volkswagen consulting case study

The transformation of the global automotive industry is accelerating, and China has beaten the rest of the world off the line.

China’s auto industry is producing 44% or more of the world’s total electric vehicle (EV) inventory—the largest share of any nation, by far. The country has also rolled out more than 800,000 public charging stations, vastly more than anywhere else. China’s EV producers include domestic companies as well as major international automakers. Multiple startups and even electronics manufacturers are getting in on the game as cars become more digital and more interconnected every day. It’s the dawn of the Internet of Vehicles (IoV).

For FAW-Volkswagen, a joint venture between Volkswagen and FAW, one of China’s largest automotive companies, the goal is to get out in front of the transforming industry by transforming itself. Beyond producing great vehicles, the company wants to deliver an overall customer experience of such quality that it turns first-time customers into lifetime customers.

Toward that goal, FAW-Volkswagen has engaged IBM Consulting® , followed the IBM Garage™ Methodology and implemented IBM Cloud Pak® for Integration to transform its development capabilities and bring together the ecosystem of services involved in today’s driving experience into a seamless, convenient experience for the driver.

Customer-focused transformation

IBM helped FAW-Volkswagen build and train a digital innovation team of > 150 people to drive a customer-focused transformation

Millions of new users

With enhanced customer experiences, the company has registered > 3 "million new users for its VW and Jetta brand apps"

“The digital transformation of the auto industry is an important pillar of China’s national economy,” explains Weipeng Jin, FAW-Volkswagen’s Manager of Internet Application Development, Management Services Department, and Head of Chengdu R&D Center. “At FAW-Volkswagen, we’re laying a solid foundation to be the country’s leading innovator in electric vehicle production and in the digital automotive business. While making great cars, we also aim to contribute greatly to the national digital economy strategy.”

FAW-Volkswagen is China’s first carmaker built to meet the scale of the Chinese market. At eight manufacturing plants in five cities, it produces Volkswagen and Audi models, and a separate line of vehicles named for VW’s Jetta brand.

So, as demand for EVs skyrockets, the challenge for FAW-Volkswagen is not so much about manufacturing scale.

It’s about software development.

Today’s high-end automobiles contain more than 100 million lines of code. (For comparison, a Boeing 787 Dreamliner contains about 14 million lines of code. The Large Hadron Collider, the world’s largest particle accelerator, contains 50 million lines.) And as vehicle technology continues to evolve—offering more control options and media, more functionality through mobile devices, and even self-driving capabilities and IoV connectivity—the amount of software will continue growing exponentially.

FAW-Volkswagen wanted to create seamless integrations between the software and the ecosystem of external services consumed by drivers—such as streaming media, parking, charging and navigation services—and maintain the seamlessness even as the software in every element continues to rapidly evolve.

To make it happen, however, the company needed to extend its development capabilities. “There is a huge difference between software and traditional electronics in terms of research and development methods. Software development focuses on agile iteration and practice, which poses a huge challenge to the R&D organization of traditional car factories,” explains Jin. FAW-Volkswagen aimed to shift the R&D paradigm to focus on cloud-native development and integration.

To build the internal skills needed to meet its goals, FAW-Volkswagen turned to a trusted partner it has worked with for more than 20 years: IBM Consulting. The IBM team helped FAW-Volkswagen transform not just the skills of the client’s development team, but also the very nature of the team within the company.

This was no mere training workshop. IBM Consulting employed the IBM Garage Methodology—proven practices that guide a company through designing, building and scaling solutions for end-to-end transformation—to help the FAW-Volkswagen R&D Center in Chengdu, China, create and train a 150+ person digital-innovation team in Design Thinking and agile operations, including DevOps practices, to support the organization’s transformation into a more customer-focused enterprise. The process generated innovative ideas and equipped FAW-Volkswagen with the practices, technologies and expertise to rapidly turn those ideas into business value.

For example, the teams identified a deficiency related to the three distinct networking platforms for FAW-Volkswagen’s three major car brands. A lack of scalability and stability across the platforms hindered innovation and delivery of new projects. “Based on this discovery,” says Jin, “we initiated the integration of the three brands and built an advanced, stable and evolvable Internet of Vehicles platform to solve the current dilemma and promote ongoing innovation that can more easily be applied across the brands.”

