Volkswagen's Defeat Devices And Stakeholder Control

Volkswagen’s Defeat Devices and Stakeholder Control

Today, the Environmental Protection Agency (EPA) issued a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from specific model years include software that circumvents EPA emissions standards for certain air pollutants. The announcement, made on September 18, 2015, resulted in a significant decline in Volkswagen's market value—losing approximately 30% of its stock worth—and led to the recall of 11 million vehicles worldwide (EPA, 2015). This scandal unfolded against a backdrop of Volkswagen’s long history as a major global automobile manufacturer and its corporate culture, which was characterized by command and control, and stakeholder-oriented governance structures.

Founded in 1936 in Germany, Volkswagen rose to become the world’s second-largest automobile manufacturer by 2015. Under CEO Martin Winterkorn’s leadership starting in 2007, Volkswagen’s strategic focus was to expand sharply in the U.S., aiming for sales of 800,000 cars by 2018. Central to this strategy was the promotion of diesel engines, which were considered environmentally advantageous due to lower carbon monoxide emissions but posed regulatory challenges because of higher particulate and nitrogen oxides (NOx) emissions. Volkswagen employed a technology called lean NOx traps (LNT), which were cheaper and lighter but less effective than selective catalytic reduction (SCR)—the more advanced and effective technology. To meet stringent U.S. emission standards using less costly technology, Volkswagen installed defeat devices—software programs that masked the true emissions performance during testing.

The discovery of Volkswagen’s use of defeat devices stemmed from environmental testing by a nonprofit group in Europe in 2013. The tests revealed that certain Volkswagen models did not meet the required emissions standards under real-world driving conditions. California’s Air Resources Board (CARB) shared these findings with the EPA in July 2015. Subsequently, in September 2015, Volkswagen admitted to regulators that its vehicles contained software designed to detect testing conditions and adjust emissions accordingly, thereby rendering inoperative the emission control system during normal driving. This software, dubbed a defeat device, allowed vehicles to emit higher levels of pollutants outside of testing, in violation of U.S. law.

The immediate market reaction to the scandal was sharp; Volkswagen’s stock price plummeted from around 235 euros in March 2015 to approximately 165 euros after the NOV was announced. The scandal not only impacted stock prices but also damaged Volkswagen’s reputation and raised questions about the company's governance and stakeholder management. An internal crisis ensued, culminating in the replacement of CEO Winterkorn and a massive recall of the affected vehicles. The scandal exposed underlying issues in Volkswagen’s corporate culture, which historically prioritized control, loyalty to family ownership, and stakeholder interests over shareholder accountability and transparency.

Analysis of Volkswagen’s Leadership and Governance

Volkswagen’s decision to deploy defeat devices was driven by a combination of strategic, technological, and cultural factors. The company’s leadership, including Winterkorn and the inner circle of the supervisory and management boards, prioritized meeting aggressive sales targets, especially in the lucrative U.S. market. The culture of command and control within Volkswagen, often described as the "V W System," fostered a top-down decision-making process where subordinate employees and managers were reluctant or forbidden from questioning senior executives. This environment discouraged ethical dissent and created an atmosphere in which the deployment of clandestine software was deemed acceptable or at least tolerable to meet corporate goals.

Control over strategic decisions predominantly resided with the supervisory board, particularly its inner circle—the presidium—which consisted of top executives and influential family members. The ownership structure further concentrated control in the hands of the Porsche and Pià«ch families, who held 32% of the shares but commanded 51% of the voting rights. This ownership arrangement reinforced a governance schema where familial interests and stakeholder relationships, notably with regional political entities like Lower Saxony, held sway over strategic choices (Schlemmer & Rehbein, 2017).

The scandal also revealed how stakeholder interests—such as local governments, employees, and regional political stakeholders—had considerable influence over Volkswagen’s governance. These stakeholders prioritized job security, regional economic stability, and long-term relationships, often at the expense of transparent corporate governance. This stakeholder-oriented approach contributed to a corporate culture that was resistant to scrutiny and transparency, and it was this culture that facilitated the concealment of the emissions cheating scheme for years.

