Comparative Corporate Governance: A Critical Assessment of Volkswagen's Governance Processes

This report provides a critical assessment of the governance processes of Volkswagen Company in the context of corporate governance principles. It analyzes the performance of the company as per the corporate governance code, determines the present governance structure of the company, and reviews the diesel emission scandal caused by the company. It also provides recommendations and improvements that can be implemented by the company in the future to gain back its competitiveness.

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Executive summary
The purpose of this report is to discuss the governance processes of the Volkswagen Company,
which recently had experienced a scandal which hampered the reputation of the company. In the
context of the corporate governance principles, the report provides a critical assessment of these
processes and structures of the company. The report analyzes the performance of the company as
per the corporate governance code. It determines the present governance structure of the
company. It critically reviews the diesel emission scandal caused by the company which had led
to a breach of trust and provides information about the other significant issues faced by the
company in the last five years. Further, it provides recommendations and improvements that can
be implemented by the company in the future to gain back its competitiveness.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
1. Company's performance concerning corporate governance code...............................................4
2. The existing governance structure of the organization................................................................6
3. A critical review of the scandal and other issues faced by Volkswagen.....................................8
Conclusion.....................................................................................................................................11
Recommendations and suggestions...............................................................................................11
References......................................................................................................................................15

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Introduction
As per the Environmental Protection Agency, most of the cars that were manufactured
and sold in US had defeat software installed. This defeat software enabled in the cars helped to
reduce the emissions during the test and this helped the cars to pass to standards of EPA.
However, in reality, cars emitted 40% more emissions than the test results. Later the company
accepted that there were around 11 million cars all across the globe which was affected in this
deception (Dunlap and Mertig 2014). There were several legal and financial aftermaths which
took place in various other countries. The company's diesel emission scandal had greatly
impacted the entire society as well as the environment. The Volkswagen scandal had pulled
down the reputation of the company (Ewing 2015). The vision of Volkswagen was to "offer
attractive, safe and environmentally sound vehicles which can compete in an increasingly tough
market and set world standards in their respective class". The company had a wide reputation
throughout the globe; however because of the bad reputation the company lost its market share
capital. There are aftermaths after this scandal; the company had to face regular inquiries in
various countries throughout the globe. As a result, the company had to incur huge losses
(Dunlap and Mertig 2014). The CEO of the company Martin Winterport had to resign along with
many other important managers of the company including the research and development heads
of the company. It was found that the vehicles manufactured by the company released more than
40% nitrous oxide than the standards mentioned in the Environmental Protection Agency (EPA)
(Ott 2018). The purpose of this report is to critically analyze and evaluate the predicaments of
the Volkswagen Company. It identifies the company's performance concerning the corporate
governance code, focuses on the existing governance structure of the company, critically reviews
the scandal faced by the company and provide recommendation and concludes the report.

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Discussion
1. Company's performance concerning corporate governance code
The German Corporate governance code ‘aims to promote confidence in the management
and supervision of the German listed corporations by the international and national investors,
customers, employees and the general public.’ According to the German corporate governance
guidelines, the supervisory board must be “responsible for monitoring the management and
approving important corporate decisions” (Kodex 2015). The board leadership is mainly
responsible for managing and leading the operations of the company. Further, the lead
independent director of the company is responsible to consult with the board committee and the
chairperson and solicit their participation in order to avoid diluting the responsibilities of the
committee chairpersons. However, the German corporate governance experts mention that the
scandal itself shows that there was lack of authority and a low sense of responsibility of the
board of directors and the board leadership, who as per the corporate governance code must be
responsible for monitoring the operations of the company (Kodex 2015). It is the responsibility
of the supervisory board that they must have the necessary skills and knowledge to perform their
supervisory function and monitor the business and the conducts on the company (Dunlap and
Mertig 2014). The supervisory board must have the knowledge and experience of the
manufactured products, vehicles in case of Volkswagen. They must possess knowledge in the
field of research and development and have experience in the leadership of the supervisory
bodies. According to Larcker and Tayan (2015), the company had a lack of integrity, honesty
and compliance. The scandal shows that Volkswagen had failed to comply with national and
international regulations. As per studies and research, Volkswagen had to face numerous
conflicts at the board level. There were significant issues faced by the company which affected

