Corporate Governance Issues in the Volkswagen Case

A company as an incorporated body is an artificial person with the ability to own property, contract, sue and be sued in its own name. Since a company is an artificial person, it has to be controlled by natural persons who act as the driving soul and will of the company. Generally, the transactions and decisions of a company are taken by a board of directors or management. The board is the decision making organ of a company and decides on behalf of and for the company. The board could in most circumstances elect or appoint one of the board members to manage the company and deal with the day to day running of the affairs of the company.

In this scenario, there has been discovery of a scandal at Volkswagen. There is a supervisory board as well as a Chief Executive Officer. The Chief Executive Officer has decided to resign due to the discovery of the scandal; on the other hand, none of the Supervisory Board Members has resigned in the circumstances. The supervisory board is ultimately accountable for the strategy and day to day activities of a company and should therefore be responsible for any malpractice that a company engages in.

In answering this question, I shall discuss whether it is the Chief Executive Officer who should have resigned or the Supervisory Board members. Corporate governance should be taken seriously to ensure that a corporate body is managed and run well. There are several theories of corporate governance that are relevant to this case scenario. The first theory of corporate governance is the agency theory (ArAs, 2016, p.31). The agency theory is to the effect that there are two individuals who are in the relationship of an agent and a principal. In this case, the CEO and the company are the two parties which are in such a relationship and the agency relationship/ theory is relevant to them.

The agency theory and relationship has three conditions that enable it to operate; the agent is free to decide on various courses of actions, an agent’s action affect their growth and those of the principal and it is very hard for the principle to monitor the actions of an agent since the available information is very scarce (Clarke, 2017, p. 12). The principal should however control the agent. There should be transparent accounting practices as well as disclosure by the agent. This did not happen in the Volkswagen case and as a result, there developed a scandal. The CEO as an agent of the company has to be accountable and by resigning, it showed some level of accountability and responsibility (Bottomley, 2016, p. 24).

Agency Theory and Stewardship Theory

On the part of the Supervisory board members, they oversee the running of the company. Major decisions on the running of the company have to be approved by the supervisory board. Here, the stewardship theory is relevant. The supervisory board members are the company stewards who should protect and make profits on behalf of the shareholders. Where there is a scandal, they are the persons who should take responsibility and resign (Chan et al, 2014, p. 63).

In summary therefore, both the supervisory board members and the CEO should have resigned and take responsibility for the scandal at Volkswagen.

Investors and activists are stakeholders in companies. By being a stakeholder, the investors own shares in companies and are major shareholders in a number of companies. Investors and activist groups exert a lot of pressure on the companies and corporate bodies so that they manage their environmental risks effectively. In doing so, investors play a major role in corporate governance as they shape the decision making processes in companies. This prevents the companies from making decisions that make have negative impacts on the environment so as to avoid environmental risks such as pollution that are caused by companies emitting and dumping waste products on the environment.

In this case scenario, corporate theory referred to as the stakeholder theory is relevant (Ferri & Göx, 2018, p. 17). Stakeholder theory can be described to refer to individuals or groups of individuals who are affected either negatively or otherwise by the achievements of the objectives of the company. The management of a company serve suppliers, business partners and employees. In making decisions therefore, the interests of all the parties have to be taken into account.

Investors are considered as the owners of the capital that is invested in corporate bodies. They therefore have a major role to play that contributes into good corporate governance. In contributing to good corporate governance and avoiding scandals, investors are guided by three major principles of corporate governance that they strive to enforce. The first is the principle of accountability. Accountability is a principle that is very central in corporate governance (Graham & Kaye, 2015, p. 18) . The principle of accountability is to the effect that there are consequences for every action that is taken by the management of a company.

Where the principle of accountability is entrenched and practices, performance is always measured and good performance is rewarded, poor performance and misconduct will not be tolerated at all. Investors could have ensured that there was accountability at Volkswagen son as to avoid the environmental risks and the crisis experienced. Accountability elements that investors should have insisted on include; executive compensation, say on the pay structures, actions on executive misconduct e.t.c. This would have prevented the crisis from occurring at Volkswagen.

Stakeholder Theory

The other principle of corporate governance that investors should have adopted is the principle of transparency. Transparency leads to accountability and without it there can be no accountability (Hotten, 2015, p. 44). Investors should therefore be well informed especially prior to making an investment and after investing. Transparency is derived from the frequency of disclosures made to shareholders and investors on the performance and major decisions of the company. Investors should insist on transparency so as to avoid any scandal and crisis such as the one witnessed at Volkswagen.

