Research Questions

Corporate Governance is defined as the system through which organizations are controlled and directed. If the corporate governance is good, there is an expectation of increasing firm performance while optimising value for stakeholders and shareholders in the long run. Along with firm performance and corporate governance, executive compensation is considered a noticeable and importance issue, having massive impacts. It is because executives earn million-dollar salaries and bonuses along with receiving stock-based pay that might involves no alignment with abundant welfare to come from operating their company ineffectively (Malik & Makhdoom, 2016). Below are the research questions that interests me to study the importance of a good corporate structure and promote it to prevent corporate scandals in the future.

1. Describe Volkswagen scandal by applying corporate governance structure?
2. Describe where corporate governance failed internally and externally in Volkswagen by focusing mainly on executive compensation?
3. What corporate governance strategies should be followed for preventing the scandal to be happen in future?  

The aim of this research essay is to analyse this issue in a corporate scandal of Volkswagen through applying the structure of corporate governance. It includes its failure internally and externally, including executive compensation to analyse, required as an element of corporate governance. This essay also includes promoting a good corporate governance for preventing the scandal from happening in an ideal future.

According to Flammer, Hong and Minor (2019), executive compensation is a practice in corporate governance and to ensure integration of CSR (corporate social responsibility) criteria in executive compensation. Along with the firm performance, there is a link of executive compensation to environmental and social performance as well. For instance, there was a failure of the corporate governance, caused at Volkswagen (VW) because of having a unique ownership structure where a single family, Porsche controlled over 50% of voting shares (Rauwald & Raymunt, 2022). Also, there was an inadequate monitoring of the CEO and other senior executives; to elevate management to the supervisory board even when they had presided over past scandals; the board of directors’ unwillingness of accepting any responsibility for the allowing use of “defeat devices” on at least 11 million vehicles with diesel engines (Plumer, 2015). There is an involvement of director stock ownership as the most positive and consistent related to future firm performance as per the Bhagat and Bolton (2019). Also, there is a strong interest of long-term investors and public policymakers in long-term firm performance. Other than this, director stock ownership is considered as a measure of corporate governance among such scandals which questions the corporate governance mechanisms effectiveness in companies. It also requires more laws and regulations for regulating and constraining corporate behaviour, considering the misaligned executive compensation as a common theme in corporate scandals like of VW.

Literature Review and Analysis

As per the case of VW emission scandal, the failure of corporate governance was based on resulting in a combination of individual mistakes and misconduct along with flaws in the company processes and a rule-breaking tolerance as well. The scandal was based on installing defeat devices in engines, when realised that it is not able of hitting emissions targets for diesel cars in the US through ‘permissible means’ (Ruddick, 2015). In the future, the company is trying for avoiding a similar crisis through overhauling its internal systems and infrastructure. There was the failure of its corporate governance both internally and externally, highlighting the devastating consequences of corporate misconduct along with having substantial negative impacts on VW, on the overall automobile industry, and on several stakeholder groups such as investors, employees, consumers, directors, and suppliers according to Crête (2016). Moreover, there were negative and several repercussions at the organizational, economic, and legal level as well that rapidly become apparent in terms of resignations. Also, there are changes in VW’s senior management, a hiring freeze, vehicle recalls, layoffs, a decline in car sales, the end to the marketing of diesel-engined vehicles, the launching of internal investigations through VW, a drop in market capitalization, and external investigations through the public authorities.

VW emissions scandal relates to the failure of corporate governance in terms of its ownership structure, revealed in management ethics as per Poier (2020). It led towards a certain kind of behaviour among employees as well, not explicitly mandated through the management while still being in the interest regarding company goals achievement. This was considered as a systemic failure of the two-tier board structure of the company, adopted while having the responsibility for both monitoring and management of a business along with making corporate decisions. However, the corporate governance and investors said that emissions scandal showed the lack in the authority and independence of doing this (VW, 2022). There was a lack of independence among both tiers, impacting the Supervisory Board’s ability of monitoring the actions of management independently. Also, it involved resulting in ineffective controls for uncovering improper activity and poor risk management through the Management and Supervisory Boards of VW. This shows the need of applying the structure of corporate governance for analysing this scandal in a better way in relation to making a change in corporate structure of the company, responsible to foster a dysfunctional corporate culture overall. When it comes to applying corporate governance structure, there is an involvement of specifying the distribution of responsibilities and rights between distinct stakeholders such as the shareholders, board, or managers, and spelling out the procedures and rules to make decisions in corporate affairs.

Conclusion

When the company employ a good corporate governance, it helps in regulating risk and reducing the opportunity for corruption as per Balachandran (2015). Corporate scandals like that of VW become more likely where senior management and directors are not able to complying with a formal governance code. VW set its corporate governance structure with the goal of becoming the largest car maker globally along with the strict emissions standards to increase the company’s growth in the future through maintaining a high standard of ethical behaviour overall (Arora, 2017). This leads towards a fair judgement in terms of the provision of performance-related pay, tied directly to VW’s governance failure. Also, there was an involvement of improving internal controls as well within the corporate governance structure, considering board of directors, employees, shareholders, and officers as per the Kabeyi (2020). Such application of corporate structure helps in preventing an individual to have too much power while contributing towards an effective and strong corporate governance practice. It includes certain fundamental principles that includes fairness, accountability, sustainability, transparency, responsibility, and independence.

