Corporate Governance & Ethics

This article explores the scandal of Volkswagen and its impact on corporate governance and ethics. It discusses the background of the situation facing Volkswagen, defines corporate governance, and examines what went wrong. It also delves into the public interest, financial impacts, and lessons learned from the scandal.

Running Head: CORPORATE GOVERNANCE & ETHICS
Corporate Governance & Ethics
Student’s Name
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Table of Contents
Introduction......................................................................................................................................3
Background of the situation facing Volkswagen.............................................................................3
Definition of corporate governance.................................................................................................4
What went wrong?...........................................................................................................................4
Public interest..................................................................................................................................7
Financial impacts and lessons learned.............................................................................................9
Aftermath.......................................................................................................................................10
Conclusions and recommendations...............................................................................................11
Reference List................................................................................................................................13

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Introduction
The scandal of Volkswagen is a significant example of how the corporate houses shape ethical as
well as political issues of environment. Volkswagen is headquartered in Wolfberg, Germany and
owns the brands like Lamborghini, Skoda, SEAT, Bugatti, Audi, and Bentley and so on. The
presence of Volkswagen all over the world made the scandal a significant event not because of
the legal and financial repercussions that happened in various countries, but because of the
significant and sustainable damage that was done to the society as well as environment.
Volkswagen was given by the goal of becoming the largest automaker in the world win in 2018,
however after to scandal the company was compelled to surrender one third of the market capital
of the organisation. In order to compensate for the violation of emission levels, the company
ordered a voluntary recall, issued public apologies followed by the resignation of the CEO and
the other directors of the organisation. There are several lawsuits as well as criminal charges
against Volkswagen and the future business scope of the organisation seems grim (Siano et al.
2017).
Background of the situation facing Volkswagen
In order to analyse how a global company like Volkswagen food engage in the act of crime for
such a long time period, it would be beneficial to perceive is case as an issue of regulatory
capture incorporating information asymmetry, private governance as well as issues with
oversight. This analysis will attempt to analyse the issues regarding social concerns that came up
because of the behaviour of Volkswagen in the domain of international economic and this report
also provide recommendations in the end for increasing the system of accountability within the
Global automobile industry.

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Definition of corporate governance
Corporate governance can be mostly perceived as the structure as well as relationship that helps
in giving direction to the corporate performance. The board of directors are Central to corporate
governance. The relationship of corporate governance to other primary participants, management
and the typical shareholders is very crucial. Additional candidates involved with corporate
governance are the employees, suppliers, creditors as well as customers. Most importantly,
Blackwelder et al. (2016) states that the framework of corporate governance is highly dependent
on the institution in, ethical, legal as well as regulatory environment of the community. In this
regard, it should be specified that in the context of this case study the concerned company,
Volkswagen has reached the engineering and environmental standard of the community because
of which they have been scandalised.
What went wrong?
International Council for Clean transportation which is the non profit organisation had invited
the expert group of scientists at Virginia University to perform standard tests on admission from
diesel cars. Meanwhile, Volkswagen has been advocating there diesel curse as one of the most
eco-friendly card models along with being fuel efficiency also. This is strong publicity helped
the customers to perceive that Volkswagen have been developed in product that generated value
towards the society and does search visit promotional activities accounted for highest sales of the
specific car models. The assistant research professor, in the course of emission testing,
dramatically identified various results which went against the low emission claims of
Volkswagen (Li et al. 2018). Since Volkswagen has been a significant market player who has
Global Business Standard, the team of professors had to conduct get tests again and again in
order to confirm their findings.