On the technology side, FAW-Volkswagen implemented IBM Cloud Pak for Integration, which provides integration patterns that align with the company’s requirements. FAW-Volkswagen uses IBM Cloud Pak for Integration components, as well as the IBM Cloud Pak’s  Red Hat® OpenShift®  container platform, to develop containerized API-based integrations across two use cases: ecosystem integration and back-end integration.

The ecosystem integration brings the diverse digital service ecosystem into vehicles as well as customers’ mobile devices. This includes integration with partners in streaming media, parking services and, in particular, EV charging services. There are multiple charging network operators in China, some that support alternating current (AC), others that support direct current (DC), with varying charge speeds available. FAW-Volkswagen uses the IBM Cloud Pak’s API gateway to mediate integration and accelerate the onboarding of charging operators. And drivers get a streamlined experience: they see all available charging options, filtered to their vehicles’ requirements, in a single FAW-Volkswagen app.

The back-end integration connects the company’s systems of record to the always-evolving software of all FAW-Volkswagen vehicle models. This includes synchronizing product development and manufacturing processes with agile development of front-end software. For customers, it means a more convenient and seamless experience. For example, a car owner can place a maintenance order to a dealership from the car’s head unit or from a mobile app, or track production progress of a recently ordered car. In each case, the IBM Cloud Pak’s API management component exchanges information via APIs between the customer’s interfaces and back-end systems such as the dealer management system and the manufacturing execution system.

“We use the API management capability in the Cloud Pak for Integration to reduce onboarding time for ecosystem partners from months to weeks,” says Jin. “For back-end integration, we use APIs to simplify access to complex applications, reducing the time to develop solutions that use these systems by 50%.”

“We’ve created a compelling customer experience on all touch points powered by digital technologies and data,” says Jin.

And customers have noticed. More than three million new users have registered for FAW-Volkswagen’s VW and Jetta brand mobile apps since the company’s development and integration transformation.

From ordering a car to driving it, FAW-Volkswagen has improved the experience.

It became the first mainstream, joint-venture vehicle enterprise to enable online custom vehicle orders. More than just a convenient new feature, “the Order to Delivery project initiated a profound change in our production planning,” explains Jin. “We have moved from an inventory-oriented model to a customer-oriented model. We can grasp users’ preferences and needs, quickly convert them to products and flexibly adjust production to satisfy expectations.”

As an example of its innovations in the driving experience, FAW-Volkswagen won a 2021 Red Dot Brand and Communication Design Award (link resides outside of ibm.com) for its Smart Cockpit Human-Machine Interface (HMI) design.

The company garnered additional accolades for transforming the very nature of its development team from a factory-focused software department to an agile group of innovators. The Chengdu R&D team became the first team within FAW-Volkswagen to gain independent R&D capabilities and won an IDC award for “Best in Future of Digital Innovation” for an intelligent network digital capacity-building project, which included the establishment of an intelligent ecosystem middleware platform. Weipeng Jin was also recognized as the “Rising Star of the Year” in the 2021 IDC China Future Enterprise Awards.

FAW-Volkswagen has changed what the company means to its customers. No longer just a producer of cars, it’s also an innovator of the experience of modern driving. “Moving forward,” says Jin, “the customer experience will continue to be our guiding principle. Using agile development and integration, we will continue to create excellent business and travel services and optimize customers’ driving and riding experiences.”

Founded in 1991 and jointly managed by First Automotive Group Corporation, Volkswagen AG, Audi AG and Volkswagen (China) Investment Co., Ltd., FAW-Volkswagen operates in China and produces Volkswagen and Audi automobiles and a separate line of vehicles named for Volkswagen’s Jetta brand. The company employs more than 40,000 people and produced more than two million vehicles in 2020.

To learn more about the IBM solutions featured in this story, please contact your IBM representative or IBM Business Partner.

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Produced in the United States of America, March 2022.

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It is the user who decides on the success of your products.

Case study volkswagen ag.

