What Can We Learn from the Volkswagen Scandal?

Every day, another axe seems to fall with the scandal at Volkswagen, as news reports unveil new victims and layers of the investigation. Unfortunately, this is just one more example of unethical behavior at an organizational level: regulators allege that Volkswagen circumvented environmental regulations by manipulating the software that measures emissions on hundreds of thousands of automobiles. It is hard to characterize an environment that supported fraud on such a systematic level — as well as the individuals who participated in the fraud — as anything other than hopelessly corrupt.

But it’s also important to look deeper and see if there is another explanation besides that of ‘bad people doing bad things.’ The field of behavioral ethics explores how people perform unethical actions in both intentional and unintentional ways. A behavioral ethics account, while not excusing the behavior, seeks to understand the way that biases and problem solving approaches operate in individual decision making as well as the role of organizational culture in shaping decisions. In the case of Volkswagen, an application of some behavioral ethics research sheds light on a more robust explanation, including:

· People tend to be overly optimistic: People have a tendency to be overly optimistic about the chances for success. Research into the practice of earnings management reveals that many corporate officials do not deliberately engage in acts of misrepresentation, but rather were irrationally optimistic. Most corporate officials do not set out to engage in long-term fraud — they are merely looking to buy some time until their promising strategies bear fruit.

According to media accounts of the Volkswagen scandal, this is what happened. The organization initially engaged in its scheme, not as a long-term strategy, but simply as a means to ‘buy their engineers some time’ to come up with a technical innovation that would satisfy the more stringent emissions standards without placing too heavy of a burden on consumers.

· They’re also overconfident: People tend to rate too highly their own abilities and talents relative to other people. Ethical scandals such as Enron, WorldCom and SAC Capital virtually radiate with individuals impacted by the overconfidence bias. But the overconfidence bias, like the optimism bias, presents a tricky problem. We want our corporate leaders to be optimistic and confident. We rely on strong leaders to envision a path to success even in the toughest circumstances. However, the natural buoyancy of many leaders needs to be tempered with caution.

Volkswagen was to be justly proud of its talented engineers and technicians, famously representing them as heavenly angels complete with white robes and wings in a commercial aired during the Super Bowl. But expecting (and demanding) that a talented team of employees pull a rabbit out of a hat does not mean that they will be able to do so.

· Aggressive goals can lead to overreaching: Reports about the culture at Volkswagen refer to the pressure for continuous growth and the perception that failure was not option. These are admirable expectations, but the focus needs to be on driving hard within the rules and in a sustainable way. One of the constants of human behavior in the workplace is that people will usually do what they believe will be rewarded and avoid doing what they believe will be punished. Setting goals without specifying how they should be achieved is the fault of the leadership team and one for which they should justly be held accountable.

So, what could have been done to prevent the fraud at Volkswagen?

1. Leaders need to check themselves: People tend to engage in wishful thinking regarding both their skills and their chances for success. Leaders need to create a culture in which they and their employees challenge these assumptions. People need to be free to ask, “what can go wrong?” or “what is the worst case scenario?”

2. Invest in the loss: Expectations do not create capacities. It is tempting to think that we can ‘will’ into reality some state of affairs that we really want. Strong leaders encourage their teams to least consider about the worst-case scenario and begin to strategize around and out of it. Conveying that an outcome is unacceptable will simply lead people to avoid it at any means possible — which can lead to terrible results.

3. Emphasize your values: Leaders need to make it clear to employees that they believe in the importance of moral ‘guardrails’. They need to convey, again and again, that while it is important to strive for success and imaginatively problem solve, solutions and strategies need to be in alignment with the values of the organization.

It is too easy to write-off the leaders and employees involved in the Volkswagen scandal as hopelessly corrupt — as badly intentioned people who looked for a shortcut and found it. The more accurate story is probably that these are mostly well-intentioned people who placed themselves in a position where the fraudulent behavior seemed like a reasonable response to a short-term situation. If this is true, then the scandal is not entirely the fault of bad character, and this is actually an optimistic conclusion that we can hopefully learn from.

Julie Ragatz is Director of the Center for Ethics in Financial Services at The American College of Financial Services.