Comparative Corporate Governance: A Case Study of Volkswagen Emission Scandal

This essay provides an insight into comparative corporate governance in perspective of the Volkswagen emission scandal. It discusses the corporate crisis, the role of corporate governance, and the suitable steps taken to prevent future scandals.

Running head: MANAGEMENT
Comparative Corporate Governance
Name of the Student:
Name of the University:
Author Note:

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Introduction:
The essay aims at providing an insight into comparative corporate governance in
perspective of a corporate crisis. The corporate crisis discussed in this article is the emission
scandal of Volkswagen that made the company face global backlash. The emission scandal of
Volkswagen which is also known as ‘ dieselgate’ or ‘emissiongate’ started in the year
September 2015 when a violation notice related to Clean Air Act was issued to the German
automaker Volkswagen Group by the Environmental Protection Agency (EPA) of United States.
The agency found that the German car maker purposely programmed its diesel engines for
activating the emission control during the laboratory testing that did not show any outputs while
in reality the emission levels have been 40 times more. This enabled Volkswagen in meeting the
US standards during the regulatory testing. Volkswagen tried to deploy programming software in
close to 11 million car models across the world that included 500,000 in United States. The essay
tried to put forward a critical analysis whether such deceit has been the contribution of the
corporate governance towards organizational culpability. The essay also discusses about the
suitable steps that has been taken for prevention of the future scandals of similar nature.
Discussion:
Corporate Crisis

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According to Kiambi and Shafer (2016), a corporate crisis refers to a situation, event or a
public initiative that poses a threat to the ability of the company in effectively operating the
business. A crisis might get escalated into long-term impediment to business growth or a
disaster when not handled properly with sensitivity and efficiency (Lam, 2014).
Siano et al. (2017) stated that German car maker Volkswagen went through one such
corporate crisis when the Environment Protection Agency (EPA) discovered that the cars sold in
the United States comprised of software in it its diesel engines that could change performance
through improved results based on the test performed. The accusations led the German car
makers in admitting that it cheated the emission test in United States.
Volkswagen had an immense pressure on selling the diesel cars in the United States since
it had been backed up by major marketing campaign that trumpeted the lower emission levels of
the cars Mansouri (2016). The findings of EPA covered close to 482,000 cars in the United
States that included the Audi A3, Beetle, Jetta, Passat and Golf. However, Volkswagen
mentioned that it was only 11 million cars that were fitted with the defeat device. The company
also faced accusations for modifications of its software on 3 litres diesel engines fitted in some of
the models of Porshe and Audi. The claims were however denied by Volkswagen that affected
close to 10,000 vehicles.

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According to Schiermeier (2015) such a culpable act is not possible without a supporting
corporate governance structure. Corporate governance refers to the practices, rules and the
processes by which a firm is controlled and directed. In other words, corporate governance
involves balancing of the interest of the stakeholders that included management, shareholders,
suppliers, customers, financiers, community and government (Crête 2016). Volkswagen did not
have a proper corporate governance structure which was evident from a statement made by the
CEO of the company who stressed on caring more about the employees than the shareholders.
Burki (2015) stated that On December, the chairman of the Volkswagen, Hans- Dieter
Potsch, made a revelation to public stating that group of engineers from Volkswagen took the
decision of rigging the diesel emission test in the year 2005 when the toughest emission
standards were imposed by United States to the automobile industry. This decision forced them
into a culpable act given the shortcoming of the technology at that point of time. Thus, engineers
were not able to meet the emission standards put across by the United States given the allocated
budget and the time. Although later the engineers could find a solution but they wanted to
continue with rigging instead implementation of the method. According to Anenberg et al.
(2017), the unethical scandal in Volkswagen does not imply a single mistake but an entire chain
of the mistakes that took place without disruption.

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Blackwelder et al (2016) however stated that some of the other significant reasons that
fueled the deception of Volkswagen have been the exceptional corporate culture of the company.
The German base automakers had a compliance based culture depending on which the
employees remain obliged in complying with the rules. This particular culture has resulted in an
atmosphere where the workforces carry the task under a centralized and critical structure.
According to the culture, the expectations and demand of company needed to be accomplished
irrespective of how the employees remain capable of performing the task. The Director of
Centre for the Automotive Research put across that the cultural practices of Volkswagen are
quite different from the other manufacturers of Volkswagen. Besides, the company has been
autocratic instead of being democratic. There was also noticeable dearth of the global thinking
amongst the leaders of the company. Clemente and Gabbioneta (2017) mentioned that the chief
positions of Volkswagen never enforced the workforces in installing any defeat devices since the
work environment with the company was famous for avoiding any discussion and dissent.
Besides, the human resource practice of the company paved the ground for rigging of emission
as it threatened the employees saying that there are always other capable candidates who would
efficiently perform the job. Therefore, the employees of Volkswagen find them in situation
where they hardly have a choice but maintain their job.
According to Cavico and Mujtaba (2016), the rewarding system of the Volkswagen acted
as another reason in enforcing the employees to keep quiet about the rigging in the emission test