Investors should also engage the company. Investors should therefore look for a means that would ensure that their voices are heard and their opinions incorporated into the decision making processes. Engagement could be both formal and informal (Larcker & Tayan, 2015, p. 8).

In summary therefore, investors and activist groups play major roles in ensuring that good corporate governance is practiced in a company. They achieve this by ensuring that there is accountability, transparency and that they are involved in the running of the company. This would go a long way in preventing the occurrence and instances of risks and scandals.

This question alludes to issues of corporate governance referred to in the case scenario at Volkswagen. In answering this question, I’ll attempt to briefly discuss all the corporate governance issues outlined and mentioned by case 13 and suggest ways that the company could have used to avoid them.

The corporate governance issues raised in case 13 are as discussed below. The first corporate governance issue is the composition and structures (Rauwald, 2018, p. 28). The management board is not gender balanced. It is entirely composed of men. The decision making process is therefore more centralized; the process is such that junior managers have no say in the decision making process of the company. A board of management composed of only one gender is very likely to take decisions that are biased.

The centralization of the decision making process also leads to poor decisions being taken up. In order to ensure good corporate governance and practice, the board of management should be staffed by both men and women so as to have varied interests that are easily reconciled at decision making. The process of decision making should be consultative to ensure that opinions of all stakeholders are sought before a final decision is made.

Another corporate governance issue is the loss of trust in the company by shareholders (Tricker & Tricker, 2015, p. 57). Shareholders entrust the executives and managers to run the affairs of the company in order to realize profits that are payable in form of dividends. Shareholders entrust the executives and managers with the running of the business of the company and the occurrence of the scandal was a breach of the shareholder trust. For trust to exist, there should be accountability, transparency and shareholder engagement in the affairs of the company. This should be achieved through the issuance of periodic disclosures.

Lack of responsibility and accountability by members of the supervisory board is another corporate governance issue alluded to in case 13 (Whiting & Birch, 2016, p. 255). It is reported that Wolfgang Porsche, a supervisory board member prevented the removal of Potsch from the position of finance director. Supervisory board members should be the first persons to enforce good corporate governance and ensure that corrupt individuals and those who intend to taint the image of the company are removed from their influential positions. Defending such persons is bad and poor corporate governance issue.

In conclusion therefore, the scandal witnessed at Volkswagen occurred as a result of poor and bad corporate governance. The scandal is majorly contributed to by the Supervisory board and the Chief Executive Officer who breached the principles of Corporate Social Responsibility and engaged in bad corporate governance with self interest. All of them should be held to account for the scandal and crisis experienced at Volkswagen.

References

ArAs, G., 2016. A handbook of corporate governance and social responsibility CRC Press

Bain, N. and Band, D., 2016 Winning ways through corporate governance Springer

Volkswagen, Case Study 13, Clarke, T, 2017, International Corporate Governance: A Comparative Approach, Routledge

Bottomley, S., 2016 The constitutional corporation: Rethinking corporate governance. Routledge

Chan, M.C., Watson, J. and Woodliff, D., 2014. Corporate governance quality and CSR disclosures Journal of Business Ethics, 125(1), pp.59-73

Ferri, F. and Göx, R.F., 2018 Executive Compensation, Corporate Governance, and Say on Pay. Foundations and Trends® in Accounting, 12(1), pp.1-103

Graham, J. and Kaye, D., 2015 A Risk Management Approach to Business Continuity: Aligning Business Continuity and Corporate Governance. Rothstein Publishing

Hotten, R., 2015, Volkswagen: The scandal explained, BBC News, 10 December 2015, date accessed 6/5/2018 https://www.bbc.com/news/business-34324772

Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education

Rauwald, C., 2018, Herbert Diess becomes new Volkswagen CEO to build brand after dieselgate scandal, Financial Review, April 11 2018, date accessed 6/5/2018 https://www.afr.com/business/transport/automobile/herbert-diess-becomes-new-volkswagen-ceo-to-build-brand-after-dieselgate-scandal-20180410-h0yls3

Tricker, R.B. and Tricker, R.I., 2015 Corporate governance: Principles, policies, and practices. Oxford University Press, USA

Whiting, R.H. and Birch, G.Y., 2016 Corporate governance and intellectual capital disclosure Corporate Ownership and Control, 13, pp.250-260