The Volkswagen Scandal
(From: Clarke, Thomas. International Corporate Governance, pp. 631-632, Taylor and Francis). “The rigour of the Dow Jones Sustainability Index assessment criteria – ‘the gold standard for corporate sustainability’ – experienced something of a shock when on 21 September 2015, Volkswagen AG (VW) was listed as the industry group leader for Automobiles and Components (S&P Dow Jones 2015a). Volkswagen’s 2015 DJSI score included top marks for codes of
conduct and compliance as well as anti- corruption and environmental reporting. On 29 September 2015, the S&P Dow Jones Indices announced that VW was to be removed from the Dow Jones Sustainability Indices as a result of revelations that it had manipulated emissions tests to conceal the level of toxic pollutants issuing from its diesel engines in popular saloon cars in the United States (S&P Dow Jones 2015b). In another contemporary illustration of a
hitherto highly respected international company confronting disaster because of its neglect and defiance towards essential environmental standards, in September 2015, VW admitted to installing software in 11 million car engines over several years that allowed the cars to pass regulators’ laboratory emissions tests but belched out toxic nitrogen oxides when travelling normally on the road. As VW faced a litany of fines, lawsuits and recall costs, its reputation for
engineering excellence and environmental responsibility was the subject of ridicule. This flagrant abuse of environmental standards was ultimately a result of lax board of director controls and a paternalist corporate governance culture described in Germany as ‘uniquely awful’ (Bryant and Milne 2015).
After seeing the company lose over a third of its market capitalization in a matter of days, the company announced it would set aside $7.3 billion
dollars, the equivalent of six months’ profits, to cover the costs of making its cars comply with pollution standards. The carmaker had become the most successful in Europe as the result of its ‘clean diesel’ advertising, and the diesel engines that were affected by the fraud accounted
for half of its sales. The outgoing CEO, Martin Winterkorn, announced too late that the company would introduce 20 new hybrid or all-electric vehicles by the year 2020 (Ewing 2015). At first the company attempted to claim only a small group were involved in this environmental
fraud and suspended a number of staff as Matthias Müller was unveiled as its new chief executive. Müller was promoted from his role as CEO of Porsche and pledged to leave ‘no stone unturned’ and ‘maximum transparency’ in an investigation into how the company cheated emissions tests on diesel cars. The new VW CEO did not reveal how many staff had been suspended or who they were, but the company said the scandal was the result of ‘unlawful behaviour of engineers and technicians involved in engine development’.
Bernd Osterloh, Chairman of VW’s work council and a member of the executive committee, said: ‘A small group has done damage to our company. We need a climate where mistakes are not hidden’. Berthold Huber, the acting head of VW’s supervisory board, called the crisis a ‘moral and policy disaster’ (Ruddick and Farrell 2015). However, governance experts argue the cheating was predictable because of VW’s lax boardroom controls and peculiar corporate culture: ‘The scandal clearly also has to do with structural issues at VW . . . There have been warnings about VW’s corporate governance for years, but they didn’t take it to heart and now you see the result,’ says Alexander Juschus, director at IVOX, the German proxy adviser. ‘VW has almost 600,000 employees but its management board is staffed entirely by men. Under Mr Piëch and Mr Winterkorn, decision-making at VW was highly centralized and more junior managers were frightened to speak their mind. The full impact of the scandal remains unclear, as the process of VW recalling and repairing
effected vehicles is lengthy and complex, while an internal investigation into how the defeat software came to be installed, led by law firm Jones Day, is yet to be published. German prosecutors announced in June 2016 that they had opened an investigation into VW’s former chief executive Martin Winterkorn over alleged market manipulation for not announcing earlier that the company had manipulated emissions tests. Shares in VW, which owns Audi and
Porsche, dropped sharply from where they were when the emissions test cheating emerged in September 2015 (Ruddick and Farrell 2015). Matthias Müller, who replaced Winterkorn, apologized to shareholders for the scandal. He said: ‘On behalf of the Volkswagen Group and everyone who works here, I apologize to you shareholders for your trust in Volkswagen being betrayed. This misconduct goes against everything that Volkswagen stands for’. Hans-Dieter
Pötsch, Chairman of VW, said the scandal cast ‘a shadow on this great company’. Some shareholders made an unsuccessful attempt to have Pötsch, who was VW finance director at the time when the defeat devices were being installed, replaced as Chairman of the VW 2015 AGM meeting. ‘You are a conflict of interest personified,’ Markus Dufner, managing director of the Association of Ethical Shareholders in Germany, told the AGM (Ruddick and Farrell 2015).
The Porsche and Piëch families, descendants of the creator of the VW Beetle, own 52 per cent of the common shares. Porsche SE, the holding company for the family’s stake, supported a recommendation to exonerate Volkswagen’s management and supervisory boards. Wolfgang Porsche, a supervisory board member, came to Pötsch’s aid in helping to beat back efforts to remove him as the meeting chairman at the VW AGM in 2016 (Rauwald and Kresge 2016). The
California State Teachers’ Retirement System claimed that VW misled investors about emissions, seeking damages that could reach as high as €700 million ($790 million) if other investors agree to join the action. Another 278 institutional investors sued in March, seeking €3.3 billion in a lawsuit over the timing of market disclosures. Volkswagen has so far set aside €16.2 billion for the scandal, including repairs, legal costs and fines (Rauwald and Kresge
2016). The European Commission had warned of car emissions test cheating five years before the VW scandal, but nothing had been done to pursue the offenders (Neslen and Harmsen 2015). More than two dozen diesel car models made by BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz were put under scrutiny as the US regulator that exposed Volkswagen’s rigging of emissions tests probed whether rival carmakers engaged in similar
cheating. The Environmental Protection Agency’s broadening search for software- based ‘defeat devices’ that understate emissions during laboratory tests encompassed at least 28 diesel-powered models. The EPA stated emissions of nitrogen dioxide and other harmful pollutants are 10 to 40 times permitted levels when the controls are turned off. Emission controls can affect a car’s performance and, in past cases involving defeat devices, carmakers have used them to enhance vehicles’ fuel economy.