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their ethics and negatively affected the level of decision making in the organization while
creating consequences that had undermined the credibility of the board of directors, the
supervisory level and the senior managers of the company (Mansouri 2016). The management of
the company had a narrow focus on the overall activities of the company and lacked adequate
responsibility and dynamism in decision making. As per the German corporate governance
guidelines, the board of directors must monitor its compliance with the German code
requirements. It is expected that the director should notify the chairman and the lead independent
director to be about the decisions taken and their implementation at all levels of the organization.
The Diesel emission scandal caused by Volkswagen, clearly states that it had violated the
German code of conduct and this could be considered as corporate misconduct (Mansouri 2016).
It was admitted by the company officials that they were highly focused on gaining the top most
position in the market. However, they were unable to achieve the position because of increased
levels of competition in the market. Therefore, to pass the standards, the engineers of the
company designed such software. As per the German corporate governance rules, the
management of the company and the boards are responsible for an adequate system of internal
control, conflict of interest, use of proper accounting rules and policies and compliance with
statutory and regulatory obligations. The company failed to comply with the standards(Kodex
2015). They must be responsible enough to review the performance of the company in respect to
the company’s mission and vision, the plans while ensuring that necessary corrective and
preventive actions are undertaken. However, Volkswagen has failed to comply with its mission
and vision as well as the German corporate governance code. The company had incompetent
management which led to the loss of reputation and incurs a huge loss for the company. The
boards and directors of the company were unaware of the conflicts of interest dealt within the

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company(Mansouri 2016). This is therefore evident that they deviated from the German
Governance code to a great extent.The officials of the company failed to maintain their
compliance and integrity because of economic and social pressures. Further, many of the
officials at the company were not aware of the wrongdoings. The duties of the boards and the
directors tend to diverge from one company to another, thereby increasing complexity and
violating the guidelines of corporate governance (Ihlen and Roper 2014).
2. The existing governance structure of the organization
Board of management
Currently, Volkswagen consists of a two-tier structure, where the boards and the directors
are responsible for the management and monitoring the operations of the business organization.
The two divisions of the boards include the management board and the supervisory board. The
supervisory body is mainly responsible for monitoring the operations of the company and
approving the decisions taken by the company officials. Currently, they are responsible and
independent with authority (volkswagenag.com. 2019). The structure of the board is divided into
an equal number of employee representative and the number of shareholders. The shareholders
account for 90% of the voting rights (volkswagenag.com. 2019). As per the corporate
governance, the publically listed companies must have an adequate number of independent
directors (volkswagenag.com. 2019). Volkswagen is operated and managed by the boards and
directors as per their Articles of Association as well as the rules of procedure issued by
supervisory level. The committees of the company include members, representatives of the
central departments of the company. The basic functions of the departments include products
manufactures, risk management, management issues, investment, monitoring and digital
transformation. Each brand of Volkswagen is managed by the board of directors. The role of the
board of management was to ensure the business operations of the company, independent

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development and its compliance with the corporate governance (Du Plessis, Hargovan and Harris
2018). The board of management of the company must comply with the law and the regulations
of the country and worldwide. This will, in turn, enable the company to pursue their interests and
at the same time safeguard and reinforce the company and its products specific features and
characteristics (volkswagenag.com. 2019). The crucial matters of the company are to be
communicated by the supervisory levels to the boards of management. This will enable effective
communication and reduce disagreements and conflicts in the organization. Volkswagen groups
are managed by respective managements of the companies (Ewing 2015). The company's
management considers the interests of the different groups of Volkswagen, and the individual
brands and ensures that the group operations and activities are following the corporate
governance guidelines and the framework which are laid down by the law.
Supervisory Board
It is the responsibility of Volkswagen Company to focus on the enhancement of the
company’s management structure (Ewing 2015). It supervises and supports the Board of
directors in the regular business operations and its advice on the issues to the management of the
company as per the duties and obligation under corporate governance and law. It is their
responsibility to observe the advice of the Corporate Governance Code each time
(volkswagenag.com. 2019). The supervisory board takes part in all the decisions which are
considered important to the company. Further, it discusses the strategic considerations at regular
intervals to the boards.
Supervisory Board Committees
Supervisory Board Committees has separate committees including, Executive
Committee, the Mediation Committee and the Nomination Committee, Audit committee and

