Volkswagen Emissions Fraud Essay

Decisions Influenced by Bias

Volkswagen produced vehicles that were equipped with emissions controls that were designed to shut off once the cars had passed regulatory tests. As s result, not only did the cars pollute more in real life than in those tests, but the company benefitted from these tests financially, because they showed that diesel engines were less polluting than gasoline ones. The result was misleading the public, making the company eligible for subsidies that gave it competitive benefit, and misleading the public, as many people may have chosen to buy a Volkswagen in part based on the emissions performance of the vehicles (Parloff, 2018).

Biases at Play

There were a few different biases at play in the Volkswagen case that can be unpacked. The first of these is the bias towards the optimal motivations of executive action. The company’s senior executive at the time, Martin Winterkorn, was aware of the practice when he ascended to his new role – and had been one of its driving forces during implementation. Further, he continued the practice, and was eventually brought up on fraud charges in the US as a result (Smith, 2018).

The first bias was likely the decision between duty – duty to shareholders to enhance the stock price, and duty to the public and regulators to provide emissions information that was accurate. The duty to regulators was legal. The duty to shareholders is real, but not legal, but it also included a duty to himself, as he would also benefit from an increase in the share price. The duty to the buyers is ethical, but not legal, and can probably be interpreted in a number of ways. Thus, WInterkorn’s actions – and indeed the actions of all at Volkswagen in this case – were influenced by personal gain.

Palmiter (2017) provides some insight into the different ethical conflicts that can arise. One is the conflict between fairness and cheating. In this case, the fairness certainly includes shareholders, who have at least some priority in the hierarchy of stakeholders. The author advances the idea that non-shareholder constituents should have the same level of interests as shareholders, but of course when the CEO’s personal wealth is heavily invested in what is good for the shareholders, the CEO will have a distinctly different perspective on the matter. That bias seems to move away from the concept…

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…interest in the first place, not to mention his participation in the project initially.

Because moral hazard is often created when there is a gap between the time period for the reward and the behaviors desired, Volkswagen either deliberately or accidentally created moral hazard in hiring Winterkorn to the top job (Cook, 2008). Therefore, the company had the opportunity to reduce the risk of such fraud by removing much of the moral hazard concerned with equity-based compensation and the misalignment of corporate goals and executive goals. This is done at the level of executive compensation structure, because once the moral hazard itself is created, the likelihood of unethical behavior is much higher. This is why in the Untied States, the Sarbanes-Oxley Act build into its structure prison terms for senior executives engaged in fraud, as a means of balancing out the moral hazard associated with equity-based compensation.

Conclusion

The Volkswagen emissions fraud was the result of moral hazard, which in turn was created by bias towards actions that benefit oneself that were not effectively counterbalanced by actions that benefited either the long-term shareholders or by non-shareholder interests. As such, Volkswagen’s Board bears much of the responsibility, though of…