Volkswagen Corporate Governance

Executive Summary                                                     

Volkswagen has admitted that up to 11 million diesel cars worldwide are fitted with defeat devices which are customized software that programmed diesel engines to detect when a car is undergoing emissions tests. Volkswagen misleading outrage has brought about a progression of overpowering destroying outcomes of corporate misconduct. In this case, politics shape corporate governance by setting rules that companies are bound by and financial incentives often play a large role in shaping political preferences. The critical effects of such deception on Volkswagen stakeholders are clarified in details. Based on these findings, recommendations are provided in order to prevent such scandal to take place in the future.

1.   Introduction

Volkswagen defeat device switches off the controls when the car is on the road, enabling it to heave out harmful levels of emissions up to 40 times higher (Clothier 2015). The organization which had once proclaimed the significance of resource conservation, climate assurance and emissions reduction was freely vilified for lacking the values they pride themselves in (Volkswagen 2017). Nearly 30% of the company’s market value has been wiped out since the scandal broke, trust in the German manufacturing sector was also questioned (Campbell 2016).

2.     How and why did the scandal happen

The International Council on Clean Transportation (ICCT), performed emissions tests on the VW Passat, VW Jetta, and a BMW X5. The emissions performance of the Volkswagen cars fell below expectation that the ICCT contacted the Environmental Protection Agency (EPA) for further investigations. The company admitted its diesel emission deception in September 2015 (Associated Press 2015).

3. The following factors that created a climate for the scandal.

3.1 High powered incentives to stakeholders

Like all large German firms, Volkswagen had a two tier board structure – a supervisory board and a management board (Raymonde 2016). Splitting these roles could mean that it is unclear who is responsible for what and where the responsibility of one ends and the other begins (McVeigh 2015). Volkswagen’s former CEO, Martin Winterkorn, had a pay package that was heavily tilted towards variable pay. In 2014, he took home €16m, of which only €2m was fixed compensation.

3.2 Principal Agent Problem

The heavy tilting towards performance related pay was common across members of the board which led to a classic principal-agent problem. While profit motive is key in business; controlling costs is crucial. Motivating engineers to design defeat devices that function in accordance to emissions standard at a lower cost is vital, and planning such impetuses isn't troublesome (Bershidsky 2015). Nonetheless, Volkswagen neglected to consider potential damages and the fundamental interests at stake which opposed to act in the best interests of shareholders (Forbes 2015). These aggregated decisions resulted in expropriation of shareholders value which are consistent with the publicly announced goal for Volkswagen for many years, namely growth: the goal was to make Volkswagen the largest car maker by sales in the world, which it ironically achieved in the first half of 2015, only to lose again in the wake of the scandal.