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Introduction  à Introduce the nature of the case, the ways that it relates to business ethics and summarise the main arguments that will be made

Case Description à provide a description of the case by outlining any relevant background information, telling the story of what happened, describing which people and institution were involved and the effect of what happened

Analysis of ethical and/or sustainability issues  à Apply the relevant academic readings in this subject outline, textbooks, journal of BUSINESS ETHICS article, and or other academic articles related to business ethics to evaluate the events I the case. Assess these events in relation to who was effected (positively and negatively) and how ethical issues were or were not accounted for by the actions of the major stakeholders (at least 20 references)

Recommendations  à Based on your analysis make recommendations as to what can be learned from the case

Case Description

The modes of reconciliation in terms of business disputes arising from fraudulent activities can range from arbitration, mediation to usual court procedures. However as fraud would have to be established through due process of law it would be more appropriate to use court procedures to determine such a dispute. It would also be essential for the various modes of recovery within the framework same. It can thus be determined that jurisdictionally courts would have the most undisputable authority in determining such points of law. Volkswagen is an international automobile conglomerate dealing in the manufacture and sale of automobiles under various companies which are its subsidiaries (Chell et al. 2016). Volkswagen itself has additional authority as far as these companies are concerned as it has the position of a holding company. Audi which is also an international automobile brand was taken over by Volkswagen and has since been a subsidiary. In recent times laws in jurisdictions relating to the effects that the products of companies have on the environment have been tightened. This is mainly due to the stand of the international community which has been designed to curb environmental degradation in all its forms (Stanwick and Stanwick 2013). The automobile industry has been often criticized for the way in which its emissions affect the environment. This means that the industry as a whole would have to reset their emission standards and would have to go through tests before releasing a product in to the market which would determine if its emission levels are controlled as per international standards. These international standards would have to be adhered to as they would be incorporated into the framework of domestic laws that are in force to ensure negative effects on the environment are reduced to the highest extent possible (Florea, Cheung and Herndon 2013). Audi had been implicated in a scandal relating to emission tests where it was found that the company was using software which would defeat the test parameters and determine that the cars met the emission levels. This software thus fraudulently passed the test for these vehicles and once passed these products could be used for worldwide sales. The scandal resulted in the stepping down of the Chief Executive Officer of the same and thus as per the circumstances the company thrown into a state devoid of any form of leadership. This report will analyze the implications of the scandal and the effects it has had on Volkswagen as the holding company.

Analysis of ethical and/or sustainability issues

Volkswagen acquired the majority shareholding of Audi in 1964 (more than 50% shares). This resultantly gave the board of Volkswagen control over the affairs of Audi in the capacity of a legal holding company. As a result of the same acquisition Audi became a subsidiary of Volkswagen. Audi is a premier automobile brand and internationally acclaimed for the various luxury cars its manufactures around the world (Rohrbeck, Konnertz and Knab 2013). Volkswagen is an equally reputed Automobile conglomerate and is the holding company for several other automobile brands as well such as BMW and Porsche. These brands cater to the higher strata of society as they are primarily focused on the manufacturing of luxury vehicles which would be beyond the average price range (Montiel and Delgado-Ceballos 2014). Volkswagen however does have sections that cater to the usual automobile purchaser as well while producing globally reputed luxury cars.

The impact of the automobiles on the environment, especially relating to air pollution, is of utmost importance in global discussions on environmental degradation and climate change. The negative impacts of such an industry have been widely researched and their various effects have been mandated to be curbed to the highest extent possible or practicable. As a measure of this emissions from the exhausts of Automobiles have been deemed to be a major contributor. This means that the same would ideally have to be reduced by automobile manufacturers to the highest extent possible (Ardichvili 2013).  This thus means that the same would have to be adhered to by these companies as a regulatory measure. This thus led to pollution emission tests which would have to be passed by the products of these companies and a failure to meet the minimum standards prescribed in these tests would mean that the same is scrapped as it would not be allowed for mass production and retail. This also means that the same would be an absolute loss for the company as a designated design would be a complete failure and thus all the production costs (implicit and explicit) that have been put into the same would be negated by a failure of the test (Hörisch, Freeman and Schaltegger 2014). Thus, in terms of profitability this emission test stood as a hindrance to revenue figures. This is because designing engines that would not produce such high rates of emission would invariably be more expensive and would thus raise the cost of production. Luxury cars already cater to the highest strata of society and a rapid rise in the retail price of the same would be construed as an unwelcome change. Thus the cost of production would have to be increased while revenue figures remain the same. This significantly lowers the profit margin and thus would have to be mitigated by the company through the employment of a production and designing process which is the most cost effective for the company (Hesselbarth and Schaltegger 2014). Thus environmental legislations were passed in various jurisdictions and these would dictate the minimum standards of emission control which would have to be displayed by the automobiles in order to obtain the certification to be able to be manufactured in a large scale.