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Image 1: The average emissions of nitrogen oxides in on road testing
(Source: Bachmann, Ehrlich and Ruzic 2017)
The council for Clean transportation analysed that Volkswagen installed a defeat device. This
device is a programmer writing code and sends impulses to the computer that the device is still
on the official test cycle and thereby allows manipulation of the results of emission control
system. In this context, it deserves mention that the diesel engines have trade off between
efficiency, clear emissions come of fuel, power and the vehicle good select only 2 out of these 3
(Oldenkamp, van Zelm and Huijbregts 2016). Somebody, intrinsic from the company might have
done this deliberately to updating the validations incorrectly. The international Council
accumulated data on 15 vehicles from various sources and riveted the findings to the
Environment protection agency as well as the California resources board. In the the 18th of

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September, 2015 the environmental protection agency clearly declared that the organisation has
violated the norms of clean air act by illegal installation of the software into the diesel curse for
cheating the admission tests.
Along with that, the real outcomes of the admission test were also brought into the open for the
exhibition of the public. The tests revealed that the toxic gases are held by the cars wear
staggering 40 times more than the permissible levels.
Very soon the company became the target for regulatory investigation in several countries.
Prosecution was faced by Volkswagen in South Korea, Canada, UK, Italy, Germany, South
Korea, United States, France and other countries as .in fact, being a global brand name, the
common people were also interested to know about the deceit that occurred under the
corporation for so many years. With the speed of the news about failure in the admission tests,
the stock price value of Volkswagen fall drastically. The company had no other option than to
come up into the public forum and speak up about the scam in open. The company admitted that
in 11 million cars, currently running over the world, such devices are installed.
In the November of the same year the environmental protection agency conducted for the tests
which revealed the use of the same defeat devices additionally, on Audi, Porsche as well as the
Volkswagen models. However, to analysing the real impact of the scandal it can be asserted that
the release of extensive amount of Nitrogen oxide into surrounding atmosphere caused a severe
and sustainable damage to the environment that is it irreconcilable. These gases are the causes of
smog, acid rain as well as submission of ground level Ozone which is the serious cause of
adversaries of health like inflammation of lungs and Airways, respiratory problems, Bronchitis
and so on. In the following year, it was stated in the inventory report by the European Union that

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can nitrogen oxide emissions accountable for harmful gases and 40% of the pollution emission
comes from the automobile and transit sector only (Rhodes 2016).
Image 3: Crash of Share prices
(Source: Dybus and Lemmen 2017)
As communicated by the person of Volkswagen, the organisation has set aside 6.5 billion Euros
for fixing the cars so that they are able to comply with the pollution standards. Apparently this
might seem to be a large volume of money; however it is only half of the annual profit generated
by the organisation. In context to this issue, the organisation is also facing 3.3 billion Euros
worth lawsuit and is also under the threat of criminal prosecution. In the United States there is a
risk of facing a fine up to 30000 dollars for every card which will take the value to
approximately 18 billion US dollars if all the on road and off road cars with defeat devices
installed in them are counted (Valentini and Kruckeberg 2018). On the day when the news about
the breach of environmental safety law was released, the share prices of Volkswagen fell by one

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third and it drops to a 20% reduced value which is the lowest in the last 4 years (Dybus and
Lemmen 2017).
It is also important to mention that in the European markets, Volkswagen accounts for 40% of
the sales and US accounts for 6% of the sales of Volkswagen cars (Rhodes 2016). Set the
European market is of far more significance then the American market and the agenda formation
of the negative publicity from the scandal should be contacted with more emphasis on the UK
market and in fact the whole European market.
Volkswagen was forced to provide public apologies along with a warrant recall of each and
every vehicle which carried the TDI engine. CEO, Martin Winterkorn, factory design instantly
and the major executive of Global Business of Volkswagen also step down from their positions.
The head of branding operations, Heinz Jakob Neusser, the research and development lead as
well as the research and development head of the department where publicly suspended.
Investigation raids well carried out in the Volkswagen headquarters and other allied Volkswagen
offices. In this context, expert analysts like Barth et al. (2018), provides that it is difficult to
fathom that only these hands of people were incorporated into this large plant of developing
manipulation software. Perhaps, it can be perceived that the company was following a wrong
strategy, but this scandal is not small enough to be perceived as a simple accident only. The
business organisations have the necessary application of remaining open as well as honest to the
owners as well as the managers should remain accountable to the stakeholders. However, this
case is more complicated than a problem of a simple deceit only.
Public interest