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for long even when they wanted to make a revelation. The bonus system put across by
Volkswagen applied to all the workforces that included employees belonging to lower position
for instance the assembly line to the higher positions such as the chief executives. However, it is
to be noted the bonus and the rewarding system in the company not only depended on the
performance but also productivity.
According to Dufour, Andiappan, and Banoun (2017), the Volkswagen scandal resulted
in critical and devastating series of consequences to the direct and the indirect stakeholders.
Therefore, this particular emission still remains under the investigation by the various authorities
with the purpose of identification of the actual impacts and derive suitable solutions for
finalizing the case. Volkswagen represented the second largest automaker across the world that
suffered huge cost burden after its admittance to the rigging in diesel emission test (Weninger
2016). The impact of Volkswagen diesel emission scandal has been a threat to public health,
plunge in the shares of the company, slump in the workforce bonus, drop in the car sales and
creation of hassles for the Volkswagen dealers.
Abuhajaj and Lampis (2017) stated that the public admittance of Volkswagen in the
diesel emission scandal made the labor leader declare that Volkswagen followed a non ethical
and inappropriate approach. He further mentioned that the company should adopt value based
changes that would allow the employees in openly communicating with the higher levels

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regarding any particular matter and also enable them in sharing their opinions with the
supervisors (Katzenbach and Smith, 2015) . People might however believe that the Volkswagen
scandal had a virtue of profit maximization but the reality remained in the primary roots fuelled
by the culture and approaches of the company.
Suitable Steps that Volkswagen Took to Prevent Future Scandals
According to Shelley (2017), the newly appointed anti corruption czar, Kurt Michels,
reorganized the compliance system of the automaker as a means of elimination of the culture that
led to undetected diesel emission cheating scandal for many years. Kurt Michels also made a
point that the company will have single investigation office for its 25 different brands.
Volkswagen will have additional offices for investigation for Audi and Porsche. The reform will
help the automaker in providing better perspective on the compliance issues thereby helping in
determining whether the problem remained confined to specific area of the company or whether
it affected the whole group.
The reorganization is thus designed in a manner for encourage Whistle blowing there
allowing both the employee and the people in doing business against the company in reporting
an unethical behavior (Vandekerckhove 2016). The actual motive was to remove the ‘Culture of
Silence ‘that led to the undetected diesel emission scandal. He also mentioned that the corporate
governance approach in the past has been wrong and if followed further would land the company
in another trouble. Therefore, the need lay in implementing robust compliance management
system that helped the company to survive. Further, the company also needs to embrace integrity
which would act as the starting point of the culture change.

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As a suitable step for preventing further scandal it was also necessary to make the
employees feel motivated and empowered in speaking to the bosses or blowing the whistle as an
when necessary (Painter and Martins 2017). Initially, the company did have a whistle blowing
system but the two lawyers who acted as the ombudsman stayed at a long distance and did not
feel connected to the company or its employees. Therefore, it was necessary to replace it with an
internal whistle blowing system thereby ruling the need for involving an outsider. The system of
Whistle blowing will also enable the customers and the business partners in passing information
for highlighting the illegal conduct by the members of the workforce. The new system would
extend extensive protection that included protection against the discrimination and
confidentiality.
According to reports published by Reuters, as a preventive measure from further scandal
Volkswagen plans in recalling close to 8.5 million affected vehicles in the European Union. It
was assumed that the engines complied with Euro 5 norm and to equip them with the Selective
Catalytic Reduction (SCR) system, it would cost up to 4.25 million Euros. Thus, the cost helps in
understanding why Volkswagen initially opted for software in rigging the emission of diesel
engine.
Thus, it can be said that further scandal of similar stature can be prevented in future by
Volkswagen by adopting a value based approach. There is also the necessity of supportive
Environmental Protection Agency (EPA) programs for the automakers for ensuring controlled
emission. Therefore, it can be said that after nearly three years of the emission scandal the
company just began to take baby steps in preventing the future scandals. There have been
implications of insufficient progress towards the repairing of the shortcomings in the company
culture and the internal controls that might lead to further consequences.

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The imperative role of EPA lies in alleviating the extreme pressure on automobiles by
offering research development and technology aids. The case of the German car makers revealed
that implementation of stringent e standards of emission resulted in opposite outcome with
devastating results. Hence, it is vital to opt for the feasible emission standards and provide the
technological and the research and development support to the automakers to prevent such a case
from happening.
Conclusion:
On a concluding note, it can be said that the deceptive scandal of Volkswagen
represented an overwhelming complicated case that led to the creation of dramatic hassles for the
indirect and the direct stakeholders. The diesel emission scandal of Volkswagen represented an
unethical action that resulted in series of various consequences. The electronic cars would enable
the environment protection agencies in saving time and cost and finding newer means of
controlling emission test. This would not only penalize Volkswagen but would also compensate
for the scandal appropriately. As the case is still ongoing so there lies a chance of lodging the
proposal for the green punishment in judging and solving the issue thereby leading to win-win
situation. The compliance related business ethics followed by the Volkswagen approach led to
the decline of treating the employees in an ethical manner who also faces the dilemma of losing

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the job and undertake unethical action thereby forcing the company in landing up with reverse
results. The essay showed the adoption of value based practices for preventing the occurrence of
the value based practices since it does not allow the existence of hierarchy and allows the
employees in achieving the expected results. It has also been found that value based ethics
helped the company in promoting democracy which implied that the executives would have the
freedom of voicing the complaints to the seniors or sharing the ideas with company that would
result in greater amount of productivity.

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