In case you were too distracted by the Pope, you probably noticed that Volkswagen has been caught red-handed in a massive scandal involving cheating on the emissions testing of 11 million diesel-powered cars sold in recent years. The costs to the company may be as much as eighteen billion dollars in the US alone. This is by far the biggest of the many automotive scandals—the fiery Pinto, GM’s deadly ignition switches, Toyota’s self-accelerating cars or Ford-Firestone’s exploding tires—in scope, if not in public policy impact.
Diesel is more popular in Europe than in America, in large part because of environmental testing standards. Gasoline engines emit more carbon dioxide, diesel engines, which are more efficient fuel-wise, emit far more nitrogen oxides (NOx) than gasoline engines. Since the introduction of the US Clean Air Act of 1970, NOx emissions are subjected to more stringent controls than CO₂ emissions here, while across the pond, CO₂ is more tightly controlled than NOx. Thus diesel automobiles make up one third of the passenger vehicle fleet in Europe, but are a relative rarity in the U.S. The sales of diesel cars has been on the rise in recent years, however. Now we know why.
Volkswagen, which manufactures many of the beasts, devised and installed a code functioning as a “defeat device” to sense when one of its diesel vehicles was being tested for nitrogen oxide emissions. test. Once a test was detected, the software would reduce torque and NOx emissions, while under normal conditions, that is, when the vehicle was not being tested for emissions, the car would be guided by a separate program that would increase acceleration, torque, and fuel economy.
Clever! Also unethical and, obviously, illegal.
A European non-profit, the International Council for Clean Transportation, was puzzled at how Volkswagen diesels were suddenly passing all the tests, and contacted researchers at the Center for Alternative Fuels and Engine Emissions (CAFEE) at West Virginia University. CAFFEE tested Passats, Jettas, and Golfs, and found that even though the cars passed U.S. emissions tests, the engines were actually non-compliant. After CAFEE released its results in 2014, Volkswagen issued a voluntary recall to address this issue, and attempted to lie its way out of the problem, suggesting that technical issues could explain the increased emissions on the road. The EPA wasn’t fooled, and VW was informed that its 2016 model year diesels would not be certified as compliant until there were plausible answers. Shockingly, Volkswagen told the truth, and confessed that it had designed and installed the “defeat device.”
There are 400,000 VW diesels on U.S.roads that have the defeat device. The company faces EPA penalties of up to $37,500 for each vehicle not in compliance with regulations. Volkswagen stock has dropped 20%, and the CEO has resigned. There is an investigation beginning by the U.S. Department of Justice. Congress will hold hearings on the issue. All of which means the company got caught.
What else does it mean? What’s going on here? The episode means that people in positions of authority at Volkswagen devised this scheme, that engineers knowingly signed off on code that would defeat the purpose of EPA and Clean Air Act regulations, and that the massive cheat was allowed to continue for seven years until it was finally detected. This can only happen in a company that is ethically corrupt from the inside out, rooted in an ethics-free, the ends justify the means culture, and yet, before this, no one suspected that VW was more unethical than any other large company. Is it?
How many other large corporations, not merely in the automotive industry but in others, are similarly corrupt? Bernie Sanders, and not only he, would have us believe that all of them are. I think he’s wrong, but this fiasco hardly bolsters my confidence.
Of course, thanks to the ethics and compliance industry that got rolling here around 1990, we have the security of knowing that U.S. companies are required to approve, implement and teach a Code of Ethics that includes passages like this one, which is typical:
Each of our employees obeys the laws, regulations, and internal rules applicable to their working environment and acts in accordance with Group values and the Code of Conduct.
Each of our employees who do not conduct themselves consistently with the Code must expect appropriate consequences within the scope of statutory regulations and company rules that can extend to termination of the employment relationship and claims for damages.
Each superior ensures that the employees in their area know and comply with the Code of Conduct. Furthermore, Group Auditing will review compliance on a case-by- case and/or random basis as part of the auditing program approved by the Chairman of the Board of Management…
The initial point of contact for each of our employees who has questions or uncertainties regarding the Code of Conduct is his or her superior. Every employee may also contact the Works Council. In addition, every employee has the following contact at Compliance available for further questions…:complaints and tips in connection with existing Company rules can also be directed to the responsible, specialized offices.