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Volkswagen can be held accountable for what they has done, however the bigger issue is how
did this many populations of today go unnoticed for so many years. In case if the environmental
protection agency has not intervened, Volkswagen would have continued to Amit search harmful
gases much above permissible limits into the atmosphere. The environmental groups have
previously issued warning regarding the fact that nitrous oxide emissions in lab tests are much
less than what it is on the roads. This implies that there was a perception that the manufacturer
using some tricks. However, what strategy they were following in particular, was oblivious to
everyone. As identified by the international centre for financial regulation, is a option that occurs
in context to situations when any authorised agency is supposed to act in favour of specific
public but on these instances they choose to pursue but on these instances they choose to pursue
commercial or political fulfilment of certain interest groups in the industry within which it is
regulating. This theory is applicable in the case of Volkswagen also (Bachmann, Ehrlich and
Ruzic 2017). Only one month after the scandal have been revealed to the public, members of the
European Union gathered in the headquarters at Brussels in order to discuss the provisions of the
breach of environmental act. They put forward and unified opinion regarding the need to
implement a emission testing model equipped with better Technology. It was presumed that
testing of operations on the road would be the best since by this name the car manufacturing
companies would not be able to deceive the tests by developing manipulation software. The
present gift from Spain requested for overhaul of the distance system to be watered down for
prevention of the loss of several qualified job positions and thereby prevent negative impact
upon the Spanish economy. The representatives from the countries like Britain, Italy, Germany,
and France and so on also spoke in the similar tone and in the end each Nation was requested to
back the water down deal. The car industry is well aligned with the European Union and the state

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governments where always reluctant to take any serious steps against and industry that have been
providing employment to 12.1 million people which comprises about 7% of the entire
manufacturing employment in the European Union. People perceive that if Volkswagen was
insulted with a strict penalty imposition, and following that if they drove away from the market,
this will be an incentive for other car manufacturing organisations to imitate the same in future
also.
The regulatory capture model is applicable on the car industry of Europe since the revolving
doors exist between regulated Agencies and companies they have been regulating. The
traditional concept of this model emphasize on material incentives exchange between regulators
as well as the various stakeholders, but now it can also be utilised for investigating how the
policies can fever specific interest groups also. According to the theory, the basic problem is that
any e member of the regulatory body is liable to do one thing, however is material and personal
interest lies in something else. Implies that at the person is always having the slack to be able to
go and do something that is fundamentally divergent from his principle and working ethics.
Hence, it can be communicated that the European Commission had selected economic incentives
over finding remedy for the environmental policy (Burki 2015).
Financial impacts and lessons learned
Volkswagen has set aside the value of 2.5 billion euros in 2018 for buying back cars in North
America. This implies the total cost to the company against the scandal is 30 billion dollars in
total. Inside the shares of porcelain heart also drop shortly in Frankfurt. Much later after the
revolution of the standard on the Volkswagen have to recover the share value of 1% only. Latest
financial fallout from Volkswagen's Bansal admission in the year 2015 that they have released
millions of diesel cars with the manipulative software for cheating the admission test resulted in

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this economic downturn. Volkswagen is the largest car manufacturing brand in the world by their
sales. However, after investing into the buying back scheme, the company observed that the
process was proving to be technically complex as well as more time consuming the company has
been still struggling to escape the impact of the diesel scandal. Prosecutors USA allege that the
engineers were well aware of the manipulation software since 2006 and the company was well
aware that the new 2.0 diesel engine would not be able to comply with the regulations of
environmental safety (Crête 2016).
In this year, the sale of diesel cars has reduced dramatically in Germany and compared to
Volkswagen the Rival German brands as well as foreign market Grounds are occupying the car
sales market in Germany. This market scandal compared Volkswagen to invest into hybrid as
well as electric vehicles. Earlier in 2018, the company has declared that Volkswagen will be
spending 50 Billion Euro on manufacturing of battery cells as they are targeting to electrify all of
their 300 models within 2030.
Aftermath
After the scandal Volkswagen is now facing the problem of developing the credibility in the eyes
of customers as well as stakeholders. After the damage done to the reputation of brand name,
there is no strict guideline that the company can follow in order to win back popular public
favour. The company is planning three possible contingency plans to reduce the impact of
scandal in the market. The first plan is to launch and uses of cars under a new sub brand name.
The next step the company has to join some independent verification agency and thereby set up a
bond. They will also be implementing numerous measures for enhancing the credibility the
company. In this case the worst case scenario can be a customer boycott of Volkswagen from