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special committee. The executive committee consists of three shareholder representatives and
employee representatives. While on the other hand, the other committees comprise of two
employee representatives and two shareholder representatives as mentioned in the annual report
of 2018 (volkswagenag.com. 2019). The executive committee takes the responsibility to plan the
resolutions of the supervisory level and they deal with the compositions of the board of
management. They look into the matters of the contractual issues concerning the management
(Du Plessis, Hargovan and Harris 2018). Further, it is the responsibility of the Nomination
Committee for selecting candidates who are suitable for the supervisory boards and recommend
for the election to the Annual General meeting. The audit committee focuses on the annual and
financial statements along with the internal audit system (Du Plessis, Hargovan and Harris
2018). The special committee on the diesel engines takes the responsibility to coordinate the
activities to the diesel issue and prepare resolutions by the supervisory board.
Even before the scandal had taken place, Volkswagen had followed the two tier board
structure. The pay structure of Volkswagen’s CEO was highly tilted towards variable pay. They
followed a performance related pay across the members of the management board. On the other
hand the executives variable pay was related to the share price linked with metrics like sales
growth, customer satisfaction and productivity. Before the scandal took place, the primary goal
of the company was to make Volkswagen the largest car maker all across the gloabe. The other
tier comprised of Supervisory Board including a former chairman and a single independent.
Growth was the only ambition that was followed by the company.
3. A critical review of the scandal and other issues faced by Volkswagen
It was realized by the Environmental Protection Agency (EPA), that Volkswagen sold
many cars in the United States that had cheat software enabled in them. The devices that were

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installed in the cars changed the actual results of emission during the test, when in actual it
emitted 40% more gas. In the opinion of Dunlap and Mertig (2014), this was admitted by the top
management of the company in the United States and agreed to undertake full responsibility for
it. This section of the report critically analyzes the scandal of Volkswagen on diesel emission and
its effect on the company’s production output.
As per the EPA, the Environment Protection Agency in September 2015, stated that the
company had violated the laws and failed to comply with the EPA standards. It cited claims that
the company and its management had purposely installed the Turbocharged Direct Injection
(TDI) engines which were programmed to activate the emission controls during the laboratory
trials and other tests. The installed device reduces the emission of nitrogen oxide emission during
the laboratory tests to meet the set standards of the United States. As mentioned by Khan,
Muttakin and Siddiqui (2013), this nitrogen oxide emission was more than 40% than the results
that were produced in the laboratory tests. Majority of the cars that were manufactured by the
company during the year 2009-2015, had this TDI software installed in cars manufactured by the
company. This was considered to be deceit to the customers of the company and it seriously
impacted the company as well as the environment. In the opinion of Larcker and Tayan
(2015), the management of the company was not responsible enough to inform the customers
about the installation of the TDI software which was more dangerous than the emission of
carbon oxide.
According to Mansouri (2016), the Diesel emission scandals of Volkswagen has serious
impacts of the company, the company had to face various inquiries and examinations which
pulled down the reputation of the company. In the past five years, the company lost stock cost
after the days of the scandal. The management of the company had to spend huge amounts for

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correcting the emanations and issues and manufactured influenced vehicles. After the EPA's
notice of violation, the stock exchange of the company fell rapidly by about 10.5% (Larcker and
Tayan 2015). The company almost lost $5 billion as the company stock rapidly fell in the past
five years. The company had to incur billions as fines and compensations in the United States.
The sales of Volkswagen had fallen rapidly in the country and brought down the reputation of
the company. It was mentioned by one of the management officials of the company that growing
protectionism has posed to be the major challenge for the globally integrated automobile industry
(Ihlen and Roper 2014). Other issues were faced by the companies in the past five years,
including its struggles with Chinese tariffs on the vehicles, higher prices of raw materials on the
imports of steel and aluminium. According to Oldenkamp, van Zelm and Huijbregts (2016),
there were raising trade tensions which had significantly impacted the profit and earnings of the
company. As per Rhodes (2016), the company faced continuing fall out after its diesel emission
scandal. However, the company confirmed in its 2018 guidance forecasting that the sales will
rise to 5% in the years to come.
According to Tricker and Tricker (2015), the entire diesel emission scandal caused by the
company concentrates on the intention of the action and the deviation from the moral law of the
country. As a consequence, the company had to face huge losses in billions accompanied by
fines and compensation. As mentioned by Schiermeier (2015), the reputation of the company
went down and much of its market share was lost. Along with bad publicity, the scandal had cost
the company at around 15.3 billion dollars as compensation to the buyers of those vehicles. In
the year 2016, the company's engineer was found guilty as he was a part of developing such
software. The officials of the company admitted that they had undertaken such step as they were
unable to keep up with the tough competition in the market and because they wanted to gain the

