Ethical Impact of Scandals of Volkswagen and Theranos

In the recent past, two major instances of unethical conduct that make an interesting study are the Theranos and Volkswagen scandal. These scandals expose a) deliberate deception of public, investor and government b) concealment and misrepresentation of facts c) greed  d) legal violations.

Therenos Scandal

Theranos is an American health technology and medical laboratory services startup in Palo Alto, California, that was founded by Elizabeth Holmes, a Stanford dropout, in 2003. It was started with a bridge loan from a venture capitalist and by 2010 it had received more than $70 million in funding. It raised more than $400 million in seed money for developing cheaper and less invasive technology for blood testing.

Its aim was to make blood testing standardized and easy by using a hand held device. Theranos engineered a technology to make blood tests so much simpler that even local pharmacies could house it. It partnered Walgreens to put Theranos labs in their pharmacies.  An innovation such as this has the potential to take the industry by storm. But the technical details of an innovation as important as this has been kept totally under wraps. No information has been shared and neither has any comparison been made with existing technologies. Despite calls from scholars for peer tested experiments to prove that Theranos tests work as well as claimed, Holmes has consistently declined to share and continued with what her critics call ‘stealth research.’ 

On October 15, The Wall Street Journal reported that Holmes has misled the public and even the government about her products. It cheated on proficiency tests and its Laboratory Developed tests (LDTs) were inconsistent and inaccurate.  The report quoting four former Theranos employees stated that tests conducted on its Edison machines showed faulty values when tested on traditional equipment.

These alleged discrepancies led to a formal complaint being filed at the New York State Department of Health which were then forwarded to the Centres of Medicare and Medicaid services. It was also revealed that majority of the tests were being performed on traditional machines of competitor companies like Siemens and not on their Edison machines.

Volkswagen Scandal

The Volkswagen emission scandal, also called the ‘diesel dupe,’ rocked the world about the same time in September 2015, when the U.S. Environment Protection Agency (EPA) charged the Volkswagen group of deception. It discovered that the engines of its diesel vehicles had a ‘defeat device’ or software that could detect they were being tested and could activate certain emission controls for perfect values when the vehicles went for emission testing. The low emission levels of Volkswagen vehicles tested with the defeat device enabled the company to secure the green car subsidies and tax exemption in the U.S. The company had planned a major marketing push for its diesel cars showcasing its cars’ low emission rates as a big winner.

The EPA investigated 482,000 cars in the U.S. alone, including Audi A3, Jetta, Beetle, Golf and Passat. However, the company admitted that more than 11 million cars, including 8 million in Europe were fitted with the ‘defeat device.’

The Volkswagen scandal exposes the rot in corporate leadership that fails to make good judgements. It is absolutely clear that this scandal did not arise out of a mistake or error in judgement or a minor ethical lapse. It was much more than that. The ‘defeat device’ was purposely designed and fitted into the cars. It was a legal as well as ethical violation of the highest order.

Volkswagen brazenly duped millions to whom it owed a good product for the price it was charging. It was a fraudulent misrepresentation of its vehicles, promising it to be what they were not. What made it worse was that it purposely committed the wrong for business gains.

The ‘diesel dupe’ was a cleverly engineered technical operation that taught the emission system of the car whether it was on the road or idle or idle while emission testing.  This scandal exposed corporate malfeasance at the highest level. The now, former CEO of Volkswagen, Martin Winterkorn, admitted his failure of leadership and his inability to abort this disaster.

These scandals point to broad business realities that force companies to indulge in unethical behaviour, particularly the perception that the value and worth of a company can only be determined by money.

Analysis of Ethical impacts of the scandals

Analysing the unethical aspects of the Theranos and Volkswagen scandal, what comes to light is that in both cases there was deliberate deception of the public, investor and government.

The Wall Street Journal accused Holmes of misleading the public and perhaps even the government about the effectiveness and capabilities of its products. Holmes, who was till some months ago ‘the darling of the media,’ now became its target. Hailed as the next “Steve Jobs,” she suddenly became the face of deceit.

