CSR & The Ethics of

Business
Should Nation States have a controlling influence over business ethics
and CSR?

Dan Kerby
NMIT dfkerby@hotmail.com
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Contents
Introduction............................................................................................................................................ 2
Defining Corporate Social Responsibility ......................................................................................... 3
The implications of Volkswagen’s diesel scandal on Corporate Social Responsibility and the
wider environment ................................................................................................................................ 6
Should Nation-States regulate/intervene?........................................................................................ 9
Benefits .............................................................................................................................................. 9
Disadvantages ................................................................................................................................ 10
Conclusion ........................................................................................................................................... 11
References .......................................................................................................................................... 12

CSR & THE ETHICS OF BUSINESS | Should Nation States have a controlling influence over business ethics and CSR?
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Introduction

This essay aims to examine the influence of Corporate Social Responsibility (CSR) on
various stakeholders of industry, examining the effects of how a successful CSR
campaign launched Volkswagen to the becoming the largest automobile manufacturer
in the world, yet what happened when it was discovered to be a scandal famously
referred to as dieselgate, and how CSR has been affected since.

This opens up a discussion relating to whether nation-states should be instrumental in

ensuring companies action their CSR policies ethically and effectively, or corporations
should be able to self-regulate and design and implement their CSR initiatives the way
they see fit. Another dimension that’s discussed is whether this is a passing ‘fad’ or an
initiative that’s here to stay, and that’s explored through various surveys and studies
conducted on consumers and industry professionals.

Being limited in time, and all other resources except bandwidth, my research is all
secondary, involving trawling through various studies and finding information from
blogs, official company websites and technical papers found on Google Scholar.
Connecting dots and coming to a conclusion at the end of this essay has been a fun
and informative ride, so I hope you gain some insight and understand the enormity of
Volkswagens contribution to CSR. Good, or bad.

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Defining Corporate Social Responsibility

Corporate Social Responsibility can be viewed as a challenge to the historic and

justifiable idea that corporations exist solely for one reason, sustainability through
profit.

In our present reality, corporations need to focus on a concept called the ‘triple’ bottom
line, which extends from the traditional theory or ‘stockholder theory’ which claims
companies exist solely to maximise the wealth of their shareholders. Triple bottom line
theory comes from the belief that an organisation needs to consider three variables in
order to ensure sustainability throughout the organisation;

 Social – By ensuring that they focus on the treatment of on and off-site labour,
to ensure that the human element within the internal and external elements of
the organisation are treated with respect and dignity, while making sure the
workers are getting fair treatment and working conditions.
 Environmental – Is the way the organisation deals with how it impacts the
environment around it. By controlling its waste outputs and from where it
sources its inputs, it can significantly reduce the footprint left by its operations.
 Financial – This is the traditional view of business sustainability, to ensure it’s
financially stable enough to keep trading into the future, and giving investors
their due returns, but, goes further to include the financial assistance an
organisation can return to the community such as, sponsorships/scholarships,
donations to causes etc.

So, doing business these days requires organisations to fulfil the needs of three
distinct areas of social importance, in order to create sustainability not just for the
shareholders, but for the stakeholders and overall economic environment.

So why is it important to business beyond the typical tree-hugging, SJW movement

that is so prevalent these days? Well there are multiple reasons why CSR
implemented properly can be beneficial to your brand, running your company in a
socially responsible way can help to improve your company image, as long as people
know about your efforts, it can help to build brand awareness, enhance brand image,
establish brand credibility, evoke brand feelings, create a sense of brand community

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and increase brand engagement (Creel, 2012, p. 21), all these are benefits that a properly
implemented CSR policy can add to your brands equity.

Increasing media coverage is something that good organisations all try to do to enable
them access to a new supply of consumers and allow them to stay relevant while piggy
backing on important social trends and aligning the consumers unconscious mind
towards their products. A study was done over the course of 2 years and over 1300
articles which came to some interesting conclusions, which showed that “the majority
of press articles on CSR are favourable” and that there is a growing media interest in
reporting positively on CSR related stories ("Increasing favorable media coverage on CSR,"
2002) which would suggest that it would be in an organisations best interests to have
a solid CSR plan that the media can report on, generating almost free exposure to
your company. Just don’t get it wrong though, or the media will be all over it and your
resources will be used in damage control instead (Volkswagen).