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topmost position in the market place (Rhodes 2016). Therefore, the team decided to cheat the
emission test to pass the test and to get the allowance to sell the car in the country. The decision
taken by the company was highly immoral.
Conclusion
Therefore, from the above analysis, it can be concluded that the giant automobile
manufacturer Volkswagen had to face a huge amount of loss as fines and compensation to the
buyers for undertaking unethical business practices and their systematic cheating. The company
has violated the laws of the country by installing defeat software. The diesel emission scandal
had severely affected the company. The world-famous automobile company lost its reputation in
the market and lost much of the market share capital. There was havoc aftermath after the
scandal went public; it had to face regular investigations and enquiries from various other
nations. As a result, the company had to incur huge amount of losses in billions. As per the
research and analyzes, it has been identified that the company boards of management and the
supervisory levels were incumbent to handle to stiff competition and as a result, chosen to take
illegal actions to earn more profit and gain the topmost position in the market. It is evident from
the analysis that the management had a very narrow focus on the surface of this and they lack
adequate responsibility, honesty and integrity leading to the breaching of trust and directly
violating the corporate governance code. It was believed that the scandal not only hampered the
reputation of the company but also the organizational, economic and legal levels of the company
as well. The company went back against its vision and mission statement. Further, the company
lacks a certain amount of integrity, compliance and honesty. There are an increasing amount of
conflicts in the organization. The report has identified the existing governance structure of the

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company and determined the issues faced by the company. Lastly, it provides recommendations
which should be implemented by the company to gain back its reputation.
Recommendations and suggestions
It is recommended that the company must initiate a long term plan based on the corporate
governance code and it needs to take necessary actions to improve the social, environmental and
human impact as per the growth and appreciation of the Universal standards guiding principles.
It is recommended that the company needs to initiate sustainability by ethical business practices
and compliance with the laws and regulations of the country and the world. This will ensure long
term success and maintain its reputation as a giant automobile manufacturer. The boards of
management, supervisors and directors need to take responsibility to monitor the operations of
the business and comply with the compliance schemes of the company. It needs to ensure that
the company does not undertake fraudulent operations and ensure higher levels of control (Htay
et al. 2013). This will help the company to avoid the repetition of such scandals. They need to
take responsibility and ensure that false emission standards are not repeated and demonstrate
their concerns for society. This will enable the company to gain back the recognition and benefits
of the company. It is further recommended that the company must sure a high level of
cooperation between the supervisory levels and the board of directors. Further, the company
needs to take steps towards integrity and maintain that. In order to restore its reputation, that
company needs to consider planning and execute various projects and programs which provide
information to its potential customers and the society at large about the company’s initiatives
towards integrity, honesty and compliance. Integrity is considered as the inner disposition which
enables the company to carry out its operations in the right direction. It implies that it needs to
act out of conviction, with steadfastness and with responsibility. It needs to take steps to comply

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with the group and ethical principles established and carry out its operations following the rules
and laws despite the economic and social pressures.
For its long term public relations plan, it is recommended that the company should
manage to improve its operational activities throughout, set internal policies to strictly comply
with the universal standards and prevent further reputational harm and loss of productivity. The
structure of the company needs to be changed and needs rebranding; it can consider rebranding
in order to gain back the position in the market. In order to strengthen the credibly and re-
establish the trust and confidence of the company, it needs to have an internal verification testing
emission and test their emission levels for its upcoming vehicles. It needs to operate its business
as per civic responsibility. Further, the communication system must be efficient in the company.
Further, it is recommended that the company can initiate various informative campaigns
and comprehensive integrity program for instilling integrity, honesty and compliance among the
staffs and employees of the organization. Moreover, carrying out the business operations with
integrity, compliance and honesty is the necessary prerequisite for the success of the business
organization. It needs to comply with various national and international laws and regulations and
it must be considered as the most important principles for the company. Essentially, it requires
dependable structures and work process which will ensure compliant behavior. It needs to
commit itself to compliance at the highest level. It needs to strengthen the trust and win back the
confidence of the customers. It needs to take measures to further enhance the awareness in the
market about the company's commitment to compliance and integrity. The group compliance
committee must ensure the integrity and compliance standards of the company. The company
needs to set objectives to encourage, reinforce and ensure compliant behavior in the business
organization and maintain its focus o preventing corruption, fraud, breach of trust and reduce the

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risks of unlawful actions. The code of conduct is considered as the key element for raising the
importance of correct ethical behavior among the employees and staffs of the organization.
These suggestions and recommendations will help Volkswagen to comply with the corporate
governance code and gain back its reputation in the market and among the customers.

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