UX Strategy & Management Volkswagen AG

• Strategic consulting
• Workshops across teams and departmental boundaries
• Clarifying roles, responsibilities, and processes
• Training on UX Management
• Establishing agile research processes

Volkswagen is currently facing one of the biggest transformations in the company's history: the transition from car manufacturer to e-mobility provider. The advancing digitalization leads to new challenges:

• Making online car sales possible
• Explaining new technologies such as e-drive systems and connectivity to customers
• Merging a fragmented digital product landscape into a coherent web presence
• Establishing digital channels for marketing new mobility services
• Integrating more than 100 markets in the design and rollout processes of the digital products

Volkswagen is convinced that these challenges can only be met by clearly aligning the digitalization process with customer requirements and needs. UX Management is key to creating an extraordinary user experience that inspires customers and leads the company to success.

The Starting Point

Although user experience was already recognized as important at Volkswagen, UX topics were not yet firmly incorporated in the company and were not managed across projects at the beginning of our collaboration.

Of the four components of user-centered design – understanding, exploring, designing, and testing – UX activities were focused almost exclusively on testing individual digital products at irregular intervals. Cross-departmental collaboration on UX was sporadic.

Furthermore, user research and UX testing were not integrated into the agile design and development process. This meant that new concepts could not be evaluated and iterated quickly enough. For example, usability test results were only available after development had already begun. Therefore, it was not possible to correct detected weaknesses before the launch.

The challenges for us as a usability and UX service provider were numerous. On the one hand, our task was to cover the operative research and testing needs. At the same time, we developed concepts to continuously increase the organization’s UX maturity level. Here, it was important that UX activities are well integrated into the agile development process and are internationally scalable.

Our Approach

Given the scale of the challenges and the complexity of the corporation, it was clear that rapid progress could only be achieved through continuous and close cooperation.

The initial focus was to better integrate design, UX testing and development activities. We established regular user days – agile one-day usability tests . This format made it possible to align user research very flexibly with the urgent questions of the product owners without slowing down the agile process. Product designers, product owners and developers were directly involved in the evaluation of the results on the testing day. This allowed them to iterate the very next day (see also Case Study VW User Days ).

Furthermore, we concentrated on the following measures:

• Establishing the role of a UX Manager. Development and training of two UX Managers on the VW side.
• Defining user research and UX testing processes together with the UX designers and Volkswagen product owners in accordance with design and development sprints.
• Expanding the range of methods: Using quantitative methods such as top task analysis , onsite surveys or tree testing to prepare strategic decisions.
• Breaking down departmental boundaries and increasing collaboration through frequent holistic UX testing, based on real user journeys and not on product boundaries.
• Joint workshops to develop solutions for problems that cannot be solved by individual departments.
• Building empathy towards the user through basic user research on the car purchase process.
• Developing a concept for elaborating and validating the new information architecture in international markets.

As with all strategic projects, expanding the UX maturity level in a company of this size takes time. Through UX management and strategy consulting, the UX maturity level at Volkswagen is continuously increasing. Due to sharpened processes and roles, and the newly created UX culture, the latest global website relaunch was thoroughly user-centered and completed in less time than was usual before.

For Volkswagen, there are already very solid signs of success on the road to becoming a user-centered company:

• Roles and responsibilities in the UX area are clearly defined.
• Research and testing processes have been defined and are in line with agile product development.
• Cross-product testing is taking place more and more often, departments are following user journeys and work in silos less frequently.
• VW is active in all phases of the user-centered design process (understanding, exploring, designing and testing).

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Crisis management and rebuilding reputation at Volkswagen

Talking to Oliver Larkin, the group head of IR at Volkswagen who took over the role as the company’s well-publicized diesel scandals were hot copy for the world’s media, it’s interesting to hear that it’s only in the last six to 12 months that long-only investors have increasingly started asking ESG-related questions. This would indicate that it’s something other than the emissions scandals that has pushed up engagement around ESG issues. 

‘The impression I get is that ESG screening has increased significantly,’ says Larkin. ‘I think it has much to do with climate change and pension funds and the like wanting to make sure they’re investing in the right sort of industry, in industry that supports the goals of the Paris Agreement.’

