The VW scandal: A view on corporate self-regulation and the law

by

Anna Beckers (*)
Anna is a Max Weber Fellow in Law and author of the freshly published
“Enforcing Corporate Social Responsibility Codes“, Hart Publishing, Oxford, 2015

In the past couple of weeks, German car company Volkswagen has dominated the news for allegedly behaving socially irresponsibly on a large scale. The company seems to have manipulated engines by building software into cars that would allow these to pass emissions tests in the U.S. This is, first and foremost, a violation of existing national laws that the company could very likely be held liable for.

Yet there is more to this scandal. It also reveals an attitude in the company not to take its own policies and standards seriously. Volkswagen has not only made a public commitment to comply with existing laws and regulations, but also to adhere to its own standards on compliance. In its website, the company defines compliance as ‘observing statutory provisions, internal company policies and ethical principles’. These are specified further in the company’s publicly available code of conduct, which also contains a section on environmental protection. With this ‘compliance’ commitment, Volkswagen follows a trend among large companies to develop corporate policies, codes of conduct, or sustainability commitments and to make them available to the public; on its website, in public relations communications, in marketing campaigns, and in the course of annual reporting.

Against this background, we might ask whether and, if so, what consequences it could have, if a company, such as VW, breaches its corporate policy. It seems apparent that non-compliance could be treated as ethically incorrect behaviour, as a moral wrong. It is less clear, however, what the legal consequences might be.

Not surprisingly, the company itself phrases its corporate policies as ‘voluntary commitments’ and ‘ethical principles’ and thus seems to understand it as a legally non-binding guideline. But is this the end of the story? In fact, in the evolving legal debate on corporate social responsibility, this understanding of corporate self-regulation as being ‘beyond the law’ is increasingly being put into doubt and, instead, being put forward is the notion that such public declarations to act socially responsibly could have legal consequences. There is, firstly, the law on unfair commercial practices that is directed towards protecting the expectations of consumers in public declarations. Companies such as Nike and Lidl have already experienced the consequences that non-compliance with a publicly declared corporate social responsibility statement can have. There is, moreover, the law on torts. Here, self-regulatory standards can be used to determine whether ‘reasonable care’ has been taken to prevent damage from occurring, which is necessary in the course of establishing liability. Finally, we might also think of the law of contracts that could allow giving unilateral declarations – such as the VW statement of developing ‘ecologically efficient advanced technology’ (VW code of conduct, p. 19) – a legally binding character. After all, the addressees of these corporate declarations could have reasonably relied on them in return for creating a benefit for the company. Consumers contributed to sales increases, governments or administrators have refrained from imposing stricter regulatory standards in the expectation of successful environmental self-regulation, and the general public has effectively exposed itself to its detriment to these products in the expectation that the ‘ecologically efficient’ cars would at least strive towards mitigating environmental pollution (thus health risks), rather than increasing it by focussing on the development of manipulation technology. As a result, a breach of the corporate policy could be considered a breach of contract, with the respective consequences. Damages could be claimed or, conceivably, the company could be legally forced to perform its policy in the future.

Philip Schleifer, also a Max Weber Fellow, has argued here, with a view on the VW scandal, that private and public regulation have to be viewed as complementary; it is necessary to pressure businesses into adopting effective self-regulation. I would say that the legal enforcement of voluntary corporate policies could be one element here. It could send the signal to companies, such as VW, that not only are breaches of the law sanctioned by society, but also non-compliance with publicly declared efforts to self-regulate. This might have the result that companies refrain from self-regulating altogether. However, based on past experience (such as the lawsuit against Nike mentioned above), I would consider it more probable that this enforcement could bring pressure to bear on companies, encouraging them to avoid liability by improving self-regulation.

(*) The MWPBlog is a platform for MW Fellows to address scholarly topics and comment on current affairs. The thoughts expressed in the posts represent solely the views of the posting Fellows and not of the Max Weber Programme