Corporate Governance: Importance, Tools, and Lessons from Volkswagen Scandal

This article discusses the importance of corporate governance in ensuring compliance with rules and regulations, and the role of the board of directors and supervisory management in strengthening governance facilities. It also covers the tools that companies can use for effective governance, and the lessons that can be learned from the Volkswagen scandal. The article highlights the failure of corporate structure and shareholders in exercising their control over the management, leading to huge losses for the company.

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Answer 1
Compliance with the rules and regulations imposed by the statutory bodies and government on
the company is the most important and necessary issue at the time when organization are
ensuring the culture of honesty and integrity in business. Commitment and willingness of the
board of director or supervisory management of the company is the most important factor for
the purpose of strengthens the corporate governance facilities and the role of compliance
officers. In case management and advisory board follow the rules and compliance function then
it will result in the reduction in the operational risk and also ensures the interest of the
shareholders of the company. It can be said that, corporate governance is the cornerstone which
not only improves the economic efficiency and growth for the purpose of attracting the
investors and gain the confidence of the investors (Moulson & Pylas, 2010).
Corporate governance provides important theory of controlling and monitoring the performance
and activities of the executive management, and also their accountability towards the
shareholders of the company. A code of ethics developed by the organization must ensure the
adherence with some of the trust and accountability concepts, and this is considered as the good
corporate governance. The board of directors and supervisory management must make efforts to
uphold and nurture accountability transparency, fairness, and integrity in each and every
department of the organization.
Board of directors and supervisory management play most important role in ensuring the
effectiveness in the corporate governance. Efficient role played by the board and supervisory
management ensures the commitment of the two to adhere with the rules and regulation, and
this helps the organization in creating value and protecting the interest of the stakeholders.
Therefore, it can be said that, sustainability accountability of the supervisory management,
especially in case of recent collapses of the organizations. Designing the governance system, in
which it will be easy for the board of directors of the company to monitor and ensure that
managers are complying with their responsibilities, is important (Heath & Norman, 2004).
In case of Volkswagen, supervisory board of the company is under obligation to check that
product meets with all the code of conduct and standards, and this scandal reflects the
inefficiency on part of the supervisory management. An executive committee of the supervisory
management did not provide any name of successor on the immediate basis. In recent dates,
character of Mr. Winterkorn’s, but speculation made by German news media focus on the
Matthias Müller (in charge of the division of Volkswagen). Other candidates are also there such
as Rupert Stadler, head of the company’s Audi division and Wolfgang Bernhard, the head of the
trucks division at Daimler. All of them are clearly held accountable for any issue arise in the
organization because these are the persons who own responsibility.

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All these persons clearly own the responsibility of the scandal because they are accountable
towards the stakeholders of the company. Therefore, it can be said that supervisory board of the
company is ultimately accountable for the scandal (Mcgee, 2017).
Answer 2
The concept of corporate governance in context of environment has arisen to provide connection
in terms of the three pillars of sustainable development that are economic, environmental and
social. Corporate governance theory related to the environment has been defined as
responsibility of the directors and establishing the accountability on part of the board of directors
of the company in context of all the stakeholders of the company, and this also includes the
systems and tools which are used to achieve the environmental objectives of the company and
their effectiveness.
It must be noted that, effective approach of company in context of environment helps the
company in many ways such as:
 It decreases the risk which causes unnecessary damage to the environment.
 Use the resources in more efficient manner.
 Improve the image of the company among its stakeholders.
 Enhance confidence among the public that company operates in the responsible manner
(Europal, 2016).
Following are the tools of the corporate governance which can be used by the company for the
guidance:
 Company can introduce corporate environmental accounting and reporting in its system.
 Company can adopt in-house environmental management and auditing systems.
 Certificate from the ISO14000 series of standards.
 Supply chain management of environment.
 Stewardship in products.
In other words, it can be said that, board of directors of the company are under obligation to
ensure that their strategies and operation ensure the protection of the environment and does not
cause any damage to the environment. Directors also own accountability in this context towards
the investors also, which means they are liable to report the shareholders and investors of the
company in lieu of the environmental issues they are addressing and whether products and
services offered by them are environment friendly or not. In the case of Volkswagen emission
scandal, there is symptom of reality, which stated that internal combustion of the cars reach the
limit of the effective compromises, but maximum car companies fail to ensure these standards
(Unisa, n.d).