Speaking to IR Magazine in March for the Who’s afraid of the big, bad governance wolf? feature in the summer 2019 print issue, Larkin explains that as the company’s CEO had recently noted, ‘Volkswagen represents around 1 percent of global CO2 emissions if you include all our cars on the streets, which makes us an important player in the whole climate change discussion.’

He also notes that until the diesel scandal – in which it was revealed that Volkswagen (and other big-brand carmakers) had been installing secret software to make engines appear cleaner in tests than they were on the road – came to light in 2015, with a follow-up scandal in 2018, Volkswagen was in fact a founding member of the UN Global Compact and the only automotive company in the FTSE4Good Index. 

As a result of the diesel revelations, the firm suspended its membership of the UN Global Compact and was dropped from the FTSE4Good Index – something that Larkin says still means some investors are unable to buy the stock.

Noting that the emissions story will be four years old in September, Larkin says the conversation has certainly evolved – but not disappeared: ‘For investors, while the issue is more or less understood and managed, the news flow continues in the background on the legal cases, which generates further headlines and commentary.’

Handling a global crisis

Something that Larkin says ‘slightly complicated matters’ when the scandal came to light was that the head of IR had left the company in May 2015, and Larkin – number two in the team – was based in London rather than Germany.

The company had previously had a non-IR person ‘as a sort of temporary head of the team’ until the scandal broke. ‘From the moment the diesel crisis happened I was working Monday to Friday in Germany, working with the interim head of IR and managing, from an IR perspective, how we handled the crisis,’ Larkin recalls.

‘As a company, we immediately put in place a task force team, with representatives from the communication side but also from the technical side and the legal side evaluating the information as it was coming through – and those people were working 24/7.’

Volkswagen also brought in specialist situation consultants, both in Germany and in the US but more or less working globally to help the company ‘manage the message and to manage the relationship into the different legal environments we were dealing with,’ Larkin continues. ‘And of course you can imagine that on the legal side we had significant external support on board as well.’

The IR team at the time was made up of 12 people based across the UK, Germany, the US and China – and Larkin says the impact of the scandal differed in different regions, noting that in China, for example, where Volkswagen has no diesel market, sales continued to climb until last year. Impact on the company’s reputation also varied from one country to the next, with Larkin noting that the company was perhaps harder hit in Germany and the UK than elsewhere. 

Looking at things from a global perspective, however, sales continued to rise steadily. Did this make conversations with analysts and investors easier? ‘It’s common knowledge that our reputation has been damaged,’ Larkin says, which has an impact even if sales remain strong. 

The market response

The investment response was varied, Larkin notes, with some investors taking advantage of the low share price and betting on gains while for others – particularly on the ESG side – Volkswagen became a no-go area. There was also a sell-down by some long-only investors and the company’s share register ‘became a lot more hedge-fund centric’ as investors tried to guess how the story would progress. But the fact that some investors were apparently unfazed by the scandal doesn’t mean Larkin and his team took their roles lightly.

Larkin says he’s ‘aware of one or two investors who left the industry or left their companies, in part because of their portfolio performance in that year, which of course was impacted by their investments in Volkswagen. And that’s something I personally find quite difficult.’

He adds that although these discussions often focus on equity investments, on the fixed-income side the issue of ESG has also ‘climbed very much up the agenda’. 

‘As a result of the scandal, for example, we didn’t issue any dollar-denominated bonds for more than two years – and the US bond market is an important source for us,’ Larkin explains. ‘A company like ours relies on €30 bn to €40 bn ($34 bn to $45 bn) of debt issuance per year and for any impact on ESG to hit the income side is something we have to take very careful note of.’ Volkswagen returned to the market in fall last year ‘as things settled down,’ he adds.

The growth of ESG

Going back to his earlier comments around the growth of ESG, Larkin says ‘ESG has picked up for everybody across the auto sector. The whole emissions issue has become a topic all auto sector IROs have had to deal with because others have also been under investigation and found wanting.’

But what’s driving the more recent shift? ‘There seems to be a much stronger awareness around ESG issues,’ notes Larkin. ‘I think there’s also a much stronger lobbying group from inside the investment community, which is building alliances across investors to drive change in the finance community. Governments, of course, are also pressuring investors to use their votes in AGMs and be more direct in how they steer their underlying investments.’