The company has defied the call of the scholars for peer tested experiments to prove that Therenos tests are as good as they claim to be. The company is poised at a critical juncture to decide medical care to millions of Americans as well as people all over the globe. The investigation initiated against the company will decide the level of deception involved. In defence of Therenos practices, Holmes denounced the Journal article. It claimed that it was willing to submit its tests for FDA approval.

The Volkswagen scandal has rightly been called the ‘diesel dupe’ as it was a well - orchestrated plan of the company to fool millions of buyers about the actual worth of the Volkswagen cars, as well as the government officials who issued green permits. The level of technical expertise that was needed to execute the plan was phenomenal. It was well thought out and cleverly executed. However, unlike the Therenos scandal in which holmes denied deception, in the Volkswagen scandal, the then CEO Winterkorn publicly apologised for public deception and breaking the trust of its customers. He resigned immediately after the scandal and was succeeded by Matthias Mueller. Mueller admitted that his primary task was to win back the confidence of his customers. An internal enquiry was initiated into the scandal as well.

Volkswagen recalled millions of cars worldwide and kept aside 4.8 billion pounds for these costs. For the first time in 15 years it recorded its first loss. These costs could rise significantly when faced by lawsuits from car owners and shareholders.

Concealment and misrepresentation of facts is also clearly evident in the two scandals, though the degree of concealment differs.

The Wall Street Journal article exposed that the Therenos technology wasn’t equipped to the task of doing the 30 or more tests in a single drop of blood that it claimed.  Rather it accused the company of diluting the blood and then running the tests on machines of other companies. It was also alleged that for the tests that were run on their own Edison machines, very different results were obtained. Internal emails revealed that these inconsistencies were prevented from becoming public knowledge. And Mr. Sunny Balwani, President and chief Operating Officer of Therenos, copying Holmes stated, “This must stop..samples should never have run on Edisons to begin with. ”

The real fact is that the company could be hiding major inconsistencies in testing. As a Therenos patient, quoted by the Journal, put it, ‘trial and error on people, that’s not ok.’ The former employees said they merely followed instructions but they were concerned that federal rules were being violated which state that “a lab must handle proficiency testing samples in the same manner as it tests patient’s specimens.”

The Volkswagen vehicles of the model year 2009-2015 concealed the installation of the ‘defeat device’ which gave lower emission ratings during testing. In reality, on the road, they emitted 40 times more of nitrogen oxide than what was claimed. Admitting this major concealment of the installation of the ‘defeat device’ to tamper with emission ratings, the German automaker announced it was withdrawing the application for regulators to certify emission controls for 2016 model and it chief claimed full responsibility of the act of concealment. This response is in variance with the response of the Therenos owner, Elizabeth Holmes, who claimed that the testing of her machines was accurate. She denied the Journal’s allegations of concealment and misrepresentation of facts.  At the Wall Street Journal’s annual conference 2015, Holmes said that the Journal’s claim that only 15 of more than 200 tests were being done on Edison machines, was ‘irrelevant’ as that was only a codename for machines that were outdated and not being used anymore. She accused the Journal for placing the ‘finger stick ‘blood tests out of context. The Journal claimed that under pressure from regulators, Therenos had ‘dialled back its finger prick testing.’ However, Holmes claimed that the company was only taking a break to gear up for the new technology and a stricter approval process. In her own words, Holmes said, ‘If you have cars driving on the right side of the road to the left side of the road, the only way to do that is to pause.’

Holmes’ defended her company against the Journal’s sources, saying that one of the former employees had worked only for 2 months and the others were ‘clearly confused.’ She also criticised the journal for quoting a Therenos researcher’s widow who committed suicide after telling his wife that the company’s technology was not working. 

Whatever the rhetoric of Holmes, the Journal claims authenticity of its accusations and Walgreens that houses 41 Theranos test centres announced in the end of October that it will not open up anymore test centres until the technology issue was resolved. The FDA has hauled up the company for failure ‘to respond to customer complaints, for problems with lab protocols and for using unapproved devices.’

Clearly,  12 years is a long period for a company like Therenos, that has received seed funding in millions of dollars to have not filed for intellectual property protection rights through patents for its novel technology and publish data generated by Edison in peer reviewed scientific journals.

Insatiable desire for business growth fuelling unethical business conduct is apparent in both the scandals. 

