Corporate Governance: Importance and Impact of the Volkswagen Emission Scandal

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Corporate governance

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Answer 1:
Introduction
This report mainly deals with providing the explanation of the corporate governance
and its importance for businesses. This is mainly carried out by providing an explanation of
the emission scandal of Volkswagen and its impact on the corporate governance policies of
the company.
Explanation of Corporate Governance
The term’ corporate governance’ refers to the rules, policies, procedures and
mechanism by which a corporation is controlled and directed. It implies to the development
and establishment of an internal governance framework based on the principles of ethics and
morals within the workplace that forms the basis of carrying out its all operational activities.
It involves balancing the interests of its wide range of stakeholders such as shareholders,
customers, employees, government, investors and the community.
It is highly essential that companies should have high quality corporate governance
for maintaining the interest of its wide range of stakeholders that is necessary for promoting
its sustainable growth and development. It mainly helps in achieving the confidence of the
investors thus enabling a company to raise its capital in an efficient manner.
Analysis of Emission Scandal of Volkswagen
Impact on the Value and Performance of Volkswagen since the occurrence of Emission
Scandal
Volkswagen is a German multinational involved in automotive manufacturing and is
recognized as one of the largest company in terms of revenue across the global automotive
sector. The company brand image has been highly negatively impacted since the occurrence
of the emission scandal than involves use of software in about 11 million of its vehicle for
cheating on emission tests (Ruddick, 2015). The software was able to sense when the vehicles
are put to tests and the installed equipment tends to reduce the emissions. The softer is known
as defeat device and it has been identified by the Environment Protection agency (EPA) that
VW cars use this device for changing their performance and reducing the emissions. The
company has also admitted to the use of such a system for reducing the amount of emission
from its vehicles when they are in testing phase (Kollewe, 2016).

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The profitability position of the company has been negatively impacted since the
occurrence of the scandal with decline in its car sales. It has suffered a first annual loss in 20
years of its history in the financial year 2015 mainly due to paying huge costs for the scandal
of about €16.2 billion (Kollewe, 2016). The decline in the sales of its automotive vehicles in
its major markets across the world such as the UK, US and Germany has further lead to
decline in its operating profits. The decline in the sales is mainly due to loss of trust and faith
of its customers who feels cheated as they has bought the diesel cars in the belief that they
are highly fuel efficient (Gates, 2017). The recall of the affected vehicles by the company has
also lead to increase in the frustration of the consumers and also it has caused VW to face the
threat of legal action from the customers and its shareholders. The customers are also
concerned on the resale value of their car and as they had developed a negative perception of
the vehicles regarding its future performance (Lebeau, 2015).
Reason of the Change in Value and Impact on the Corporate Governance Policies of
Volkswagen
The decline value of the VW vehicles in the mind of its customers and shareholders
has lead to negatively impacting the company value due to reduced sales of its vehicles. The
scandal has lead to posing questions regarding the ineffective of corporate governance
policies of the company to identify the occurrence of such unethical practices. The scandal
has highlighted the negative impact of corporate misconduct and placed importance on
developing strong internal control framework to reduce the risk of occurrence of such
unethical practices. The development of an effective corporate governance system within the
company is very essential to prevent the occurrence of such corporate misconduct in the
future and promoting the sustainable growth of the company (Hotten, 2015).
Discussion of ways to mitigate risk going forward
VW can mitigate the risks of occurring of such scandals in the future by developing a
strong system of corporate governance that ensures the development and implementation of
ethical policies and procedures within the workplace. The governance policies should lead to
development of an internal control risk management framework that can identify any type of
operation risk in advance so that the occurrence of such unethical practices can be minimized
(Bryant, 2015).
Conclusion