In September 2015, the most audacious fraud in the corporate history was exposed to the world. The fraud was committed by the world’s biggest carmaker named as Volkswagen and it is commonly known with the name of Dieselgate or Emissiongate scandal. The company is a German corporation and is in existence since the year 2008. It was found by the US Environmental Protection Agency that Volkswagen had deliberately been indulged in deploying the defeat devices in the cars to circumvent the emissions tests in United States. The top management personnel of the company were aware of the ill-practices of company’s engineer and were in continuous support of them in concealing the facts about these practices from the US regulators and the customers of the company. Therefore, the corporate governance structure of the company was blamed for the entire scandal. The scandal occurred due to the greedy intensions of the managerial persons and engineers of the company to become the top carmaker in the world. The company’s negligence towards its responsibility of protecting the rights of its shareholders made the company suffer from heavy fines and penalties (Blackwelder and Katerine 2016).
By 22nd September, it was ultimately admitted by the Volkswagen Group that it has sold around 600000 vehicles in US market and such vehicles were equipped with the defeat devices that contained sophisticated software to cheat on the emission test designed by the US regulators. The defeat devices were less of a device than a mere code in reality on the electronic control module of the car that could detect whether the car is run in the labs for the testing purpose or they are run the roads for their actual usage (Siano and Vollero 2017, 27). While in the laboratory the cars could clear the emission test it was generally observed by the environmental protection agencies that the cars were actually emitting nitrogen oxide 10 to 40 times more of what was ideally allowed as per the standards of US market (Armstrong 2017).
The stock prices of Volkswagen were considerably higher prior to the opening up of the scandal on part Volkswagen group as it was successfully operating as the largest manufacturer in the world as it was owning the most notable brands across the world such as Volkswagen, Porsche, Lamborghini and Audi (Volkswagen AG 2018). The company was highly recognized for its branded cards that offered maximum satisfaction to its customers. Volkswagen group was operating its business as a family controlled company because the Porsche and Piech families were owing almost 52% of the company’s voting rights. Also, the 20% of the Volkswagen’s voting rights were owned by Lower Saxony and the State of Qatar held 17% voting rights in the company. Due to this, the external shareholders were holding only 11% of the overall voting rights of the company. Soon after the acceptance of the fraud commitment by the company in response to the notice of EPA for the violation of federal rules of emission, the stock prices of the company declined by 20% on the stock exchange on the very first day after the investigations report went public and on the next day the prices of the company’s share further fell down by 12%. The stock prices kept on falling down further which made the shareholders of the company suffer heavy losses (Leggett 2018). The Qatar which has the major holding the major stake in the company lost near about five billion dollars as a result of scandal revelations. Also, there was a great impact of the scandal reports on the sales of the company as it declined by 24.7% in 2015 in comparison to the sales of 2014.
There were various factors that contributed to the major scandal that was undertaken by the Volkswagen Group. The intense competition in the market pressurized the engineers of the company to design such software that could defeat the federal emissions test in US. It was the extreme greed for the substantial growth of the company by its management that induced the engineers to take up such illegal practices of cheating on the regulatory bodies of US (Milne 2015). Volkswagen was struggling to supersede Toyota as well General Motors to achieve the top most position in the car market globally. The corporate skulduggery was the prime reason why the managerial persons of the company supported their engineers in their illegal and unacceptable practices. Corporate Skulduggery is the economic phenomenon which represents the behavior of an average individual to the opportunities and constraints (Zhan, Veijalainen and Denis 2016). To achieve the aim of global leadership, the company had US as its obvious target market because of its small presence. Moreover, the corporate governance structure lacked the appropriate control system that was required to protect the interests of the shareholders of the company (McGee 2017). The family controlled business was the key factor that contributed to the emission crisis because of its fractious as well as unfocused board which was not accountable to anyone except the trade unions (McGee 2017).
