Why ?Good? Managers Make Bad Ethical Choices

By Chaahat Khattar

We have all been enlightened on Volkswagen’s epic emission fiasco. The mother company of Audi, Skoda, Bugatti, Lamborghini and Porsche allegedly falsified emission results by using a “defeat device”. This defeat device made the engine pass the emission tests while during the routine run on the roads, it worked on the normal mode that emitted 40 times more Nitrogen Oxides (NOx) gases than permitted under EPA standards. As a result, VW could market its products as highly efficient while hiding the fact that they significantly harmed the environment. Although there have been no deaths due to these NOx gases, studies have shown that they have harmful effects in the short term and even lead to poor health nearby areas. The Economist has quoted a study which estimates that 58,000 early deaths in the US have been attributed to NOx. VW earlier admitted that there are 500,000 cars in the USA which have the TDI engine. These devices have been part of the standard equipment since 2005. Last week, VW had confessed that there are 11 million vehicles fitted with such a device globally. This may lead to largest ever car recall and the biggest ever corporate scandal in modern history (VW is facing potential fines of up to USD 18 billion).

The impact of this will not be felt only by VW. The entire automobile industry would be affected. Some analysts even fear that the future of diesel engines itself has come under a cloud.

[su_pullquote align=”right”]The Chairman of Volkswagen group Martin Winterkorn has accepted moral responsibility for the above scandal. He claimed that he was not aware of the existence of such a device.[/su_pullquote]

The purpose of this piece is not to deliberate on the scandal, but to understand why the managers at the world’s second largest automaker allow deployment of such a defeat device? If such a big price would have to be paid for this error, why is it that the managers allowed it to continue?

As I started digging further, I recalled a classic Harvard Business Review (HBR) article that first appeared in 1986, called “ Why “Good” Managers Make Bad Ethical Choices” by Saul W. Gellerman. I was not born back then, but this epic article is nothing less than ‘7 Habits of Highly Effective People’ and is worth reading a million times. The article, through the examples of Manville Corporation, Continental Illinois Bank and E.F. Hutton talks about four commonly held rationalisations that can lead to misconduct by managers:

Belief 1: An activity is within reasonable ethical and legal limits

It is hard to believe that the managers at VW did not know that passing the emission tests using ‘defeat’ software was unethical or illegal. Not just one or two managers, but a team of engineers and designers would have to have known about the device to be able to clear it by unethical means. They also knew that when the cars were going through the normal runs, they were emitting more NOx than what was permissible. They probably knew that it was harmful but were maybe unaware of the extent to which the health of the community was being damaged. In such a competitive world, mileage is extremely important for a car to sell well in the market.

[su_pullquote]For VW’s managers, having less efficient cars than their rivals came at the cost of disappointing their bosses and shareholders.[/su_pullquote]

It is quite possible that the managers would have rationalised that US standards for NOx were higher than European standards in a deliberate attempt to make diesel cars i.e. European cars, less popular. It is very likely, that other companies in the industry are also using such tactics.

Belief 2: An activity is in the individual’s or the corporation’s best interest

The managers of VW, who approved these scandalous methods, did it for their organisation’s interest. VW had a stated goal of becoming the largest car maker in the world, dethroning Toyota. This goal could not have been achieved if the US market was not conquered. So, it is quite likely that the senior managers who had volume targets, pressurised the designers and engineers to find solutions for meeting the EPA’s emission standards. When it was not possible through straightforward means, the ‘defeat’ device method was used to achieve the goals. Out of their own self-interest, none of the managers would blow the whistle.

Volkswagen managers approved to such scandalous measures for their organization’s interest | Photo Courtesy : Visualhunt

Belief 3: An activity is “safe” because it will never be found out or publicised

Given that this tactic was in practice since 2005, it is fair to say that complacency would have set in. The managers probably thought that this secret was ‘safe’ and would never see the light of day. Though some say that Bosch, one of VW’s suppliers, had warned and even requested the company to stop using the device, the managers continued to do so. They lived in the delusion that since it had stayed a secret for so many years, it would never be discovered in the future as well.

Belief 4: If an activity helps the company, the company will condone it and even protect the person(s) who engages in it

The managers at VW would argue that they approved of the defeat device because it was in the interest of VW and not for their personal gains. This is why they assumed that the act would not be condoned by their bosses. VW is known as a highly centralised and hierarchical organisation where most decisions flow top-down from Wolfsburg, Germany. It is quite likely, that the top management would have given tacit protection to the managers who were directly involved in the use of the ‘defeat’ device.

Greed, competition, pressure, numbers or all of them?

So the managers at VW were ‘good’ people.

They had no intention to cause damage to their company or to the environment and health of the society. They were just too myopic and self-centered.

Many of them will now lose their jobs. If the US law takes a harsh view of the misconduct, some may even be imprisoned. They would probably repent for not standing up or not blowing the whistle at the appropriate time. Most would blame their bosses, for demanding impractical targets and numbers.

As the management of VW awaits its punishment, there will continue to be managers making small compromises with ethics. It’s no surprise that their reasons would be the same as those of the VW managers.

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Chaahat Khattar is an ardent economist and is working with an international consultancy firm. He is an MBA and pursuing Masters in Business Laws. He is also a Harvard University alumnus and a certified financial modeller. He has keen interest and experience in authoring research papers and case studies and have contributed to various renowned journals. Chaahat can be reached at ckhattar@gmail.com