A robust and realistic CSR plan can help to boost employee engagement as people
who work for companies that have a good social image and positive media presence
would stand to reason that they would be happier working for that kind of company. A
study by Towers Perrin Global, found that CSR is the 3 rd most important driver of
employee engagement, and the organisations reputation is an important factor in
employee retention and engagement (Towers Perrin, 2008). In 2017 Cone
Communications performed a CSR study bringing to light some interesting
information, including 87% of Americans would purchase a product from a company
that advocated for an issue they cared about, and 76% would refuse to support a
company that championed an issue contrary to their beliefs (Towers Perrin, 2008, p. 6).
This goes to show how, in this day and age, CSR has become an essential driving
factor in attracting and retaining consumers.

One of the most crucial ways a company gets revenue is through investment, and that
vehicle for capital growth doesn’t escape the tightening grip of CSR, in fact, the
research points to effective CSR practises increasing and retaining investors better
than those who don’t. Which would make sense as millennials and generation z’ers
are growing up and entering the economy following a far different set of values than
their forefathers did when they come of age, and a successful investor will have their
finger on the economic ‘pulse’, and they can plainly see the effect that CSR is having

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on corporations and the research backing consumer tastes and buying habits. A 2017
CSR survey conducted by American insurance agency Aflac, shows in detail the
opinions of a select group of American consumers and professionals (Aflac, 2017), as
1400 where selected, with 100 being investment professionals, 100 CSR executives
and 1200 consumers aged over 18, in which they asked the same questions between
the consumers and the investment professionals, which is interesting to see the
correlation between the way the two types view different issues. Through a buying and
an investment perspective, which all boils down to the fact that investors, whether
because of their own moral compass, or as I suspect to a degree, the fact that the
consumer trend is showing consumers would rather spend their money in socially
responsible companies, therefore that’s obviously where you’d be looking to invest
your money, wherever the customers are spending theirs. 20% of consumers would
rather do long division and 19% would rather clean the garage under their mother in-
laws supervision (Aflac, 2017, p. 9) than buy a product from a company that’s considered
irresponsible. If you’re an investor and not taking that on board, then you probably
won’t be investing for very long.

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The implications of Volkswagen’s diesel scandal on Corporate

Social Responsibility and the wider environment

In 2006 Volkswagen had a plan to increase its waning market share through the use
of a newly developed diesel engine that was intended to compete with Toyota.
Unfortunately for VW, the newly developed engine couldn’t meet the stricter EPA
(Environmental Protection Agency) standards for emissions. As the VW’s group
chairman Hans-Dieter Potsch explained the engineers “quite simply could not find a
way to meet the tougher limits” ("Volkswagen: Engineers couldn't meet U.S. emissions laws,"
2015). This is important because this implicates ‘intent’ within the company itself to
choose to create a device that could manipulate the emission test results, and a
conscious undertaking to create a huge marketing campaign advertising their ‘clean
diesels’ "'Clean diesel' ad campaign bites VW," 2016) which effectively moved the company
from 3rd largest auto manufacturer in 2013 ("top 10 largest automakers in the world," 2014)
to the largest in 2016 ("DriveSpark - Top 10 Car Group Manufacturers In The World In 2016 By
Sales," n.d.). Even amidst the diesel scandal, they increased their market share through
manipulation of consumer interests through their CSR policy, which was to create
environmentally responsible diesel cars that could offer an alternative to vehicles such
as the Toyota Prius.

This was an important event for the CSR movement, with VW’s own environmental
Principal Products Policy’s subsection on climate protection stating, “reduce
greenhouse gas emissions” (Volkswagen, 2008) which was written in 2008 (two years
after the decision to use cheat devices was enacted) by Dr. Martin Winterkorn the CEO
of VW, who has been charged with fraud and conspiracy (Muller, 2018). This would tend
to mean that he was well aware of VW’s intention to cheat the processes, while
allowing the company’s image and market share to be built on the CSR principal of
sustainability through environmental responsibility. This is in effect a classic example
of a company using or promoting an image/ideology to increase market share through
the promotion of certain CSR principals, regardless of whether the company is actually
following the stated guidelines themselves. So, putting into perspective the size and
sophistication of the program to create and deploy the cheat devices, one must ask if
they are the only company doing it, or were they the only company caught?
Specifically, because they had been pushing the environmental CSR directive so

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strongly, which lead to their products receiving a higher level of scrutiny than the
general competition, considering the whole fiasco was discovered seemingly by
accident (Hess, 2017). Importantly, this has wider reaching implications for the entirety
of the public view of how corporations create and implement their CSR directives, with
VW greenwashing the public into thinking their products are environmentally
responsible, when in-fact, they were not.