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In this case, investors of the company take action against the company and file suit for seeking
the damages from the company. Investors make choice between the collective and individual
action, and suits for seeking damages that reach up to $790 million was filed against the
company. Almost 278 investors sued the company in March, for seeking euro 3.3 billion amount
as damages from the company (Caria, 2016).
As stated by the regional court in Braunschweig, almost 1400 complaints were registered by the
institutional and individual investors against the Volkswagen, and these investors were seeking
8.2 billion euros as damages. 750 cases out of these 1400 were submitted by the United States
authorities against the company on the ground that company used illegal software for cheating
the American emission test. Company already settled amount of $15 billion in the United States
in context of the cost related to the deception. All these actions of the investors are considered as
good lesson for the other companies (Clark, 2016).
Answer 3
This scandal of Volkswagen is considered as biggest failure of the corporate governance, as this
can be proved from number of evidence such as company fails to effective corporate structure. In
other words, corporate structure of the company fails to ensure appropriate control system in its
corporate structure and also fails to ensure that company’s management does not consider the
shareholder’s interest. The main aim of the corporate governance is to ensure effectiveness in the
corporate structure and for this it is necessary that structure of the corporate decrease the
problems related to the agency, and this result in issues in the interest of the shareholders and
also in the interest of company’s management. In context of the Volkswagen scandal, check and
balance system is not right and this results in the priority to the management interest instead of
the shareholders interest. Many analysts are there who stated that corporate structure of the
Volkswagen is not correct as it fails to cross check the operations and decisions of the company
(Armour, 2016).
Another corporate governance issue in this case is deals with the shareholders failure. In other
words, shareholders of the company does not use their power for the company’s interest and fails
to observe that management interest is prevailing over the organization interest. Company’s
shareholders ultimately have power to exercise their control over the company’s management,
and this power is lie in the voting rights holds by the company’s shareholders (carrigan, 2017). It
must be noted that, it is not possible for the shareholders of the company to exercise direct
management power in the organization, but they exercise complete control in the decision
making process of the company and they hold right to override the decisions taken by the
directors of the company. in case of Volkswagen scandal, it can be said that shareholders of the
company are those important players who holds the right to change the decision of the
management and protect the company from this scandal, but as stated they fail to exercise their

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control and ultimately leads the company into huge losses. This scandal vulnerably affects the
profitability of the company and also returns to the shareholders such as legal charges, damage
claims, etc (Lacoma, 2017).
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Armour, J. (2016). Volkswagen’s Emissions Scandal: Lessons for Corporate Governance? (Part
1). Available at: https://www.law.ox.ac.uk/business-law-blog/blog/2016/05/volkswagen
%E2%80%99s-emissions-scandal-lessons-corporate-governance-part-1. Accessed on 3rd June
2018.
Caria, P. (2016). The Volkswagen’ case; morally permissible?. Available at:
https://www.researchgate.net/publication/292722292_'The_Volkswagen'_case_morally_permissi
ble. Accessed on 2nd June 2018.
Carrigan, P. (2017). Volkswagen: A General Analysis of Corporate Governance. Available at:
http://blogs.coventry.ac.uk/researchblog/volkswagen-analysis-corporate-governance-vw/.
Accessed on 3rd June 2018.
Clark, N. (2016). Volkswagen Shareholders Seek $9.2 Billion Over Diesel Scandal. Available at:
https://www.nytimes.com/2016/09/22/business/international/volkswagen-vw-investors-lawsuit-
germany.html. Accessed on 2nd June 2018.
Europarl, (2016). Lawsuits triggered by the Volkswagen emissions case. Available at:
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N.pdf. Accessed on 2nd June 2018.
Heath J. & Norman W. (2004). Stakeholder Theory, Corporate Governance and Public
Management: What can the History of State-Run Enterprises Teach us in the Post-Enron Era?
Journal of Business Ethics 53: 247-265.
Lacoma, T. (2017). Corporate Governance Issues & Challenges. Available at:
https://bizfluent.com/info-7863014-corporate-governance-issues-challenges.html. Accessed on
3rd June 2018.
Mcgee, P. (2017). The Board’s Most Important Function. Available at:
https://www.ft.com/content/a6ba3788-34cb-11e7-bce4-9023f8c0fd2e. Accessed on 2nd June
2018.
Moulson, G. & Pylas, P. (2010). Available at: http://www.sandiegouniontribune.com/sdut-
volkswagen-ceo-steps-down-takes-responsibility-2015sep23-story.html. Accessed on 2nd June
2018.

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Unisa. Corporate environmental governance. Available at:
http://www.unisa.edu.au/Global/business/centres/cags/docs/apcea/APCEA_2003_9(4)_Burritt.pd
f. Accessed on 2nd June 2018.