In a way, the diesel scandal also helped shine a brighter light on ESG issues, he adds: ‘Investors are being perhaps more outspoken and a little bit more aggressive in promoting their views on these issues.’

The way investors approach ESG issues internally is also evolving, Larkin says, citing a conversation with someone from a ‘very global fund’ who has been tasked with designing the framework around that fund’s ESG screening. ‘He’s on the fixed-income side and he’s designing the ESG screening tool,’ he says. ‘That for him is something new – in the past it was much more of a junior activity.’

Despite the damage to its reputation from the emissions scandals, Volkswagen is responding to the growing demand for ESG information. ‘Diesel is something that will always be in our history, and we have to take that into account, but one thing we did in response to all this was to hold an ESG forum in Berlin in July last year where we had about 40-50 attendees,’ says Larkin. ‘At least twice a year we also do ESG roadshows and I just see that increasing more and more in the months and years ahead.’

This is a longer version of an interview with Oliver Larkin of Volkswagen for the summer 2019 issue of IR Magazine

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...

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Case study: How the Volkswagen Group promotes compliance

The Volkswagen Group is one of the world’s leading automobile manufacturers and the largest automaker in Europe – delivering, in 2018, a total of 10,834,012 cars and commercial vehicles to customers. Compliance with national and international laws and regulations, internal rules and voluntary commitments is among the Volkswagen Group’s guiding principles     Tweet This! , along with ensuring compliant behaviour in a lasting manner.

This case study is based on the 2018 Sustainability Report b y the Volkswagen Group published on the Global Reporting Initiative Sustainability Disclosure Database  that can be found at this link . Through all case studies we aim to demonstrate what CSR/ ESG/ sustainability reporting done responsibly means. Essentially, it means: a) identifying a company’s most important impacts on the environment, economy and society, and b) measuring, managing and changing.

The Volkswagen Group believes that only with lasting, dependable integrity and compliant behaviour will it gain and strengthen the trust of its staff, customers, shareholders, business partners and the general public and seeks to become a role model when it comes to integrity and compliance. In order to promote compliance the Volkswagen Group took action to:

• implement a Code of Conduct
• provide channels for reporting misconduct
• encourage training and communication

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• Which are the most important impacts (material issues) the Volkswagen Group has identified;
• How the Volkswagen Group proceeded with stakeholder engagement , and
• What actions were taken by the Volkswagen Group to promote compliance

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What are the material issues the company has identified?

In its 2018 Sustainability Report the Volkswagen Group identified a range of material issues, such as environmentally friendly products, human rights, product and transport safety, zero-impact mobility, customer satisfaction. Among these, promoting compliance stands out as a key material issue for the Volkswagen Group.

Stakeholder engagement in accordance with the GRI Standards

The Global Reporting Initiative (GRI) defines the Principle of Stakeholder Inclusiveness when identifying material issues (or a company’s most important impacts) as follows:

“The reporting organization shall identify its stakeholders, and explain how it has responded to their reasonable expectations and interests.”

Stakeholders must be consulted in the process of identifying a company’s most important impacts and their reasonable expectations and interests must be taken into account. This is an important cornerstone for CSR / sustainability reporting done responsibly.

Key stakeholder groups the Volkswagen Group engages with:

To identify and prioritise material topics the Volkswagen Group carried out a number of stakeholder surveys and, also, organised a Stakeholder Panel.

What actions were taken by the Volkswagen Group to promote compliance ?

In its 2018 Sustainability Report the Volkswagen Group reports that it took the following actions for promoting compliance:

• Implementing a Code of Conduct
• The Volkswagen Group’s Code of Conduct is the key instrument for strengthening employees’ awareness of correct behaviour and finding the right contact persons in cases of doubt. The Code of Conduct was revised in 2017, and was established throughout the Group. The framework is available to all employees on the intranet and to third parties on the Internet at any time. The Code of Conduct is also integrated into operating processes. For example, employment contracts for employees of Volkswagen AG include a reference to the Code of Conduct and the obligation to comply with it. In addition, compliance with the Code of Conduct remained part of employees’ annual reviews in the reporting period and was thus taken into account when calculating their variable, performance-related remuneration. In addition to the Code of Conduct, there are various Group policies and guidelines regarding specific compliance issues. Organisational instructions also apply on dealing with gifts and invitations, as well as on making donations.
• Providing channels for reporting misconduct
• The Volkswagen Group has had a system for reporting any breaches of the law or rules since 2006. This system is optimised on an ongoing basis. Among other things, a central investigative office has been set up in the Compliance department, which is responsible for coordinating the whistleblower system within the Volkswagen Group and for processing information concerning Volkswagen AG and its subsidiaries. Information on misconduct can be submitted in any of the major languages used by the Group and is treated confidentially. The people providing the information will be protected and need not fear any sanctions for their actions. They can decide for themselves whether they wish to give their names. For this reason, a specially protected online reporting channel was set up in 2017, via which information can be sent to the investigative office anonymously. The Volkswagen Group continues to rely on established channels such as the ombudsman system, too. This system can be used to confidentially report any suspicions – in one of 11 different languages – to two independent lawyers appointed by the Group. The ombudspersons and the whistleblower system can be used by anyone, employees and people outside the Group. In addition to the existing reporting channels, since August 2018 it has also been possible to report potential breaches of rules via a 24/7 telephone hotline. By calling the relevant number, employees, business partners and customers anywhere in the world can provide information round the clock, 365 days a year. A caller who calls the global telephone number will speak to a specially trained person, who can include an interpreter in the call if necessary. In addition, a revised Group policy was passed in 2018. This has further improved the whistleblower system, by providing extra communication options. The whistleblower system was also strengthened significantly by adding more staff. In 2018, a total of 2,920 reports were registered throughout the Group. All substantiated reports have been, or will be, investigated, and any misconduct penalised.
• Encouraging training and communication
• The Code of Conduct, is a key component of compliance training. The training is completed by anyone, from directors to individual employees. Face-to-face and web-based or online training is used. Following a risk-based approach, mandatory compliance training is provided for specific target groups. In addition to traditional lectures and online tutorials, case studies, role-playing games and other interactive formats form part of the training provided to employees and managers. Employees can also use special e-mail addresses to solicit advice on compliance issues. All internal channels are used to communicate regulations and other compliance-related content, with a focus on further developing the whistleblower system over the course of the reporting period. Online communication takes place mainly via employees’ own posts on the Volkswagen intranet and on the internal, Group-wide communications platform “Group Connect”. There are also articles, interviews and other publications in cross-brand and specific divisions’ media. At the same time, compliance-related issues are publicised at various employee information events and company meetings held at a number of locations.

Which GRI Standards and corresponding Sustainable Development Goals (SDGs) have been addressed?

The GRI Standards addressed in this case are:

1)  Disclosure 205-2 Communication and training about anti-corruption policies and procedures

2)  Disclosure 205-3 Confirmed incidents of corruption and actions taken

Disclosure 205-2  Communication and training about anti-corruption policies and procedures corresponds to:

• Sustainable Development Goal (SDG) 16 : Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
• Business theme:  Anti-corruption

Disclosure 205-3  Confirmed incidents of corruption and actions taken corresponds to:

78% of the world’s 250 largest companies report in accordance with the GRI Standards

SustainCase was primarily created to demonstrate, through case studies, the importance of dealing with a company’s most important impacts in a structured way, with use of the GRI Standards. To show how today’s best-run companies are achieving economic, social and environmental success – and how you can too.

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References:

1) This case study is based on published information by the Volkswagen Group, located at the link below. For the sake of readability, we did not use brackets or ellipses. However, we made sure that the extra or missing words did not change the report’s meaning. If you would like to quote these written sources from the original, please revert to the original on the Global Reporting Initiative’s Sustainability Disclosure Database at the link:

http://database.globalreporting.org/

2)  https://www.globalreporting.org/standards/gri-standards-download-center/

Note to the Volkswagen Group: With each case study we send out an email requesting a comment on this case study. If you have not received such an email please contact us .

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Critical Lessons from the Volkswagen Scandal

Ethical failings precipitated the auto giant’s reputation crisis.

Volkswagen has paid dearly for the ethical shortcomings that led to “Dieselgate.” But has VW learned from the scandal? With the FTC recently filing the final court summary on the case, Michael Toebe reflects on the crisis that leveled the company’s reputation.