Conclusion

Companies like VW fell into bankruptcy due to such large-scale scandals, mainly due to failure of corporate governance, influenced by both external and internal factors. When it comes to internal factors, it is mainly due to lack of competency of non-executive directors such as unqualified backgrounds, controlling, monitoring, and advising failure and inadequate internal controls like failure of sub-committees. In case of VW, the internal factor was inadequate internal controls and also, due to ineffective corporate governance structure. It is based on being inadequately implemented or designed that affects the firm performance as well. Other than this, there are external factors like the economic condition, influencing corporate governance failure that leads towards financial crisis. It requires the company to apply an effective corporative governance structure to address both internal and external failures along with ensuring to promote the prevention of such scandal from happening in an ideal future. In such aspects, there is a link among executive compensation, corporate governance, and firm performance overall.

Moreover, there is a need of delivering appropriate strategy during the prevention of corporate scandals while designing and adopting corporate governance to control the management activities and decisions. This leads towards improving the market value, capital resources, and performance of such companies like VW along with ensuring the company’s accountability to the shareholders and enhancing transparency on financial reports further. Executive compensation plays a great role in corporate governance while monitoring and controlling the company effectively and having positive impact on the value and performance as well. Other than this, companies making improvements to in having a better corporate governance structure leads towards attracting more investors, resulting in expansion or developments along with increasing employment. This shows the way VW is making improvements in the market along with maintaining its performance and the executive compensation. It ensures opportunities in the future and earning profits through a fully functional board of directors and encouraging them in fulfilling their responsibilities to protect the interest of shareholders (Chen & Jermias, 2014). Overall, these are the implications of a good corporate governance, as an effective part of the business strategy along with firm performance and executive compensation to promote in preventing such scandals from happening in an ideal future.

Based on the above observations, it can be concluded that corporate governance plays a crucial role among companies in terms of distributing responsibilities and rights by all individuals. It ensures the company like VW in following transparent and appropriate decision-making processes along with protecting all stakeholders’ interests, including the top management team, shareholders, policymakers, employees, the environment, government, communities, and peer companies within the same industry as a whole. There is a need of an effective corporate governance structure to deal with its both internal and external failures of corporate governance while considering executive compensation as its element. It involves making improvements that also helps in maintaining firm performance among companies overall. This helps the company in getting sustainable opportunities based on analysing its implications while promoting a good corporate governance in preventing such scandals like that of VW from happening in an ideal future. Also, the involvement of executive compensation in corporate governance helps in motivating regulation and accountability, defining a positive relationship among the firm performance as well, considering the interests of all stakeholders.  

References

Arora, J., 2017. Corporate governance: a farce at Volkswagen?. The CASE Journal, 13(6), pp. 685-703.

Balachandran, B. & Faff, R., 2015. Corporate governance, firm value and risk: Past, present, and future. Pacific-Basin Finance Journal, Volume 35, pp. 1-12.

Bhagat, S. & Bolton, B., 2019. Corporate governance and firm performance: The sequel. Journal of Corporate Finance, Volume 58, pp. 142-168.

Chen, Y. & Jermias, J., 2014. Business strategy, executive compensation and firm performance. Accounting & Finance, 54(1), pp. 113-134.

Crête, R., 2016. The Volkswagen scandal from the viewpoint of corporate governance. European Journal of Risk Regulation, 7(1), pp. 25-31.

Flammer, C., Hong, B. & Minor, D., 2019. Corporate governance and the rise of integrating corporate social responsibility criteria in executive compensation: Effectiveness and implications for firm outcomes. Strategic Management Journal, 40(7), pp. 1097-1122.

Kabeyi, M. J. B., 2020. Corporate governance in manufacturing and management with analysis of governance failures at Enron and Volkswagen Corporations. Am J Oper Manage Inform Syst, 4(4), pp. 109-123.

Malik, M. S. & Makhdoom, D. D., 2016. Does corporate governance beget firm performance in fortune global 500 companies?. Corporate Governance, 16(4), pp. 747-764.

Plumer, B., 2015. Volkswagen’s appalling clean diesel scandal, explained. [Online]Available at: https://www.vox.com/2015/9/21/9365667/volkswagen-clean-diesel-recall-passenger-cars[Accessed March 2022].

Poier, S., 2020. Clean and Green–The Volkswagen Emissions Scandal: Failure of Corporate Governance?. Problemy Ekorozwoju, 15(2), pp. 33-39.

Rauwald, C. & Raymunt, M., 2022. VW keeps Porsche IPO on table amid market volatility to ignite EV push. [Online] Available at: https://www.business-standard.com/article/companies/volkswagen-porsche-ipo-on-table-even-as-market-volatile-byukraine-crisis-122022501003_1.html[Accessed March 2022].

Ruddick, G., 2015. VW admits emissions scandal was caused by ‘whole chain’ of failures. [Online]Available at: https://www.theguardian.com/business/2015/dec/10/volkswagen-emissions-scandal-systematic-failures-hans-dieterpotsch
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VW, 2022. Corporate Governance & Control Failures. [Online]Available at: https://sites.google.com/site/vwemissionsscandal/corporate-governance-control-failures [Accessed 2022].