The German automaker, Volkswagen AG has many famous models sold around the world and in the United States. About five hundred thousand VW models which were sold in the U.S. between the years 2009 and 2015 were powered by diesel engines. During the same period, there were about 11 million diesel-powered engine vehicles sold around the world. Diesel vehicles are more fuel efficient (up to 30% more miles per gallon) than regular gasoline-powered ones and emit lower levels of carbon monoxide. However, to meet the strict exhaust, and nitrogen oxide emission guidelines, diesel vehicles require extra equipment and exhaust trap systems to meet such requirements (Jung & Park, 2017).
To reduce costs, improve efficiency of the vehicles and pass all emission testing required by the U.S. and other countries’ environmental regulations, VW installed a piece of software – a defeat device – to allow only few emission controls to be activated during tests, thus passing the emission inspections, and deceive the environmental and transportation authorities.
On September 18th, 2015, the U.S. Environmental Protection Agency (EPA) sent a notice of violation of the Clean Air Act to Volkswagen AG ‘VW’. After a thorough investigation, the EPA and CARB (California Air Resources Board) stopped sales of Volkswagen vehicles powered by diesel engines in 2016 (Jung & Park, 2017). The VW conspiracy was globally known as ‘The Dieselgate’. The organization faced a global crisis and was being investigated by environmental agencies and justice departments in many countries including the U.S. (Gwyther, 2015).
Martin Winterkorn, Volkswagen’s CEO since 2007, denied the allegations, early on, and his knowledge of the emission defeat device installed in the vehicles. After tests results were revealed publicly by the U.S. authorities showing that nitrogen oxide emission levels were about 40 times higher than the regulations threshold, Winterkorn and VW admitted that they mislead the authorities, and by end of September 2015, Winterkorn resigned from VW (Painter & Martins, 2017).
Although VW corporation acknowledged their fault, apologized to the public, their customers and the governments of many nations, VW incurred massive financial losses ($25 billion in US only), criminal penalties and fines ($4.3 billion), loss of market value (over $16 billion) and reputation damages, which in aggregate, exceeded any financial benefits achieved by concealing the true emission levels since 2009 until 2016 (Shepardson & Taylor, 2018).
Martin Winterkorn leadership style had been described as authoritarian, perfectionist, cultivated a culture of fear, focusing only on results to appease the Board of Directors and shareholders plus, he did not allow a healthy flow of communication among different levels of management (Jung & Park, 2017). A major warning sign that many C-suite leaders fail to acknowledge, is putting the financial and product performance goals above, and ahead of, public safety and government regulations. Martin Winterkorn and the engineering team responsible for VW Diesel powered emission regulators, were a good example of such leadership failure (Painter & Martins, 2017).
Among other missteps or gaps in Winterkorn leadership style was the lack of empowering his management teams to do the right thing and make the right and ethical decisions, and not being a visionary to appoint the right compliance team to track, study and recommend changes based on the continuous changes in environmental regulations and laws in the U.S. and the rest of the world (Lagadec, 2009).
Winterkorn had the power to comply with the U.S. EPA regulations, measure the costs and set the pricing of VW’s products accordingly. Instead, he reduced costs by utilizing outdated emission compliance regimes (Painter & Martins, 2017), concentrated the company’s efforts to boost sales growth in the short term, reduced prices to gain the highest market share possible. When the conspiracy was discovered by the U.S. EPA, he underestimated the crisis, the public reaction, and the media coverage. He denied accountability and knowledge of the ‘defeat devices’ which concealed the emission levels of the diesel-powered vehicles. His denial of the allegations was not met graciously received by the public opinion, and that lead him to resign immediately from VW group by the end of September 2015, under pressure from the Board of Directors (France 24 Live News, 2015).
Winterkorn made several judgmental and ethical mistakes. He was a hardliner boss, not trusting or empowering his teams of engineers and intelligent leaders (Lagadec, 2009), was not transparent and ethical in following the legal requirements and placing the public safety ahead of shareholder earnings (which proven over the time to be the wrong and very costly strategy) and was not a good communicator. Many believe that the coverup of the defeat devices for so many years cannot have been done without his knowledge, and they would be right in their assumptions based on his management style. VW current leadership had learned the lesson, the hard way and have been implementing a much transparent crisis management strategy to gain the trust of their customers, the public, the governments and their shareholders (Painter & Martins, 2017).