Volkswagen’s good name has been tarnished regularly in the media in the last four years over its low-level decision-making and irresponsibility. Severe financial penalties have been meted out as punitive and corrective measures. There are lessons to be learned from VW’s errors.

In 2015, the company confessed to cheating emissions tests on 11 million vehicles across the globe. “Dieselgate,” as the scandal was called, was a punch to VW’s reputation. The financial hit, significant. The company has paid a whopping $9.5 billion in the last four years to American car owners.

That’s historical, with the Federal Trade Commission (FTC) calling it the “largest consumer redress program in U.S. history.”

The total penalties paid internationally has totaled $35 billion.

VW knew of the problems with its vehicles. As is common in developing scandals and the reputation crisis that accompany them, instead of responding ethically, leadership engaged in reckless decision-making. The needed corrections were deemed undesirable, and the financial incentives and temptation to cheat proved too great.

There is, however, another school of thought, says Bret Hood, Director of 21st Century Learning & Consulting and adjunct professor of Corporate Governance and Ethics at the University of Virginia. “Some have argued that VW actively contemplated the risk versus the reward, but I would bet that they approached the issue as did Ford with the Pinto. We take the issue and turn it into a cost-benefit analysis and, as we are taught, the lowest cost is the choice,” he says. “Where we are fallible is that we never do an objective evaluation, because our System 1 brains (automatic) are working in our subconscious to help us produce a predetermined outcome; in this case, sales volume.”

Hood sees another variable as very likely in play, as questionable a rationalization as it could seem to critics. “There are a number of ethical models, such as the Rest Model, Kohlberg’s stages of moral development and the Jones Moral Intensity model, but as Ann Tenbrunsel and Max Bazerman point out, most of the time, the decision-makers have not classified the dilemma as an ethical issue,” he says. “This idea is reinforced by (Daniel) Kahneman’s work on the System 1 (automatic) and System 2 (rational deliberation) thinking.”

It’s reasonable to suppose that moral courage was either insufficient at VW or absent altogether. In cases like these, governance and compliance will never be conducted as skillfully as necessary. As history proves repeatedly, scandal is far more likely.

Click to read more coverage and analysis of the Volkswagen scandal

Expectations mixed with unexpected developments, stress, psychology and intent are strong drivers of predictable behavior. “As we look at Wirecard, Enron, etc., the executive decision-makers are assisted in their deviation from the ethical path by both motivated blindness and indirect blindness,” Hood says. “With motivated blindness, ‘I am willing to overlook things because it is easy for me to overcome internal objections as I am motivated to succeed.’ When you get into large organizations such as these, it is easier to diffuse responsibility through psychological distance from the victims as well as the actual act of committing the fraud.”

This psychological distance is an important variable to understand and recognize as a driver of decision-making and behavior. It plays a role in acts and momentum that lead to a violation of principles, weak or failed governance and missing compliance.

“Indirect blindness comes in when I, the executive, do not actually participate in the unethical behavior but rather, someone on the lower rungs of the organization actually creates the transactions necessary for the unethical behavior to succeed,” Hood says.

This can be either a conscious act or a realization. Either way, both can end up being used as a defense by leadership in behavior and a response when wrongdoing is exposed and scandal is underway, even if considered unprofessional, unconvincing and a failed attempt at absolving oneself of responsibility.

“As an example, the CEO of VW did not sit in on the meetings talking about falsifying the codes, nor did he create the software code that accomplished the mission. This leads to indirect blindness since ‘I did not take part in the mechanics of the process,’” Hood says, as an example of how this works.

The cold and difficult truth is investigators, the law, the media and the public don’t buy this type of defense. The evidence trumps the corporate or legal spin.

“Despite this, the CEOs of all these organizations had an active hand in the unethical behavior by what they said or didn’t say,” Hood says. “In the VW case, an engineer went up to an executive and said, ‘We don’t have the technology to accomplish this.’ The executive responded by saying, ‘Maybe it is time I get another engineer.’ While there was no specific unethical message, there was clearly an implied message.”