This kind of guidance provides an ethics backbone for corporations, strengthening the ethical culture and making it far less likely that…oh, wait.
That’s from the Volkswagen Code of Ethics.
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Sources: Detroit Free Press, Hackaday, New York Times
Graphic: Hackaday
Ethics Alarms 
Here’s my take on what went wrong at VW. (That’s Volkswagen with an “e.”) Sounds like this particular code of conduct only applied to the employees. http://bit.ly/1Ozuh3A
At least I spelled it right about half the time. Or is that worse?
That’s usually the case with such Codes..and we know that if the leaders ignore them, the codes are worthless.
The codes are worthless if they’re imposed from the outside only. Ethical people are ethical with or without codes. That comes from inside. Ethics are taught from birth by families, not suddenly imposed from the outside by institutions and agencies.
Ethical leadership starts from inside the leader. A leader that got that way through being brought up that way. I despair of ever having a majority of ethical citizens because there are so few ethical people being raised by ethical parents anymore.
Of course, there are exceptions, but not many, I suspect.
What I enjoy is the theater in all this. Assorted mouthpieces and execs will do a song and dance routine that would make Gene Kelly envious. I understand the potential legal ramifications, brand protection and compliance issues, but would just love to see a statement that says: ” We totally F’ed up. No one is to blame but senior management. We will accept all consequences for our actions including jail time.” Damn….I might consider buying one.
I completely agree. A similar point was made about the evident contradictions in ENRON’s mission statements. Just as this is an ethics issue, so is it a trust issue, and one I’ve been writing about as well.
The only thing I’d add is to caution against the simplification that these are conscious evil-doers. The truth is always messier.
I’m sure very few employees at VW felt a fully conscious awareness of wrong doing on their parts. That doesn’t mitigate the importance of full on prosecution of leaders, but it does mean we need to recognize the nature of human frailty and group-think, as well as the huge impacts of environment.
Demonization doesn’t work here past a few top people (like Winterkorn, who has no excuse for not having known). But this is also a particularly strong case for the proposition that environments pollute moral behavior – it’s not just bad apples.
The best case I’ve seen for this argument is here:
And a great case for moral outrage not just at individuals but at our overall institutions is today, from the great Henry Mintzberg, here:
http://www.theglobeandmail.com/report-on-business/rob-commentary/volkswagen-corruption-crisis-isnt-a-scandal-its-a-syndrome/article26479332/comments/
To paint this as just a few evil blackhats gone wild is to miss the true nature of evil – it’s endemic in the culture, and that’s much scarier.
Comment of the Day, Charles.
It is just bad apples. That’s what the saying “one bad apple spoils the barrel” means.
I dearly hope the EPA is going to take the opportunity to take closer scrutiny on other manufacturers. While I hope this is a one-off event, it would be nice to be sure. Then again, I may just be trapped in the ‘barn-door fallacy’. This whole incident goes to something I’ve thought, which is that regulatory agencies need more resources (in terms of both money and manpower) and incentives to do their jobs properly. VW got caught only because their scam was so egregious; how many companies, in all industries, are cheating the regulatory agencies without us knowing? In many cases, for instance, the FDA and USDA only have the resources to check food plants once or twice a year. What goes on the other 364 days of the year that we don’t know about? How much of my bratwurst is being cut with rat meat? How much of my Zoloft is being cut with sawdust? How many under-the-table sales are going on in gun stores? We just have no way to know right now.
Sadly, I expect scandals like this. Regular people, too many of them, are convinced safety regulation is just to choke business, instead of protecting their health. Bad emissions aren’t as visible as Love Canal or a hurricane.
That’s because they’ve been told that again and again by politicians and big business. The same goes for environmental regulations. In the last couple months, I’ve started seeing television ads that rail against recent EPA ozone regulations – ads that are absurdly, obscenely deceptive, but deceptive in ways that the layman (IE people without knowledge of chemistry, meteorology, or medicine) wouldn’t catch. The same sort of campaigns go on any time there is a new regulation, and often against existing regulations.