The key actors of the emission fraud were the engineers of Volkswagen as they were the only parties who were directly involved in the designing of the devices that could cheat on the federal tests by implementing the illegal software in the devices that could be turned on only at the time of laboratory emissions testing to meet the US standards for nitrogen oxide emission from the cars but in real world practice they were not activated to control the emission of harmful nitrogen oxide gas that caused intense air pollution in the entire environment (Crête 2016, 25). The engineers were indulged in such activities because they were instructed by the managerial persons of the company to hit the target, both in terms of performance and price. But, unfortunately it required huge money and promotion to meet the desired target and therefore, the engineers of the company could not manage to achieve this (Bovens 2016, 262). To meet the targets of the ambitious executives of Volkswagen, the engineers adopted the unethical and inappropriate ways. The manager, senior managers, board of directors and all other top management personnel had never restricted the Volkswagen’s engineers to adopt such practices, for their personal benefits at the cost of causing loss and harm to the shareholders, customer and employees (Rhodes 2016, 1501).
The top executives of Volkswagen along with the CEO of the company named as Martin Winterkorn felt extremely guilty for breaking the truth and faith of the customers as well as the regulatory bodies as Volkswagen promised to cooperate with the US regulators. The company called for an external investigation to be carried out by the independent parties and also it has conducted an internal probe in response to revelations of its illegal practices (Parloff, 2018). The formal acknowledgement of deception on part of the company was made by its executives in Germany and US to the officials of the EPA. The company has also paid all the imposed fines and penalties for deceiving the regulators (Krall and Roger 2015, 12).
From the Volkswagen’s case two lessons about the corporate governance can be learned. The role of the top management of the company is literally a face work where they merely have to represent their organization to the outer world and hence they are represented as the face of the company. However, the major decisions about the business of the organization are left with the middle level managers who are charged with the responsibility of transforming the visionaries of the top management into the real actions. If the expectations of the key stakeholders such as shareholders, government and mass media changes, the façade of the organization and its personnel must also be changed to accommodate the requirements of its stakeholders so as to satisfy them. This was the real scenario in the case of Volkswagen’s CEO Martin Winterkorn as he was the main face of the company and was representing the company through his identity (Makortoff 2017). Changing faces to adopt the changed expectations of the stakeholders helps the company to stay the same internally whereas the external impression to the outsiders is that significant changes have been made to satisfy them at the best. But its opposite also holds true as rotating the top managers of the company to indicate the change to the outer world while remaining static. Useful illegality is the second lesson that can be learned from the above case of Volkswagen. It means the deliberate deviations from the company’s formal rule (Chadwick 2017). The deviations from the rules are not have any idea about the people who are actually responsible for the emission scandal because those people could not be easily and directly identified. The illegal deviations from the rules are not always the sabotages. Rather, they allow the things to be done in the quickest and more efficient ways by following the ‘red tape’. The invention of any device that can save ample of time and resources in producing law conforming diesel engines is actually useful (Ewing 2017, 65).
Further, from the above case, it is clear that although the shareholders are not involved in the internal activities of the company though they hold the absolute right to be protected for their interests in the company. The main rule of corporate governance requires the top management personnel and other management persons to remain accountable towards its shareholders and their interests in the company (Mansouri 2016, 2011).
No, the efforts of Volkswagen did not prove to be the suitable steps to prevent the scandal from its further occurrence. The corporate culture since the scandal has become worst as the management is collecting bonuses and variables pays irrespective of the losses incurred by the company. The appointment of new board member by Volkswagen to deal with the legal affairs of the company has raised more concern towards its integrity (Geuss 2017). Further, the rule of corporate governance says that all accountable actions must be taken to restore the trust of public in the company but the company does not seems to take any such action and hence there cannot be seen any improvement in the corporate governance structure of Volkswagen (Neate 2018).
Conclusion:
From the overall discussion carried out in this report it can be concluded that corporate governance plays a crucial role in the long term survival and success of the company. The controlling and directions from the top management of the company should be given considering the interest of all the stakeholder groups such as employees, government, environment and shareholders. In the case of Volkswagen being discussed in this report it came quite clearly that corporate governance must be strong to achieve long term growth. Volkswagen was running business smoothly with good profitability until the scandal came out in the news. When the scandals came out, the financial performance of the company hampered. Further, the company also lost goodwill, faith and trust of the customers. The Stock price fell down severely affecting net worth of the shareholders negatively. The company faced reduction in demand which badly affected the operations of the company. The overall impact of this mess was not perceived only on the wealth of the shareholders but also on the other stakeholders such as employees, environment, and government. Therefore, it is quite evident from the discussion that the long term success of the business is dependent upon the corporate governance of the company.
References:
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