Case Study VW Environmental Scandal

Question: Discuss about theCase Studyfor VW Environmental Scandal. Answer: Introduction and Purpose It has always been crucial to maintain sustainability in the business operations to achieve success in the long run. The companies need to understand that operating in a sustainable manner would always be in the best interest of all the stakeholders. The focus of the companies should be equally allocated to the society, environment, and profiteering. The profit making should not be the only criteria to measure the performance. The companies should seek to strike out adequate balance between the needs of the society, environment, and person profiteering (Jackson, Boswell, and Davis, 2011). In absence of this balance, sooner or later financial collapse of the company is certain. In the context of this, in the report presented here, the case of Volkswagen (VW) Group has been analyzed. The analysis carried out in this report covers the discussion on the breach of the environmental laws by VW group of companies. Further, the analysis covers various accounting and finance theories to expla in the impact of that breach on the share prices. Terms of Social Contract The social contract signifies an understanding of the terms between the individuals living in the society. The understanding established through the social contract between the people is of morals or the political obligations. According to this theory, the people living in the society must be faithful and ethical to each other (Erckel, 2009). In the context of this, going through the case of VW group, it has been found out that the group has violated the term of social contract. In the case of VW group, it has been observed that the group circumvented the rules and regulations of the clean air act. The vehicles of VW group were found to be failing in the emission test and thus, the use of VW vehicles was considered hazardous to the environment and the society. The impact of health people was assessed which showed that 59% of the premature deaths were due to excess pollution caused by the defective vehicles. Thus, the vehicles sold by VW group were responsible for contamination of the environment and the premature deaths, which proves that the group clearly violated the terms of social contract, which requires everyone to be ethical towards the society. Reaction of VW Group Management Following the media release about the environmental scandal of VW, the chief executive officer of the group, Martin Winterkorn, accepted the allegations. However, the CEO denied any fault on his part. Further, VW group appointed new CEO as a result of resignation of the existing CEO. The reaction of VW group does not seem justified because replacing only the CEO will not cure the defects in the system. As per the justification theory, VW group should have considered changing the entire system analyzing the rationality (Forst, 2012). Further, the CEO of the group should also have accepted his accountability towards to the environmental scam. Reaction of other Companies within the Automobile Industry The companies operating in the same industry are connected with each other whether directly or indirectly. Thus, if one company in the industry comes out with adverse performance, the performance of peers is also affected. Immediately, after the revelations of the environmental scam, the other companies in the automobile industry should have been alert to the situation. Impact of Share Price of VW after Revelations of the Emission Scandal The stocks prices in the capital market are affected by several factors one among those factors is the market sentiments. The market sentiments refer to the psychology of the investors, which is affected by the good or bad news about a particular stock in the market. The good news about the stock creates the market sentiments in its favor which generally results in appreciation in the value of stock. On the other hand, the bad news causes negative market sentiments resulting in downfall in the value of stock (Mitra and Mitra, 2011). In the case of VW group, the market sentiments went negative when the bad news that the company has violated the environmental laws came out. The impact of negative market sentiments was perceived to be severe as the stocks price dropped heavily. It could be observed that VWs stock price dropped from $183.57 to $123.80 when the group was served a notice of violations of the clean air act from environmental protection agency. The primary reason for this se vere downfall in the price of stock was loss of confidence in the investors after the revelations of the violations of clean air act. Market Efficiency/Inefficiency The efficient market hypothesis established that the movement in the prices of the stocks incorporates all the available information adequately. Further, it states that the securities such as stocks are always fairly priced and the movements in the prices are always justified and reflect the true worth of the stock (Bailey, 2005). However, the market inefficiency theory opposes this view and establishes that sometimes the movement in the price does not reflect the true worth of the stock. In the current case of VW, having a look on the drop in the price of stock, it could be asserted that it does not reflect an efficient market. The price of stock started collapsing before the revelations of the scandal and on the day when the news came out in the market, the stock dropped significantly down. Impact of Collapse of One Company on Others in the Same Industry The asset pricing theory states that the return on a particular stock is correlated with various macro economic factors such as gross domestic product, inflation, and interest rates (Koch, 2009). According to the principle enunciates in this theory, the price of a stock is not dependent only one factor rather its a result of combined impact of all the relevant factors. Thus, it could be asserted that the roots of all the companies working in an industry are linked to each other whether directly or indirectly. Further, the fundamental accounting concepts could also be applied to understand the relationship among the companies working in a particular sector or industry. For example, there would be companies in the automobile industry out which some would be supplier of VW and some would be customers of VW. The negative financial performance of VW would certainly affect the financial position of the suppliers of VW, thus, the impact of downfall in the share price of VW could be also be perceived on the their share prices. Further, the associate companies which have investment in VW would also face consequences of the negative sentiments in the market. The market sentiments that other automobile companies may also get exposed in future will affect the share prices of those other automobile companies which not even associated with VW in any manner. Thus, its the correlation of the companies working in an industry which causes negative of one company to pass on to others. Using the Profit as the Only Measure of Performance The accounting framework of triple bottom line outlines that the corporations should seek to maintain a proper balance between three measures such as people, planet, and profit. This balance is crucial for every company to be successful in the long run by achieving sustainable development. Thus, it could be inferred that the companies should not only focus on the maximization of profit, but they should also keep welfare of the society and protection of the environment in focus (Jackson, Boswell, and Davis, 2011). Sustainability which refers to the long and healthy life is achievable only when the company maintains an adequate balance between people, planet, and profit. In the absence of an adequate balance in these three measures, the company will not be able survive in the long run. In the above context, the current example could be taken of the VW group, which collapsed due to inadequate balance among people, planet, and profit. The company focused too much on the profit aspect while disregarded the considerations towards to the society and environment by producing cars which were less costly but harmful to the environment. The company made huge profits from sale of these cars, but lost even more when the defective cars were caught up by the regulatory authorities. Thus, it could be articulated that the considering the profit as the only performance measure is not in the long run interest of the business. Conclusion The discussion carried out in this report revolves around the case of environmental scandal of VW group. The VW group which manufactures world class cars was hold liable for producing cars having defeat device causing emission of nitrogen oxide in excess of permissible limit. The use of such cars produced by VW caused serious damage to the environment and the society and resultantly the regulators imposed heavy fine and penalty. Due to this mess, the stocks price of VW collapsed from $183.57 to $123.80, which caused serious loss to the investors. The group pocketed huge money out of the sale of defective cars, but it all washed out in a flash after revelation of the scam. Thus, it could be articulated that the companies should not only focus on the profit making but society and environment should also be given equal importance. References Bailey, R.E. 2005. The Economics of Financial Markets. Cambridge University Press. Erckel, S. 2009. Classical Social Contract Theory: The Classical Social Contract Theories of Hobbes, Locke and Rousseau Compared. GRIN Verlag. Forst, R. 2012. The Right to Justification: Elements of a Constructivist Theory of Justice. Columbia University Press. Jackson, A., Boswell, K., and Davis, D. 2011. Sustainability and Triple Bottom Line Reporting What is it all about? International Journal of Business, Humanities and Technology, 1(3), pp. 55-59. Koch, C. 2009. The Arbitrage Pricing Theory as an Approach to Capital Asset Valuation. GRIN Verlag. Mitra, G. and Mitra, L. 2011. The Handbook of News Analytics in Finance. John Wiley Sons.