Personally, I’m somewhat against new regulations, but only because we can’t enforce the ones we have now – the VW scandal and the continuing waves of deaths from salmonella and listeria should be proof of that. People are told that these regulatory agencies are trying to choke out business, but don’t realize that agencies like the FDA are so under-resourced and have such low corporate morale that they couldn’t choke out a weasel, let alone Big Auto.
There is input from consumers that can also act as watchdogs. Currently I have my own personal crusade going against Unilever – the producers of Breyer’s Ice Cream. I love ice cream. Grew up with a small plant in my neighborhood.
Now this crusade may appear petty, small and inconsequential to some of you and others. Two local super markets I have filed complaints with regarding false advertising of said ice cream – both in their stores and in their advertisements. Why?
Take a long look at Breyer’s next time you are near a freezer in your local store. Read the label. Most of their ice cream is a “Frozen dairy desert.” It does not meet minimum government standards, yet they charge a big price. Mix it in with the few containers that are still ice cream and blanket advertise it as ice cream. The stores in question? Their response is “Talk to Breyer’s, not us!” Great response.
So I will haunt them. I will continue to pester Unilever. I will file consumer complaints every time the product is incorrectly advertised – that is pure deception.
So that is my current windmill. Will I be successful? Years ago I was laughed at when a group I was involved with – GASP (Group Against Smoking Pollution) attempted to stop smoking in super markets. You see the end result of that.
Bottom line is individuals can make changes when the word gets out.
See http://www.litigationandtrial.com/2010/09/articles/series/special-comment/ebay-v-newmark-al-franken-was-right-corporations-are-legally-required-to-maximize-profits/
Companies are legally obligated to maximise profit, while remaining within the bounds of the law.
VW’s conduct, while unethical, is not obviously illegal. and may not be technically illegal at all. It’s worse than that, subverting the law’s intent.
Moreover, the corporate culture worldwide has been that it is unethical not to maximise shareholder value, regardless of all other considerations. Lawbreaking included, as long as the benefit exceeds the penalty, or there is little chance of getting caught, or where political pressure ban be brought to reduce or prevent any actual consequences. It’s not that they’re unethical – far from it – it’s that the ethical system they operate under is malignant.
And they would have gotten away with it if not for those meddling kids.
Maximizing profit to benefit shareholders does not preclude doing good AND doing well by all stakeholders. The most profitable companies have the “right” core values, have them embedded in the culture, practice them daily, and refuse to chase short-term quarterly earnings. They are meeting the needs of ALL their stakeholders, not just shareholders. It’s simply no longer an either or.
These companies have also “banked” trust right from the Board level down (something Volkswagen certainly did not do) and are less likely to get “rocked” in the wake of a scandal. So when all is said and done, maximizing shareholder value, at the expense of doing the right thing, is a cop out for companies like Volkswagen.
You can read more here. http://bit.ly/1GHV62j
Just be a bit contrarian, cars have long been designed to perform differently depending how you drive them. For example, fuel economy standards are defined under standardized driving conditions. It’s understood that deviating from those conditions — driving uphill, hauling a heavy load, or simply leadfooting it from stoplight to stoplight — could reduce fuel economy. A typical design goal might be to adjust the tradeoff between fuel economy and performance according to the driver’s apparent intent: If they are smooth on the pedals, optimize for the high fuel economy they are apparently trying to achieve, but if they stamp hard on the pedal , downshift the transmission and give them all the power they want.
I’d expect similar tradeoffs between performance and pollution. And in an international market, the engine management software’s rules for making these tradeoffs would probably be customized for the regulatory requirements in each country where the cars are sold.
My point is that the corruption at Volkswagen need not have been particularly widespread, since most of the mechanism for cheating the tests was already present for perfectly legitimate reasons. In fact, since varying engine controls under different conditions is a normal part of engine management, Volkswagen’s problem will probably turn out to be less about what they did and more about how much they did it. I’m assuming there are acceptable variations described somewhere in the regulations.
(If the discrepancies between lab and road tests were small, I might even be willing to believe that this was a case of overly aggressive tuning that unintentionally crossed some regulatory threshold, but it sounds like the differences are too substantial to be a mistake.)
I did a little more reading, and it turns out that modern cars pretty much have to operate differently when they are being tested in a lab, because otherwise things like traction control and stability systems get confused. So even that part is already present in the engine management software. It would have made cheating really easy.
