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"Emissiongate" at Volkswagen

It's been dubbed the "diesel dupe". In September, 2015the Environmental Protection Agency (EPA) foundthat many VW cars being sold in America had a "defeat device" - or software - in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results.

The outlines of the scandal are now well known. For nearly a decade, from 2006 to September 2015, VW anchored its U.S. sales strategy aimed at vaulting the company past Toyota to become the world's No. 1 carmaker on a breed of cars that turned out to be a hoax. They were touted as "Clean Diesel" vehicles. About 580,000 such sedans, SUVs and crossovers were sold in the U.S. under the company's VW, Audi and Porsche marques. With great fanfare, including Super Bowl commercials, the company flacked an environmentalist's dream: high performance cars that managed to achieve excellent fuel economy and emissions so squeaky clean as to rival those of electric hybrids like the Toyota Prius.

It was all a software-conjured mirage. The exhaust control equipment in the VW diesels was programmed to shut off as soon as the cars rolled off the regulators' test beds, at which point the tailpipes spewed illegal levels of two types of nitrogen oxides pollutants (referred to collectively as NOx) into the atmosphere,up to 40 times above what is allowed in the UScausing smog, respiratory disease and premature death.The EPA's findings cover 482,000 cars in the US only, including the VW-manufactured Audi A3, and the VW models Jetta, Beetle, Golf and Passat.

Over the past two years, prosecutors in the U.S. and Germany have been tracing who was aware of the scheme and have identified more than 40 people involved, spread out across at least four cities and working for three VW brands as well as automotive technology supplier Robert Bosch. They brought formal charges against former Volkswagen engineer Oliver Schmidt who ultimately received seven years in prison for his role in the scandal. However Schmidt was a henchman, everyone understood, and his sentence, a stand-in. Above all, the courtroom was haunted by the shadow of an individual who was absent: Martin Winterkorn, who was VW's CEO during almost all of the fraud.

At first, Volkswagen insisted the fraud was pulled off by a group of rogue engineers like Schmidt. But over time the company has quietly backed away from that claim, increasingly focusing on protecting a small cadre of top officials. The crime may well have started among a relatively small number of engineers afraid to admit to feared top executives that they couldn't reconcile the company's goals and the law's demands. Schmidt had committed his crime according to the prosecutor, "to impress ... senior management and the board." He was talking about Winterkorn, who was not only CEO from 2007 until the scandal brought him down in 2015, but also chairman of the company's management board. Winterkorn was also then the highest paid CEO in Germany, having made $18.6 million the previous year, more than 100 times Schmidt's pay.

Examining the chronology of the company's behavior in light of that information leaves little doubt that knowledge of the wrongdoing reached high up the ranks, repeatedly coming within a whisker of CEO Winterkorn himself. According to Schmidt, he and a second employee had made presentations to Winterkorn and other senior officials at a meeting on July 27, 2015 where they were unmistakably informed of the cheating. The CEO's response to that information looked suspiciously like a cover-up. Winterkorn did not direct his subordinates to notify authorities about the cheating or launch an investigation to determine exactly what had happened. Instead, he sent Schmidt on a mission to persuade U.S. regulators to allow the sale of 2016 VWs.

The German car giant has since admitted cheating emissions tests in the US. "We've totally screwed up," said VW America boss Michael Horn, while the group's chief executive at the time, Martin Winterkorn, said his company had "broken the trust of our customers and the public". Mr Winterkorn resigned as a direct result of the scandal and was replaced by Matthias Mueller, the former boss of Porsche. The company also pleaded guilty in April to federal criminal charges of conspiracy, fraud, making false statements and obstruction of justice.

In the U.S., Volkswagen agreed to pay roughly $15 billion in civil compensation and restitution to consumers and federal and state authorities for the 2.0-liter cars involved, and the sum has since crept up to more than $25 billion, as deals were reached for the 3.0-liter cars, and for criminal fines and penalties. Volkswagen has bought back or fixed most of the offending vehicles, and customers have received thousands of dollars per car in compensation for a variety of losses, including the deception itself and diminished resale value.That resulted in the company posting itsfirst quarterly lossfor 15 years of 2.5bn in late October.

(a) Upper-level managers at Volkswagen were apparently unaware of the tampering that was going on in order to ensure that Volkswagen vehicles sold in the United States met EPA regulations. How does this reflect on the decision making process at Volkswagen with regard to its emphasis on ethics? Please apply relevant concepts for your explanation.

(b) Evaluate VW's tampering of the emission system of its vehicles purely from the perspective of appropriate economic considerations based ethical practices. Please apply relevant concepts and provide explanation.