Recommendations

Rupert Stadler who joined Audi in 1990 was designated the position of Chief Executive Officer (CEO) of the company in 2007 (Jennings 2014). The scandal in question mainly considered models A7 and A8 which had been manufactured between the years 2009 and 2013 (Hahn et al. 2015). A large number of these models had to be recalled by the company due to the scandal. This led to an immense financial loss for the company. The scandal was surrounding a defeat device embedded into the system of these cars through software. These defeat devices would veil the actual emission rates and thus would defeat the tests which checked the standards of emission control. This means that when this emission control is ultimately tested, the automobiles with the software would pass these tests devoid of the actual violations they were making. It was later discovered that these automobiles were producing around ten times the permitted rate of emission and thus would be an extremely harmful addition to environmental degradation while the companies continued to make their profits (Floyd et al. 2013). More importantly, the defeat device can be construed as a way to cheat authorities into endorsing these products and qualifying them as market ready. This means that that the administration of the company was guilty of fraud and the same was also reiterated by the courts. The Chief Executive Officer of Audi Rupert Stadler continued to hold his position in the company despite the declarations of the court relating to the fraud of the administration. The parent company also known as the holding company was also implicated in the issue and they had to change their chief executive officer to Hebert Diess (DesJardins and McCall 2014). In 2018 however Stadler was arrested in connection with the fraud of the company in Germany (Beauchamp and Bowie 2014).

Ethics maybe defined as certain moral principles that uphold the integrity of a person or entity while ensuring that their actions do not adversely affect others. Ideally this means that an ethical person or entity would assess the implications of its actions and thus would work towards ensuring that the same does not bring about any adverse effects on other entities. These are mainly based on principles of morality and fairness. The first ethical issue identified here is the company engaging in fraudulent activities to defraud regulatory authorities. Moreover it can be assessed that in such a situation the company was acting against its prescribed objectives and business framework (Davies 2016). This ethical issue can be explained using the utilitarian approach. The utilitarian approach envisages a maximization of optimal use of resources and business opportunities while minimizing adverse effect in due course of the same. The ultimate aim of this is to ensure that an entity that is engaging in business activities would try to maximize their profitability and productivity however it must not cause detriment to other persons or entities in the process. In the case of Audi the company had to find more cost effective modes of production as the new regulations on emission would make the manufacturing process more expensive. In order to remedy the same the company chose to incorporate technological advancements which would resultantly defraud the test results and thus the company could continue to produce vehicles at their initial cost price while also showing that they are meeting the statutory requirements prescribed by the governments (Klettner, Clarke and Boersma 2014). However, in doing so they were acting illegally which may be defined as social deviance. Thus the society would be adversely affected by such an act (Quarshie, Salmi and Leuschner 2016). The consumer who purchased the cars would also be defrauded through such claims and they would resultantly be a cause to environmental degradation (Hoffman, Frederick and Schwartz 2014). Thus their customer base and the environment would be adversely affected.  The legal system that prescribes the test and is being defrauded in the same would also be adversely affected by the fraudulent activities of the company. Thus this was an absolute utilitarian failure. The failure can be evaluated through the number of stakeholders adversely affected by the fraudulent activity. Thus if the company would adopt a utilitarian approach then they would not implement a design which engages the company in illegal activities.