The Theranos story is a scandal of greed and hunger that paved the way for unethical business. It is an example of what happens when a ‘semi informed technophile’ who has not even completed her education, has a revolutionary healthcare idea that starts making huge business news and suddenly appears hugely profitable to both owner and investor alike. Scientific scrutiny and peer reviewed testing not only take the backseat, they are not even considered important enough to be addressed seriously. Billions of investor dollars are the quick rich formula for the healthcare start up to take the healthcare industry by storm. What has been forgotten in this buzz is the plight of innocent patients whose testing and diagnosis went awry.

The Volkswagen scandal also had a huge greed factor that propelled the automaker to install the ‘deficit devices’ in the vehicles. However, unlike the healthcare start up, Volkswagen did not need a ‘quick rich formula.’ It was in search of a formula by which it could get a stranglehold on the automobile market, in the times when the governments of the developed countries were insisting on ‘green’ emissions for securing permits.

Major legal violations have surfaced as the Therenos and Volkswagen scandals have shaken the business world.

John Carreyrou of the Wall Street Journal alleged that Therenos’ Edison technology did not perform on par with proficiency testing. According to the law, the labs are required to prove to the federal centres for Medicare and Medicaid services that they can give accurate results whether their machines are bought or internally developed. This process of proficiency testing is done by accredited organizations that send samples to the labs several times a year. The labs need to test the samples and report the results. These results are confidential and are not disclosed to the public. If these results are close to average of those in the peer group, the lab receives a pass grade.

In early 2014, Therenos split the proficiency testing samples into two. One was tested with Edison machines and the other was tested on the machines of other companies. The results thus obtained were at variance according to internal mails. And the employees were asked to stop Edison testing. This is in clear violation of federal law which states that proficiency testing and blood sample testing must follow the same procedure.

In the Volkswagen emission scandal, the United States Environment Protection Agency (EPA), issued a notice of violation of the Clean Air Act, on September 18, 2015, to VolkswagenAG, Audi AG and Volkswagen Group of America Inc., alleging that they were fitted with a ‘defeat device’ that masked actual emission standards for nitogen oxides.

On November 2, the EPA issued a second notice of violation. It stated that when the vehicles were being normally driven on the road, the installed software suppressed the emission controls, giving better mileage but emitting upto 40 times more nitrogen oxides than legally permissible.

A study of the Therenos and Volkswagen scandals of 2015 reiterate that unethical business conduct has far reaching and devastating consequences. The Theranos scandal is a bubble waiting to explode if the allegations against the company are proved right. It is a reflection of what happens when greed and lure creep in to the psyche and claim foreground. Rapid growth can be difficult to handle for any start up but when it is a healthcare startup, the results are far more dangerous. The life and health of the population is put in jeopardy.

Similarly, the unethical installation of the ‘defeat device’ has been a huge blow to the Volkswagen brand and its cars. The ‘clean diesel’ engine image of Volkswagen has been left badly tarnished. While brands like Honda and Toyota have installed hybrid engines, Volkswagen is left struggling with millions spent on recall of vehicles and convincing customers of their good intentions of supplying vehicles fitted with clean and powerful engines. 

In addition, the public outrage will take long to subside. The company may end up paying $18 billion in fines. By adopting unethical practices, the company has not only lost money but it has also lost the trust of its customers, its good reputation and a large segment of the automobile market. From being the world’s biggest carmaker in the first half of the year,  it has seen its sales crash after the outbreak of the emission scandal and its stock price fall by 20% in the European morning .

Though unethical shortcuts may seem lucrative in the short run, they are never profitable for businesses in the long run. They make the company vulnerable to scrutiny by investors, law makers and the consumers. Temporary financial gain translates into cascading financial loss when the unethical bubble bursts.

Failure to comply with ethical standards is costly in terms time, resources, brand image and consumer loyalty. As companies grow and expand operations, it is important to stress on ethical practices that can bind the company together. ‘Ethical decisions ensure that everyone’s best interests are protected’ at all times.

This blog post is inspired by the blogging marathon hosted on IndiBlogger for the launch of the #Fantastico Zica from Tata Motors. You can  apply for a test drive of the hatchback Zica today.