Reference no: EM131410344

Case 1: The Volkswagen emissions scandal: A case study in corporate misbehavior

What is Volkswagen accused of?
It's been dubbed the "diesel dupe". The Environmental Protection Agency (EPA) found that many VW cars being sold in America had devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The German car giant has since admitted cheating emissions tests in the US. VW has had a major push to sell diesel cars in the US, backed by a huge marketing campaign trumpeting its cars' low emissions. The EPA's findings cover 482,000 cars in the US only, including the VW-manufactured Audi A3, and the VW brands Jetta, Beetle, Golf and Passat. But VW has admitted that about 11 million cars worldwide, including eight million in Europe, are fitted with the so-called "defeat device".

The device sounds like a sophisticated piece of kit.
Full details of how it worked are sketchy, although the EPA has said that the engines had computer software that could sense test scenarios by monitoring speed, engine operation, air pressure and even the position of the steering wheel. When the cars were operating under controlled laboratory conditions - which typically involve putting them on a stationary test rig - the device appears to have put the vehicle into a sort of safety mode in which the engine ran below normal power and performance. Once on the road, the engines switched out of this test mode. The result? The engines emitted nitrogen oxide pollutants up to 40 times above what is allowed in the US.

What has been VW's response?
"We've totally screwed up," said VW America boss Michael Horn, while the group's chief executive at the time, Martin Winterkorn, said his company had "broken the trust of our customers and the public". Mr. Winterkorn has now left the company as a direct result of the scandal and has been replaced by Matthias Mueller, the former boss of Porsche. "My most urgent task is to win back trust for the Volkswagen Group - by leaving no stone unturned," Mr. Mueller said on taking up his new post. VW has also launched an internal inquiry. With VW recalling almost 500,000 cars in the US alone, it has set aside €6.5bn (£4.7bn) to cover costs. The carmaker has said it will begin recalling cars in January.

But that's unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards - a maximum fine of about $18bn. Legal action from consumers and shareholders may follow, and there is speculation that the US Justice Department will launch a criminal probe. Then, or course, there is the cost of fixing all the cars.

How widespread are VW's problems?
What started in the US has spread to a growing number of countries? The UK, Italy, France, South Korea, Canada and, of course, Germany, are opening investigations. Throughout the world, politicians, regulators and environmental groups are questioning the legitimacy of VW's emissions testing. France's finance minister Michel Sapin said a "Europe-wide" probe was needed in order to "reassure" the public. At this time, only cars in the US named by the EPA are being recalled, so owners elsewhere need take no action. However, with about 11 million VW diesel cars potentially affected - 2.8 million cars in Germany itself - further costly recalls and refits are likely. Half of the company's sales in Europe - VW's Av. Blanc 53, 1202 Geneva, Switzerland T: +41 22 906 94 94 F: +41 22 906 94 90 E: [email protected] W: gbs-ge.ch Accredited by: IACBE ECBE EDUQUA Member of: CCIG FEDE FSEP AGEP ACICS biggest market - are for diesel cars. No wonder the carmaker's shares are down 30% since the scandal broke - with other carmakers also seeing big falls in their stock prices.

Will more heads roll?
It's still unclear who knew what and when, although VW must have had a chain of management command that approved fitting cheating devices to its engines, so further departures are likely. Christian Klingler, a management board member and head of sales and marketing is leaving the company, although VW said this was part of long-term planned structural changes and was not related to recent events. In 2014, in the US, regulators raised concerns about VW emissions levels, but these were dismissed by the company as "technical issues" and "unexpected" real-world conditions. If executives and managers willfully misled officials (or their own VW superiors) it's difficult to see them surviving.

Questions
Q1. Discuss the main issues that Volkswagen has been involved in. Be specific in your discussion.

Q2. Explain why the case can be appropriate as a CSR-related topic. Give details to support your answer.

Q3. If you were a decision maker at Volkswagen, what will you do to remedy the situation? Give at least two recommendations to support your answer.

Case 2: British pharmaceutical
British pharmaceutical giant GlaxoSmithKline (GSK) has been accused by Chinese police of a massive bribery network run with travel agencies that were used to funnel $450 million to doctors, hospitals, and officials since 2007.

An anonymous tipster sent emails and documents to a newspaper, which showed sales staff bribing doctors with speaking fees and lavish gifts like Rolex watches if they prescribed GSK's products. GSK currently spends $82 million a year paying doctors to speak at or attend conferences. GSK is even accused of organizing fake conferences to account for the money. The investigation against GSK was announced last week and four senior GSK executives are being held for "serious economic crimes" and the head of GSK's operations in China recently left the country. His departure coincided with a number of investigations of the company's offices.

Five months after the Chinese investigation, GSK announced that it will stop paying doctors for promoting its drugs and stop having targets for its marketing staff -- a first for an industry battling scandals over its sales practices, and a challenge for other pharmaceutical companies to follow suit. Britain's biggest drugmaker also said it is addressing conflicts of interest that could put commercial interests ahead of the best outcome for patients.

In the United States, the industry's biggest market by far, many companies have run into conflicts over improper sales tactics and GSK reached a record $3-billion settlement with the U.S. government last year over charges that it provided misleading information on certain drugs

"I think other companies will follow suit, but one of the biggest problems is that the industry persists in regulating itself," he said. "The only way to properly control promotion is strong and enforced regulation by the state."

The decision to stop payments to doctors for speaking about medicines during meetings with other prescribers marks a big shift for a global industry that has always relied heavily on the influence of experts in promoting products.

Questions
Q1. Using two of the CSR Approaches discussed in the course, explain how ethics has to persist in the pharmaceuticals industry. Be sure to give examples from the case to illustrate your point.

Q2. Discuss at least two important concerns related to unethical practices in GSK. If you were to apply the Principles of CSR, what could be the most appropriate principle that can be discussed?

Q3. Draw strategic recommendations on how the two concerns in question 2 can be addressed.