Corporate Governance And Sustainability Measures In The Aftermath Of The Volkswagen Scandal

Background and Overview

Discuss about the Firms and Collective Reputation System.

Volkswagen is one of the pioneer companies known for manufacturing automotive founded in 1937 in Germany. It was the largest automaker in the world in 2016. It employs more than 626000 employees. The company has relied on its innovation strategies and quality outputs over the year and enjoyed the market leadership. The company deals in passenger as well as luxury cars and Porter’s five forces analysis has been explained below:

Barriers to entry is High as the automobile industry in itself is huge and there is insurmountable start-up cost being involved, obtaining license is difficult and above all creating trust in the brand is the most challenging thing.

Power of suppliers is generally low as suppliers so specialise and manufacture parts only for selected automakers and as a result are heavily reliant on them. It would have a heavy impact on their business to lose a contract with the automaker(Siano, et al., 2017).

Power of consumers’ ranges from low to medium as there is abundance of substitutes and consumers do not generally buy in bulk quantities. Instead, government agencies and large firms do buy in bulk quantities.

Availability of substitutes can be said to be medium as the government is promoting environmental friendly practices like use of public vehicles coupled with the increase in the gas prices.

The rivalry amongst the automobile industry is high as US automobile industry is considered to be an oligopoly but off late the Japanese automakers have captured a huge market share making the competition even fiercer(Blackwelder, et al., 2016).

From the above it can be concluded that Volkswagen position is safe in market and is expected to hold a considerable market share.

Following the major scandal that unfolded in the then 78 year old history of Volkswagen, the company was found to have cheated and illegally pass the emission tests for about 11 Mn diesel vehicles (Bromwich & Scapens, 2016). This had a series of implications on the company both from present as well as future perspective including criminal proceedings against 6 employees in US, lawsuit by investors, and ongoing probe in criminal proceedings in Germany and facing a fine as large as $20 Billion. However, post this the company reframed its policies and strategy in order to rebuild its tarnished image which included moving away from the diesel engines which dominated the company’s business share in the past and also scaling back on all forms of diesel and gas. The company also announced of its plan to introduce a 30 battery electric vehicle by 2025 (Ewing, 2017). The company also promised that the first highly automated vehicle will be on road shortly as Volkswagen has been known in the past for its technical prowess. This will also help the company in meeting the emission standards. The company also focused on electric mobility and set it as one of its major aims going forward and finally the company delivered 10.3 million vehicles in 2016 edging past the arch rivals Toyota. Further, all this lead to the non-financial impact of the change in the top management at Volkswagen and the financial impact of having to pay a huge fine. Due to this, it is also expected that the people worldwide will move from diesel engine cars to the petrol versions and also the emission testing methods would undergo the change (Li, et al., 2018).

Corporate Governance and Sustainability Measures

This is in reference with the check and evaluation of the procedures of corporate governance measures being practiced at the company. Corporate Governance is one of those significant and critical areas which needs to be adhered to keeping the future in mind and the concept of sustainability (Choy, 2018). What has transpired in Volkswagen in the last few weeks is still under investigation as to who actually were involved behind the scam and from when the same is in action. The question is whether it is a failure of corporate governance or a management quality issue. In addition to the laws and regulations for the individual specific countries, there also exists a number of conventions and the recommendations of international organizations that are addressed generally to the private state and not the individual companies but the same needs to be adhered to. Some of these include “Agenda 21 on sustainable development, “the General declaration on Human rights issued by UN in 1948”, “OECD guidelines for multinational enterprises”, etc. Besides this, Volkswagen commits itself to “Declaration on Social Rights and Industrial Relationships at Volkswagen” and the “Charter on Labour relations”. It is clear that Volkswagen management has not adhered to any of the above mentioned quoted conventions which has had a significant impact on the Management quality as well (Bachmann, et al., 2018).

Due to the scandal on emission testing, a doubt has been created both upon the internal processes in Volkswagen as well as the management under whose nose the defeat device meant to give the test results in advance fitted into the engines was carried out. This has posed major challenges to sustainability and corporate social responsibility but the strategy of Volkswagen has been revised and the same is expected to regain the lost momentum and it should help believe the investors in the company. Some of these include deploying intelligent innovations and technologies and becoming a leader in customer satisfaction, generating more than 10 Million vehicles a year to regain most market share, aiming to achieve minimum 8% return of sales before tax, aiming to be best and attractive employer in the world (Tanaka, et al., 2018). It also has a strategic implementation of processes and teams in mind as shown below to strengthen the corporate governance at work.