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any of the significant target markets. This will lead to a rapid drop in sales and finally it will
result in collapse of the company.
Conclusions and recommendations
At the current moment, Volkswagen is supposed to align all their effort as well as resources for
the re-establishment of credibility within the organisation. The company might select the policy
of rebranding, although this is fairly and likely to happen. They can also select some independent
verification Agencies which is easier to achieve and fairly low cost strategy also. However,
comparatively more costly option would be to sell one of their product lines and there by post a
bond. This option is actually most expensive and is a kind of Last Resort to the organisation if
the brand is boycotted in some popular target market of Volkswagen. However this also seems
fairly impossible because since the drop off stock market value of Volkswagen by 20% after the
scam came into public, the company has slowly started to stabilize share market value and even a
recovery of 1% stock value has been done by the company. How is work, influence from Expert
Opinion so it can be commented that a combination of the second as well as the third strategies
would be the best recommendation so far as the current situation of Volkswagen is concerned.
New brands are otherwise also going to be introduced in the market since Volkswagen will be
conducting rebranding of the electronic vehicles which will be launched in the market within
2030. It can be expected that as the customers slowly start regaining their trust into the brand
name of Volkswagen, the sales figures will start to gradually increase. Customers are currently
talking over purchasing cheap stocks of Volkswagen because many of them have faith in the fact
that the company will revive out of this crisis situation and they will definitely take necessary
steps to display ethical retrieval from the scandalised position. However, it is doubtful that the
prices of the stocks will be retrieved back to the previous positions, anytime soon. However, if

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Volkswagen shows the customers that they regretted to receive them and dedicate the research
and development in order to formulate better corporate social responsibilities practices it will
help the company to regain their status in the Global market of automobile industry.
implementation of the second strategy is easier, how is the company has to be careful in
implementing the third strategy if they wish to do that. In this context, it can be argued that out
of the currently owned companies of Volkswagen, it is most advisable that they should sell their
Big Truck developing company MAN SE. MAN SE has an average revenue generation rate of
14.6 8 billion Euro and the subsidiaries include Man truck and bus, man diesel and Turbo, man
Latin America, Neoplan and many others. This is quite a vast franchise and the money required
from the sales of this franchise can be used for payment of the claimers as well as government
penalties. it is evident that Volkswagen will attempt to solve this issue without selling any of
their brand , but the combination of III and II strategy will help the company to best compensate
the claims as well as government penalization from its own resources. This because, as stated in
the annual reports of the company, they will be emphasising on investing over research and
development in the field of electronic vehicles and that means that they will be spending money
on innovation. In case if Volkswagen is able to capitalise on this market, there is high hope that
the car manufacturing brand will be able to regain the leading position in the Global automobile
domain, again.

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Reference List
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Volkswagen Scandal.
Burki, T.K., 2015. Diesel cars and health: the Volkswagen emissions scandal. The Lancet
Respiratory Medicine, 3(11), pp.838-839.
Crête, R., 2016. The Volkswagen scandal from the viewpoint of corporate governance. European
Journal of Risk Regulation, 7(1), pp.25-31.
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Li, L., McMurray, A., Xue, J., Liu, Z. and Sy, M., 2018. Industry-wide corporate fraud: The truth
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Oldenkamp, R., van Zelm, R. and Huijbregts, M.A., 2016. Valuing the human health damage
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