The monetary, societal and political costs, plus the ongoing repercussions caused by
this event can be quantified with the prison sentences, monetary fines, market share
and revenue loss. Yet the implications to CSR extend much further, as the Volkswagen
scandal highlighted a global need for vigilant regulatory enforcement of air pollution
laws by the International Council on Clean Transportation (Icct, 2015), which will affect
other manufacturers and make it even harder for automotive companies to provide
new diesel engine cars. The European Parliament voted to reform EU testing
legislation and allow greater powers for regulating bodies ion direct response to the
VW scandal ("EU bodies agree to tighten vehicle rules after dieselgate scandal," 2017), while
branching into the societal impact uncovers some disturbing facts. Reports show that
5,000 deaths occur annually in Europe ("5,000 Deaths Annually From Dieselgate in Europe,"
n.d.) and over 38,0000 globally (Carrington, 2018) directly because of companies not
adhering to the emission test requirements, the 5000 in Europe can be attributed to
Volkswagen itself, through ‘dieselgate’. This all ties together in a way that shows the
larger effects of a company failing its corporate social responsibilities, Volkswagen and
in the wider industry, as the failure to voluntarily conform to expected standards is
costing money, in Volkswagens case over $25b in fines, jail time for certain members
of the company ("How VW Paid $25 Billion for Dieselgate ? and Got Off Easy," 2018 ) and the
increased levels of death and disease relating to the levels of nitrogen oxides released
from the cars.

From the wide sphere of influence that was born from this scandal, there were key
stakeholders that were affected. R. Edward Freeman says stakeholders are “any
group or individual who can affect or is affected by the achievement of the
organisation’s objectives.” (Freeman, 2010, p. 46), and we can break these down into
internal and external groups of which there were many throughout this ordeal. Being
the largest auto manufacturer means that their actions influence a wide range of
interest groups, with VW employing over 642,000 people ("Volkswagen Group - global

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number of employees 2017 | Statistic," n.d.) whom are all internal stakeholders who have
been constantly fearful over potential legal issues and the fact that the company has
had to dedicate an enormous amount of capital or order to pay fines, recall cars and
increase development in order to catch up to their competitors advancements within
the diesel sector. While this happened, 10 of VW’s senior managers have been
charged, with sentences of up to 7 years imposed, and the CEO of Volkswagen and
Audi in the firing line. This has to have negative connotations for the morale of the
company, while uncertainty spreads as people question their potential careers. Yet,
this is merely the epicentre of the sphere, as the companies’ investors took a massive
hit, losing $20b off its market cap and its share price falling 30% (Stash, 2016).

The Government as an external stakeholder has been highly involved in the process
of regulation and prosecution of the various entities involved in allowing the cheat
devices to be installed, and as the German government is closely tied to the
automobile industry, being one of its most important industries being one of its largest
employers and exporters, it has been criticised for seemingly allowing the VW group
to get away with the scandal for so long, eventually involving an investigation into the
German government to ascertain whether there was any collusion ( "Germany to
investigate government's role in 'Dieselgate' scandal," 2016). Whereas on the other side, the
US has issued an arrest warrant for the former CEO Martin Winterkorn, yet is unable
to extradite because Germany will only extradite to EU member nations ( "U.S. issues
arrest warrant for former Volkswagen CEO but unlikely..," 2018) which all costs taxpayer money,
and time needed to propose new legislations and enforce them all stemming directly
from this scandal, which takes their time and resources away from other endeavours.