The blame-shifting and attempt at exonerating oneself organizationally or individually is not just poor form; it is considered contemptuous to throw your team into the fire, given that the professionals are doing as expected – and uncertainty or fear is a very real component of psychological safety.

“Since people need their jobs, they interpret the exec as saying ‘do whatever it takes and I will tacitly approve,’” Hood says. Another factor is the competitive nature of business in general and the natural personality of leadership or a leadership team.

“Competition and rivalry can certainly lead to unethical behavior as the perception of rivalry creates in (and out) groups,” Hood says. “This usually leads to advantageous comparison wherein you look at yourself and say ‘what I am doing is not nearly as bad as what my competitor is doing’ or ‘I have to do this in order to make this a level playing field.’”

VW has survived its scandal and reputation crisis, but has VW learned from it? Or will the company repeat its errors, as other organizations do?

Are leaders in other organizations paying attention to and learning from this story and similar scandals – from the psychological errors, belief systems, natural competitive tendencies and compromise or failures of ethics, decision-making, governance and compliance?

Some, maybe. The wise ones. However, not all organizations and leaders will pay attention and correct the course they are currently traveling.

Scandals are not closely dissected and examined, but they really should be. Organizations that choose to do so – that regularly test and question their own mindset, practices and weaknesses and make critical adjustments – will be taking significant steps toward critical, protective improvements and risk management, therefore protecting mission, shareholders, reputation, the board and executive careers.

When coupled with humility and a growth mindset, intellectual honesty is a safety precaution critical to prevent embarrassing, costly and career-damaging scandals and to keep your organization from becoming the next cautionary tale.

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Sustainability drives automotive market cap

How Volkswagen is driving clarity and confidence in their sustainability strategy.

Call for change

Having a bold Environmental, Social and Governance (ESG) strategy matters to investors, employees and the public—but not if they don’t understand it. Despite having launched the most ambitious decarbonization and digitalization initiative in automotive history, the Volkswagen Group (VW), the world’s largest automaker by volume, had a market cap well below that of its rivals. VW realized they needed to better articulate their ESG strategy.

To address this, the auto major wanted to implement a more cohesive sustainability narrative—from environmental to diversity to human rights and resource efficiency—that would resonate with its culture and its individual brands. VW also wanted to sharpen its overall ESG focus, defining the initiatives, responsibilities and KPIs that would make sustainability synonymous with the corporate strategy.

Achieving this would clarify its sustainability strategy—to become an emission-free, digitally-connected leader in mobility—and drive greater awareness among stakeholders, including the investment community.

When tech meets human ingenuity

Accenture broke the project into three phases. Phase one involved determining where VW stood in relation to its peers. Since investors trust S-Ray, a machine learning platform that generates ESG ratings of companies based on millions of data points for over 7,000 listed companies, the team identified the data needed to generate an S-Ray score and ESG rating in line with VW’s industry-leading efforts.

Next, the team conducted C-level workshops to develop support for the company’s ESG vision, emphasizing decarbonization, circular business models, workforce transformation and human rights in supply chain. The third phase saw the team help articulate VW’s ESG narrative, which included key initiatives, responsibilities, KPIs and a plan to communicate all the company’s efforts.

A valuable difference

In six months, the team consolidated VW’s ESG narrative from 18 sustainability topics to just four major topics, with easily understandable ambitions and KPIs for each area so the company can measure its progress more efficiently. Targets were set in areas such as decarbonization, circular economy, human rights in business and workforce transformation.

With ESG objectives woven into its operational and functional processes, there’s now a clear connection between VW’s S-Ray score and the overall corporate strategy, integrating the NEW AUTO plan to pivot VW to a global software-driven mobility provider that powers the future of EVs and fully networked transportation.

Customers are already on board—in December 2020 VW’s electric ID.3 was the second best-selling car in Europe and by 2021, the Volkswagen Group was being seen as the market leader in e-mobility.

With ESG analysis and real-world ESG performance becoming clearer, VW is able to accelerate its sustainability strategy. Its overall growth ambitions are reflected in its market cap rise, which is becoming consistent with that of other global enterprises. VW’s roadmap is set for further growth as investors look to make smarter bets on how we’ll all get where we want to go—together, and for the planet.

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