifics of the technology used to manipulate emission data to VW’s response to whether this problem extends to the car industry as a whole. The BBC provided a nice primer for understanding the full breadth of this scandal in their article “Volkswagen: The Scandal Explained”.

On a purely business level, this event has created unprecedented challenges for the leaders of VW. Already, both the US and Switzerland has stopped selling the company’s newest diesel car. In the wake of this scandal, former Porsche chief Matthias Mueller took over for former CEO Martin Winterkorn who resigned after the revelations of the firm’s wrongdoing. Not surprisingly, the new top executive has promised an “unsparing investigation and full transparency” going forward. Yet since assuming power, the scandal has only deepened as more countries are opening investigations into VW’s business practices and a growing list of models accused of using this fraudulent technology. The Agence France-Presse takes a closer look at the business ramifications of this scandal in its article “New Volkswagen boss has work cut out for him in wake of test rigging scandal”.

These revelations of cheating also point to broader issues of innovation and technology. A traditionally assumed advantage of capitalism is its promotion of technological advancements and innovation at all levels of production. Yet the VW case shows the reverse side of this ingenuity. Here the company was incentivized to find creative ways to subvert environmental regulations for maximizing its market share and increasing its profit. This bad innovation goes beyond the VW case, including but not limited to social media companies to everyday drink products. Paul Levy investigates this issue in his article in The Conversation “Toxic innovation: Volkswagen is the tip of a destructive iceberg”.

Just as significant have been questions regarding what this means for the company’s corporate governance. A crucial defect of Volkswagen, it is widely argued, is that its corporate structure is closed around a range of strong stakeholders including regional ownership, labour representatives and two families – leaving only 10% of its stock public. This “insider” structure lacks the transparency that a more investor oriented system would provide. While the scandal should be condemned, this does not mean that its ownership model is inherently ethically flawed, especially in comparison to Anglo-American ones. Specifically, it avoids the pitfalls of short-term thinking often plaguing investor cultures. Nils Roper defends VW’s “insider system” and its fostering of a more “patient capitalism” in his Open Democracy article “Volkswagen’s insider system isn’t necessarily a bad system”.

Nevertheless, this scandal has led many to question whether existing forms of corporate social responsibility are still effective. One obvious answer is the need for greater oversight and transparency. Corporations cannot be trusted to regulate themselves, especially in an increasingly competitive global marketplace. The VW follows in a long line of cases of corporate malfeasance. Corporate social responsibility does not go potentially far enough in ensuring that businesses serve not only their private interest but also the public good. Carl Rhodes examines exactly this problem in his article in The Conversation “7-Eleven, Volkswagen cases show why we should push back on 'corporate ethics'”. 

This article was written to accompany the Autumn 2015 series of The Bottom Line. For more information on the series, visit the series page.