Environmental groups have had a huge stake in dieselgate, with one groups
specifically trying to ban all diesels from West German roads (Wilde, 2018), with the
attempt falling flat, but they will still be going through appeals and different nations
courts to get their message heard, and also, one of the main stakeholders,
Volkswagen’s customers. Most of these customers brought these cars on top of the
marketing campaign proclaiming to be clean diesels, and compensation has not been
consistent through each market, with US customers receiving between $5-$10,000
depending on the age of their vehicle, yet UK customers are receiving nothing apart
from a software upgrade (Brignall, 2017) which has reportedly made the cars feel
sluggish (Harper, 2018). So, UK consumers are rightfully angry at the government

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requirements for Volkswagen, especially considering the only 3% of the US market is

diesel compared to 50% in Europe ("Diesel-powered Passenger Cars and Light Trucks | Bureau
of Transportation Statistics," 2017). So considering all the resources used to uncover,
prosecute and start to repair this fiasco, the question of should companies be allowed
to self-regulate their CSR directives or should the various Governments have more
control over the way CSR is implemented, especially when it comes to environmental
issues such as pollution, or should it be left to the companies themselves to direct
what ethics they deem important in society? Dieselgate has opened a figurative can
of worms on the whole CSR movement, and uncovered an industry norm, which
seems to be created to deceive people into buying into their CSR schemes, and taking
the word of the corporations who are supposedly looking out for the triple bottom line,
yet the age of Milton Friedman really was not that long ago, and we as a society are
still relatively helplessly under the shadow of corporate decisions.

Should Nation-States regulate/intervene?

I believe regulation is needed, yet as history has shown, there is a fine line between
too much intervention and not enough.

Benefits

The benefits to nation-state governments regulating and intervening really depend on

the amount of regulation and who they come to their regulatory ideals. Ideally, the
intervention would be just enough to support organisational efforts while not being too
over bearing and allowing innovation with little restriction. Because this is a relatively
new idea it needs to be allowed to organically shift with the market demands. The
regulations would give the consumer and law makers more authority to ensure that
companies are protecting the environment and things like people’s privacy for
instance. It also raises a small (potentially) but scalable barrier to entry, by making
sure people who are looking to get into business will realise that this other dimension
exists that needs to be closely monitored if you wish to have a chance in business,
while also encouraging responsible investing by creating enough awareness that sees

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investors shying away from companies that abuse or have inadequate CSR policies,
which if anything, will force large corporations to thoroughly asses and implement
these new standards if they are wanting to get investment.

Disadvantages

One of the main disadvantages, which is prevalent in all governments and regulatory
bodies, is corruption. There will always be this element has it is almost human nature
in a way, but this can have dire consequences, as Volkswagen found out. But not only
was the monetary value of the scandal enormous, but the amount of flow on damage
that it caused, and the amount of time it took for authorities to eventually find out, as
VW managed to get 11 million vehicles on the road in that time, only to be found out
by accident. Also, the balance of finding out what the best ratio of interference will be
a process that will take organisations down as they find out the best way to implement,
much like fixing a safety issue after somebody has already paid the price, Ayrton
Senna, and Dale Earnhardt come to mind, as in their respective sports, nothing was
fixed until they paid the ultimate price, and I could see this happening within industry
as well.

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Conclusion

National governments should be involved in ensuring that companies are adhering to

their CSR policies, with guidelines and frameworks that businesses can use to make
sure they are doing enough. Although it gets tricky, because the real question is “how
much should nation-states regulate or intervene?”, as I feel through the research
mentioned previously in this essay shows that the market itself is organically moving
towards the triple bottom line model of sustainability. Eventually unsustainable
companies will not be competitive, yet if left up to their own devices, companies will
do what they need to, to continue their competitive advantage. A glaring example of
this was the Volkswagen dieselgate scandal, which cast a shadow on CSR and how
a company can be a ‘darling’ in the industry, yet behind the scenes they are doing the
complete opposite of what they are advertising to the consumer/investor. This not only
cast a shadow on VW and the industry as a whole but held back innovation for the
company has their competition fought harder the reach the emission goals that VW
couldn’t.

Assuming the right amount of regulation is found, I think eventually corporations could
finally become a slave to the consumer, instead of the Orson Welles nightmare
oligarchy situation. This would mean that yes certain people wouldn’t be making the
obscene amounts of money they are now, but they would still be making significant
amounts, while the wider society would benefit from the growth of a corporation that’s
truly socially responsible. Freidman was right for his time period, but I feel he didn’t
account for the shift in power created by the internet and technology in general. No
one can do everything, but everyone can do something.

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References

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