It aims to revolutionize the corporate atomic structure itself by making a difference in the ethical responsibilities and the fiscal responsibilities with the change in the policies and the practices. In short, it is moving from the traditional corporate governance system to the shareholder value based orientation. All the collective measures mentioned above should see Volkswagen coming over the debacle it has faced in the past and once again emerging to the top.

Impact of Emissions Scandal on Volkswagen

The AAA model is based on the concept of Authentication, Accounting and Authorization from end to end and is a framework for intelligently controlling access to private networks. In the present context, it may be interpreted as reflecting the true status of the company, its policies to the shareholders after duly auditing the same. In the given case, since the senior manager has asked to substitute the inflammatory wordings used in the client letter with a more constructive one so as not to alarm the clients, the following points have been drafted.

The company has been a leading car manufacturer over the past decade or so and has been delivering excellent financial and non-financial results. It has been meeting all the shareholders’ expectation and the CAGR targets over the past(Castille & Fultz, 2018). Along with the same, the company has also represented strong processes and has been a market leader in terms of the innovative strategies and improving upon efficiency of the vehicle engines. However, the recent “defeat device scandal” found by Environmental Protection Agency has put the company’s processes, the testing systems as well  as the management under the scanner but with the renewed approach and constructive policies and the vision to overcome the tarnished image will help the company to be back as a leader.

From perspectives of the environmental authorities and the pollution control agencies, the company which affected 11 million cars worldwide with the so called “defeat device” has set up an internal inquiry and the set aside €6.7bn for covering the costs on account of the defects and complaints. Besides that the company may also face a penalty as good as $ 37500 per vehicle totalling up to $18 billion. This will be having a major financial impact and the company has also posted a loss for the 1^st time in the last 15 years but the Group’s chief executive office Matthias Mueller, is confident that the company would leave no stone unturned to gain back the lost market share as well as the investor confidence in the company(Mun & Shin, 2018).

The company has also decided to move away from the diesel engine system to the electric and battery driven cars and the petrol versions of the car in order to control the pollution and encourage mobility and sustainability. Just like somebody’s loss is someone else’s gain, in the similar way, the scandal relating to the diesel engine has given rise to the market switch to the petrol engines overnight and the company also plans to manufacture fully automated electric cars by 2025 (Alexander, 2016).

The company has also made major improvements in the testing processes and will be adopting and adhering to the major conventions which were directed to the individual companies earlier. This will help in making the process of testing more robust and making it much closer to the actual conditions on road.

Besides all the above processes, the company has also set upon a digital transformation target for the coming years and has also set a renewed strategy and approach to regain the lost market share and status (Bizfluent, 2017).

All these factors put cumulatively should see Volkswagen overcoming the past issues and emerge as a leader in delivering quality and sustainable vehicles to the customers.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Bachmann, R., Ehrlich, G. & Ruzic, D., 2018. Firms and Collective Reputation: The Volkswagen Emission Scandal as a Case Study..

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].

Blackwelder, B. et al., 2016. The Volkswagen Scandal.

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Castille, C. & Fultz, A., 2018. How Does Collaborative Cheating Emerge? A Case Study of the Volkswagen Emissions Scandal. Proceedings of the 51st Hawaii International Conference on System Sciences.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Ewing, J., 2017. Faster, Higher, Farther: The Inside Story of the Volkswagen Scandal, s.l.: Random House.

Li, L. et al., 2018. Industry-wide corporate fraud: The truth behind the Volkswagen scandal. Journal of Cleaner Production, pp. 3167-3175.

Mun, K. & Shin, I., 2018. A close look at the role of regulatory fit in consumers’ responses to unethical firms.. s.l.:s.n.

Siano, A., Vollero, A., Conte, F. & Amabile, S., 2017. “More than words”: Expanding the taxonomy of greenwashing after the Volkswagen scandal. Journal of Business Research, pp. 27-37.

Tanaka, K., Lund, M., Aamaas, B. & Berntsen, T., 2018. Climate effects of non-compliant Volkswagen diesel cars. Environmental Research Letters, Volume 13(4).