Stakeholder Interests and Dominance in the Defeat Device Decision

Volkswagen’s stakeholders varied significantly in their interests: shareholders aimed for profitability and market share; employees sought job security and favorable working conditions; local political entities sought economic stability; and regulators demanded compliance with environmental standards. Among these, the corporate leadership and family owners prioritized stakeholder harmony and regional political alliances, which, in practice, meant disregarding the legal and ethical obligations associated with environmental regulation. The decision to pursue the defeat device strategy was primarily driven by the desire to meet ambitious sales targets and avoid costs associated with SCR technology. This approach benefited the owners and management but severely compromised regulatory compliance and ethical standards.

The internal decision-making process was opaque, with critical information about the defeat devices and their legal implications often concealed. The leadership’s stance reflected a stakeholder capitalism model emphasizing stakeholder appeasement—particularly maintaining the relationships with regional political interests—over shareholder transparency and accountability. The scandal illustrated how stakeholder interests, especially those of powerful families and regional authorities, dominated strategic decisions, leading to actions that violated environmental laws and ethical business practices.

Volkswagen’s Response to the Discovery and Crisis Management

Upon the revelation of the defeat devices, Volkswagen’s initial reaction was to deny involvement and resist full disclosure. The company claimed that the software in question was not explicitly illegal under European law and that it was unaware of the legal violations in the U.S. (Volkswagen, 2015). The internal response was also characterized by attempts to manage public perception while delaying full transparency, citing the need to inform shareholders first and respecting German privacy laws. This response was widely regarded as inadequate and damaging to trust, especially given the scandal’s scale and the urgency of environmental and consumer concerns.

Effective crisis management requires transparent, timely, and accountability-oriented strategies. Volkswagen’s initial response was defensive, legalistic, and slow, which amplified the crisis. A more appropriate approach would have involved immediate acknowledgment of the issue, comprehensive internal investigations, and proactive cooperation with regulators (Coombs, 2015). This might have mitigated some reputational damage and fostered consumer trust. Additionally, implementing corrective measures, publicly apologizing, and committing to ethical standards would have been essential components of responsible crisis management.

Recommendations for Future Handling of Similar Crises

Volkswagen’s scandal underscores the importance of ethical leadership, transparent governance, and corporate accountability. For future scenarios, companies should establish robust internal ethics and compliance programs that encourage reporting of unethical behavior without retaliation. Leadership must foster a corporate culture premised on integrity rather than control or stakeholder appeasement. Regular training, clear channels for whistleblowing, and strict adherence to legal standards are crucial.

Furthermore, crisis response plans should prioritize transparency and open communication with all stakeholders. Early engagement with regulators, honest disclosure of issues, and swift corrective actions can help restore public trust. Emphasizing stakeholder interests aligned with ethical standards can prevent conflicts and reduce the temptation to resort to clandestine schemes, thereby safeguarding both corporate reputation and long-term sustainability (Friedman & Miles, 2006).

Conclusion

The Volkswagen emission scandal exemplifies how corporate culture, governance structures, and stakeholder management can produce profound ethical failings and legal violations. The confluence of a top-down command culture, stakeholder dominance, and strategic focus on sales targets led to the decision to use defeat devices, ultimately damaging the company's reputation and financial standing. Addressing such issues requires cultivating an ethical organizational culture, transparent governance, and proactive crisis management. Companies must recognize that aligning stakeholder interests with ethical business conduct is essential for sustainable success in a globalized economy.

References

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• EPA. (2015). EPA and California Air Resources Board Announce Findings of Substantial Emissions Cheating by Volkswagen. U.S. Environmental Protection Agency. https://www.epa.gov/newsreleases/epa-and-california-air-resources-board-announce-findings-substantial-emissions-cheating
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