Read the following cases and answer the questions that
follow.
Case 1: VW Cheats on Emissions Tests
In 2006, Mercedes-Benz introduced Blue-TEC, an advanced
system to trap and neu-tralize harmful emissions and particulates that allowed
Mercedes to market “clean diesel” cars. VW and Audi made agree-ments to share
the technology to enable all three companies to market clean diesels in an
attempt to expand the market for diesel car. If VW and Audi had not joined
Mer-cedes, they would probably have been at a significant competitive
disadvantage. VW, however, being a company of proud employees, started work on
their own “clean diesel” system and introduced one in 2009. Unfortunately, VWs
new system could operate in compliance with U.S. emis-sion standards only if
their engines were adjusted to run at very poor performance and gas usage
levels, which were not com-petitive with the BlueTEC systems already on the
market. Motivated by pride and enabled by arrogance and complacency,1 VW
engineers decided to install a computer software switch that, when government
emission tests were started, would alter the engine performance characteristics
during the tests from a normal high-performance/high-emission setting to a
low-emission/low-performance setting. This computer software defeat device
allowed VW vehicles to pass the California emission tests, which were the
toughest in the United States. In fact, the VW engines produced up to thirty-
eight times the allowed pollution lev-els.2 Hypocritically, VW’s Super Bowl ad
showed their engineers sprouting white wings like angels.Essentially, VW
engineers decided to cheat—to defeat the emission tests—with a technical “fix.”
They gambled that no one would find out and/or that there would be little
negative reaction. Apparently, top management were unaware of the plan to
cheat. Interestingly, this was not the first time that a defeat device had been
used. In 1973, VW was fined $120,000 in the United States for using an earlier
defeat device, and in 1998, truck engine makers agreed to a $1 billion
settlement for a similar instance. But VW tried it again, and when high test
results came to light in 2014.VWs software deception was discov-ered in 2014 by
scientists at West Virginia University who disclosed their results at a public
forum. VW’s reaction was that the testers did not conduct the tests prop-e r
ly.3 The U.S. Environmental Protection Agency repeated the tests and questioned
VW personnel. This triggered VW’s halt of sales of some diesels and the
production of others, an internal investigation, and the resignation of the
CEO, Martin Winter-korn, as well as a recall of 11 million cars.4 In September
2015, VW stock sank by 20% and then another 17%, and $7.3 bil-lion was
allocated to cover the recalls, refits, and other costs of the scandal.5 The
amount of fines and the cost of settling civil lawsuits will not be known for
some time, although the U.S. Justice Department has sued VW for up to $48
billion.6 It is evident that many VW employees and man-agers knew of this
illegal deception of cheat-ing on emissions standards from before 2009 to 2014,
thus putting the company at great financial and reputation risk. Concern has
been expressed that the VW emissions cheating scandal has under-mined the
vaunted reputation of German engineering, calling into question the traditionally
respected Mercedes, BMW, and other brands that employ so many in Germany and
abroad. Also, VW’s cheating has deeply offended the
environmental/sustainability movement, which is very strong in Europe, and the
governments that backed the “clean diesel” program there. As David Bach has
pointed out, “‘Clean diesel,’ it turns out, is as much a lie as ‘clean coal.’
Volkswagen’s abhorrent behaviour therefore threatens to delegiti-mise the
countless and essential efforts by companies around the world to develop
scalable environmental solutions.”
Answer the following questions:
- Why
did none of the several design engineers, test engineers, and technicians
involved blow the whistle to top management and/or the regulators? - VW has
a governance system in which the Supervisory Board is different from North
American boards of directors. How is it different from North American
governance models? Could the differences in governance have contributed to
the decision to cheat and to keep it a secret? If so, how? - How
would VW ensure that its policy on environmental protection is upheld? - Had
the VW employees evaluated the decision from the deontological
perspective, do you think they would have made the same decision?
2: BP’s Gulf Oil Spill Costs
- What are the costs to other stakeholders in society beyond those that Reuters included? For example, was the cost of lost reputation considered? How would these costs be estimated?
- Since there are so many uncertainties involved in analyses such as Reuters presented, are analyses like this useful? Why or why not?
- Why were BP’s early estimates so low? After all, as Reuters reports, BP had experience with two other recent cases. Consider both US GAAP and IFRS rules for reporting contingent liabilities.