Blog #8: Ethics

Today's blog is about financial ethics. Two consecutive weeks in lectures and seminar I've been learning about it. I think it is mostly about common sense and what we have experienced about it in real life workplace. I used to work in a company back in my hometown, as a part-time accountant assistant. Although it was just a temporary job, it was something I have learned a lot about being ethical. Being ethical means to eliminate self-interest, having good moral, being professional, follow the law and the list goes on.

There are not many news about financial ethics but here is one about Volkswagen. According to Financial Times (2015), professor of business ethics complained that Volkswagen cheats their emission tests. It is a procedure where cars have to be tested to know whether they meet the standard or not. The companies used clever software to detect when certain diesel models were subject to emission tests and to send the engines into a special low-emission mode. It seems like the engine management software could detect road wheel rotation speeds, steering inputs and use of accelerator to make this determination. This is why VW were under pressure of not having the new model vehicle. VW came clean eventually and admitted that 11 million vehicles were affected worldwide.

Of course, fines applied, reaching US$18 billion (based on half-million affected vehicles). Criminal investigations began as well. It also caused VW's share price to decrease. This situation has led to fines, compensations, lost in sales, and it also costs their reputation.

According to the professor, many VW engineers and executives must have known something was going on. I think it was totally unethical to have done something like this. When businesses go bad, people would always push the blame on the society. For example, saying "everybody is doing it too!" or "if we don't do it, someone else will" or " no one is getting hurt!"

I think VW was trying to cut costs because the car industry has high cost of capital, as stated by the presentation of Fiat Chrysler's CEO, Sergio Marchionne named "Confession of the capital junkie". In the presentation, Sergio Marchionne demonstrated that the car industry's cost of capital was too high. Furthermore, the returns of mainstream OEM (such as VW) were lower than their WACC. Therefore, I assume that this is the reason behind the skipping of emission test, which helps with reducing the overall cost.

This also makes me wonder.. Does that mean that the whole world doesn't have to be ethical anymore? VW has showed that unethical business can lose you respect, reputation and a huge sum of money. Hope it serves as a lesson to VW and other companies out there that business ethics are important and that every businesses in the world, no matter small or big, should be ethical. Without ethics, a company can never be successful. Do what is right, not what is easy.

Source:
Financial Times, 2015 http://www.ft.com/cms/s/2/32689e6c-6c3e-11e5-8171-ba1968cf791a.html?ftcamp=engage/capi/widget/client/openft/b2b#axzz45pGnf2lI
http://www.bbc.co.uk/news/business-34324772

Fiat Chrysler "Confession of capital junkie" http://www.fcagroup.com/en-US/investor_relations/events_presentations/quarterly_results_presentations/SM_Fire_investor_presentation.pdf