Impact of Automobiles on the Environment

Secondly, the virtue approach is another important ethical theory. This considers the character of the individuals and entities involved in a particular scenario (Gao and Bansal 2013). This considers the virtuousness of the entity and the individuals involved in regulating the same, in other words the administration of the company. In the Audi emission scandal it can be seen that the company was undertaking illegal activities in order to maintain its profitability. This cannot be inferred as a virtuous activity and thus reveals that the company did not adopt the virtue approach in its activities (Klettner, Clarke and Boersma 2014). Moreover the administration of the company was involved in the fraudulent activities as they would be the persons invoking the decision to use the defeat device in the vehicles manufactured by them. The administration of the company, namely the board of directors was thus acting in financial self-interests (Quarshie, Salmi and Leuschner 2016). This is because such a step would be detrimental to the interests of the company as well as the interests of all other stakeholders. The board was thus engaged in ratifying conflicts of interests. This is an unethical approach and conspicuously establishes that the administration of the company was not virtuous (Ferrell and Fraedrich 2015). Thus, in light of the virtue approach this was also an unethical step taken by the company to maintain its profitability while affecting all the stakeholders of the same in a negative way (Trevino and Nelson 2016). The company administration can also not be considered virtuous or ethical and thus the same is an absolute failure to observe principles of morality (Carroll and Buchholtz 2014). In the same way, the conflicts of interest given effect to within the company are recorded as unethical and thus add to the ethical issues of the scenario.

Volkswagen is a premier automobile brand and holds a considerable market share in the global market. The luxury wing of this company also known as Audi is also one of the most reputed automobile brands in the world which strictly caters to the more affluent sections of society. However with the advent of the defeat device scandal, both companies have lost substantial sections of their client base (Hörisch, Freeman and Schaltegger 2014). This is mainly because the client base was convinced of the impeccable quality of products produced by these companies (Klettner, Clarke and Boersma 2014). However, when the scandal revealed that these companies were blatantly involved in defrauding the regulatory authorities as well as their own customers this idea of dependability became obsolete (Trevino and Nelson 2016). Thus the following changes should ideally be incorporated by the company in order to regain its market share. These would ideally also ensure that any further disputes like the defeat device scandal do not reoccur.

Emission Control

The first possible change which should be implemented by the company is an adherence to Corporate Governance Principles. These principles embody structural recommendations which would avoid the ratification of conflicts of interest and would also ensure that the interests of the company and the interests of the stakeholders are considered as the highest priority of the administration of the company (Quarshie, Salmi and Leuschner 2016). Some of these recommendations are the employment of a larger number of non-executive independent directors. These would ensure that the interests of the ownership and administration of the company do not conflict with each other (Carroll and Buchholtz 2014). Another important recommendation is the use of external auditing committees at regular intervals. This would lead to the identification of any form of discrepancies in accounting and financing procedures. A regular evaluation of the directors is also an important step in ensuring that the directors consider the interests of the organization first and not engage in giving effect to conflicts of interest.

Secondly, it would be prudent for the organization to enter into Corporate Social Responsibility (CSR) activities (Klettner, Clarke and Boersma 2014). The societal structure or structures that an organization transacts in is considered as a stakeholder of the organization. This is because activities of the organization directly affect the society and the environment that it transacts in. In this scandal Audi and Volkswagen have been seen to be an active contributor to environmental degradation and pollution (Hörisch, Freeman and Schaltegger 2014).  Thus it would be a beneficial step for the company to engage in Corporate Social Responsibility (CSR) activities as it would show an inclination towards improvement and better social conformity (Hörisch, Freeman and Schaltegger 2014). It would also be seen as an active contributor to the betterment of the environment.

Thirdly, the company would be prudent to adopt the utilitarian approach and the virtue approach into the framework of its activities (Klettner, Clarke and Boersma 2014). This would increase the ethical stand of the company and would avoid any further issues like the scandal.

Conclusion:

To conclude, it may be assumed that for a global conglomerate to function successfully an observance of ethical principles is a must to ensure sustainability. A company would not be able to function as a global entity and maintain its market share unless it is established that the company is ethical and hence a reliable investment. Moreover engaging in fraudulent and illegal activities leads to a massive loss of goodwill in the market as it may be profitable for a certain amount of time but such compliance discrepancies would ideally be identified by the authorities within a reasonable amount of time.  Rupert Stadler was arrested by the German authorities and the same stands testament that in such cases of fraudulent activities the highest levels of administration of the company would be liable to be implicated and these individuals would be held liable for the catastrophic unethical conduct of the organization. It can also be observed that an incorporation of the utilitarian approach and the virtue approach would be the best way to structure the administration of a company.

Utilitarian Approach to Business Ethics

Reference:

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