This scandal is worse that you present it. When you look at it, our government encourages such conduct. When you look at what happened, it sure looks like our wonderful Democrats hate the United States and the companies and working Americans. In 1998, the government went after US diesel manufacturers for a less-devious defeat device (it seems that it worked only when the engine was under strain and the emission controls worked at least some of the time during normal operation). They were fined and had to pay for environmental remediation to the tune of $1 billion. The software was not as essential to the running of the engines as VW’s, as the companies were able to make the engines compliant with a software fix.
Enter VW. They not only run this scam, but they market the vehicles as ‘clean diesels’ and environmentally friendly. They make the cars this way for over a dozen years. The EPA refuses to raise the emission limits on diesel cars because they say “well if VW can do it, you can too”, shutting US companies out of the market because they wouldn’t cheat. The environmental group that discovered this fraud was trying to study the VW diesels to prove that US car companies could do the same thing if they wanted to. Their premise was that the US companies are not dedicated enough and American engineers are not as smart as German engineers. What they found is that the VW diesels are horribly polluting cars. Eventually , they got the EPA to take notice. The EPA agreed not to fine VW and agreed to keep the whole thing quiet if VW would just fix the cars. Gee, why didn’t CAT and Mack get that deal? Do only foreign companies get such deals? The only reason this comes to light is because VW told them they fixed the cars and they didn’t. Despite this, it appears that VW is not going to be fined. In addition, the cars are still allowed to be on the road. They don’t meet emissions, never met emissions, can’t be made to meet emissions, but they are still allowed on the road. Those models aren’t legal to register in the US, why are the still allowed on the road. In other news, recent testing show that BMW’s fancy diesels, even with urea injection, emit well over the limit as well and the same is probably true of Mercedes’.
Why shouldn’t German companies act this way? There is no economic incentive not to. They know if THEY get caught, they won’t get fined like a US company will. VW just pushed it too far. If they had quietly recalled the cars, the EPA would have helped them cover it up. They couldn’t fix them, of course, because their engines aren’t even capable of meeting emissions and operate under load (unlike the US diesels above that got fined). We still aren’t going to fine VW (they have set aside money to deal with this and they aren’t including a US fine). We aren’t going to fine BMW. We aren’t going to fine Mercedes. Our government cares more about German companies and German jobs than ones in the US.
Another good lesson to remember, VW isn’t just a company, it is largely owned by the government. A government that likes to tout their own environmental excellence while denigrating the US. When the government owns the companies, who is going to protect you?
This is hardly a precedent. Over ten years ago it was found that ventilated cigarettes are ‘… the major design feature for reducing the official machine smoked, standard tar, nicotine, and carbon monoxide (CO) yields of cigarettes … official tar tests have given regulators the impression that something was being done to reduce the toxicity of cigarettes to human smokers, while at the same time industry documents show that cigarettes were being designed to be “elastic”—yielding more smoke to human smokers than to smoking machines. It is excellent public relations for cigarette manufacturers to appear responsive to governmental and consumer encouragement for less hazardous cigarettes. It should be a public relations disaster to reveal that the industry was aware of compensatory smoking for decades, knew the machine tests underestimated actual smoke exposure, and designed cigarettes to beat the machines.’
Not only did this hardly make a splash but also it was perfectly legal. Volkswagen may well have been acting legally if the laws similarly only addressed the formal testing, and even professionally ethically (that is, not ethically by ordinary understanding but by the standard of “everybody does [or would do] it”, which is how courts have ruled it professionally ethical for doctors to conceal the risk that a throat operation might ruin a singing career, which it actually did).
I have a VW TDI, love it and have recommended it successfully to others. Some were already looking at gas VWs and others looking at small sedans, I can think of about 8 who ended up buying them. I am a gearhead to some extent and I got the car because it is efficient, handles well and is responsive, that was my selection criteria in order of priority. Some of those who I recommended it to had environmentally friendly on their criteria, I now feel responsible for influencing them. VW has always had a strong advocacy among owners, it is a large part of what made them so dominant, they have likely destroyed that for generations, even die hards I know aren’t rationalizing this away. Now if Hillary Clinton zombies could just learn from them.