Questions:
1) What does the long-running VW emmissions scandal suggest about the prevalent corporate culture at the company? Why were investors not more engaged in the company at earlier stages?
2) What role did the VW Supervisory Board play in resolving this saga?
3) Did the VW senior executives react quickly and effectively to the discovery of the emmissions scandal? Was it sufficient to highlight the significance of the resignation of the CEO?
4) Will other corporations learn the lessons of the VW saga, or will efforts to cut costs and evade environmental regulation continue?”
Solution
VW Scandal and How It was Managed by the Supervisory Board
Questions
1. Why were investors not more engaged in the company at earlier stages?
Volkswagen (VW) Group has participated in a scandal to conceal their heinous act of polluting the environment. VW owned Audi and Porsche but realized a drop in the sales on these models because of the cheating scandal that was revealed in 2015. The Chief Executive Officer (CEO) was not being honest to the shareholders on the existence of problem in its management. This asserts that the corporate culture of VW is based on the authoritarian structure. The CEO is
the principal figure who comes up with the management decisions concerning the company. The other shareholders are supposed to take orders ‘from above’ and not questions them. VW is a renowned company that has wide experience in the manufacturing of the vehicles. This may have made the investors to have entrusted the management to execute important policies and orders on their behalf. Furthermore, Piech and Porsche families, which constituted of members
of the original inventors of VW owned more than 51% of the common share of the company. They had the freedom to execute the supervisory and management roles. Initially, it was hard for the other shareholders to come up with the major decisions concerning the management of VW Group, which is why it was easier for the occurrence of the scandal to be manipulated.
2. Role played by the VW Supervisory Board in resolving this saga
VW Supervisory Board aimed at resolving the outcomes of the scandal in a more amicable manner. It wanted to act as the mediator between the investors and the owners of the organization. First, the scandal was branded as a ‘moral and policy disaster. In this case, by branding the scandal as a ‘moral and policy disaster,’ the Supervisory Board wanted to exonerate and vindicate the initial owners or the members of the two families that established VW from the MANAGEMENT OF A SCANDAL 3 scandal. It also wanted the major shareholders not to lose trust and faith in the management
board. To pass the blame, the management laid the blame on staff members such as the technicians and engineers involved in the development of the engine.
As asserted by Clarke (2017), the Supervisory Board did want to worsen the situation. Instead, it wanted to resolve the problem amicably, which is why it confiscated some of the important set of information such as the disclosing the exact number of those who were suspended or laid off because of the occurrence of the scandal. The board acted as the mediator, it did not want to leave ‘any stone unturned’ in addition to enhancing ‘maximum transparency.’
It wanted to eliminate the existing notion that the cheating was premeditated and could be predicated and controlled within the boardroom. This is why the board did not want junior managers to speak their mind, as this could have worsened the mediation process. This could have induced a worse scenario that could have made the shareholders to lose trust in the company, thus, leading to the crippling of its operations and the eventual fall in the value of its
shares.
3. Did the VW senior executives react quickly and effectively to the discovery of the emissions scandal? Was it sufficient to highlight the significance of the resignation of the CEO?
VW senior executive was able to react quickly, as well as effectively in addressing the issues underlying the occurrence of the scandal. Even though the scandal led to a substantial loss in terms of reputation and costs, the senior executive put in all important efforts that could help to erase any occurrence that could lead to further losses. For example, its announcement of allocating more than $7.3 billion of its profit in enhancing the compliance to the set MANAGEMENT OF A SCANDAL 4 environmental laws was meant to restore trust. The amount allocated was equivalent to a half a year profit of the company. It was also imperative for the company to announce the resignation of Martin Witernkorn, the outgoing CEO, as this could help to redeem the image of the company. The outgoing CEO acted too late in addressing and ending the scandal. As asserted in the case, the CEO aimed at introducing at least 20 brand new all-electric and hybrid vehicles before the year 2020. According to Clarke (2017), the announcement of the resignation of this CEO was meant to exonerate the management from the blame and public shame that could have emerged. Instead, this was a way redeeming its image at the expense of the adversity that befell the CEO.
It was a way of ensuring that the advisory and management board could not be blamed for the occurrence of the scandal. It was a well calculated move for redeeming its image, and protecting its competitiveness in the market.
4. Will other corporations learn the lessons of the VW saga, or will efforts to cut costs and evade environmental regulation continue?
VW’s handling of the scandal provides a great lesson to other organizations. Even though it was imminent that the scandal was premeditated and something that the management was aware of, the board members were able to exonerate the owners from then blame. It was able to handle the issue in a more amicable manner, thus, restoring the trust the other shareholders had on it. It is important for other organizations to learn from VW on how to handle itself when a
sage occurs. It is important to confiscate some important information to protect such organizations from making losses and losing the public trust. Above all, it is important adhering to the set environmental rules, as this is one of the most important requirement for the contemporary organizations.
References
Clarke, T. (2017). International Corporate Governance: A comparative approach. Routledge.
Order with us today for a quality custom paper on the above topic or any other topic!
What Awaits you:
• High Quality custom-written papers
• Automatic plagiarism check
• On-time delivery guarantee
• Masters and PhD-level writers
• 100% Privacy and Confidentiality