Volkswagen’s Corporate Scandal: Diesel Fraud by Volkswagen

This report discusses the Volkswagen’s Corporate Scandal: Diesel Fraud by Volkswagen. It covers the Emission Scandal and its consequences, the impact on the stock prices of Volkswagen, the key actors of the emission fraud, and the lessons learned from the corporate governance of Volkswagen. The report concludes that corporate governance plays a crucial role in the long term survival and success of the company.

Running Head: Diesel Fraud by Volkswagen
Volkswagen’s Corporate Scandal

Diesel Fraud by Volkswagen 1
Introduction:
In September 2015, the most audacious fraud in the corporate history was exposed to the world.
The fraud was committed by the world’s biggest carmaker named as Volkswagen and it is
commonly known with the name of Dieselgate or Emissiongate scandal. The company is a
German corporation and is in existence since the year 2008. It was found by the US
Environmental Protection Agency that Volkswagen had deliberately been indulged in deploying
the defeat devices in the cars to circumvent the emissions tests in United States. The top
management personnel of the company were aware of the ill-practices of company’s engineer
and were in continuous support of them in concealing the facts about these practices from the US
regulators and the customers of the company. Therefore, the corporate governance structure of
the company was blamed for the entire scandal. The scandal occurred due to the greedy
intensions of the managerial persons and engineers of the company to become the top carmaker
in the world. The company’s negligence towards its responsibility of protecting the rights of its
shareholders made the company suffer from heavy fines and penalties (Blackwelder and Katerine
2016).
Emission Scandal and its consequences
By 22nd September, it was ultimately admitted by the Volkswagen Group that it has sold around
600000 vehicles in US market and such vehicles were equipped with the defeat devices that
contained sophisticated software to cheat on the emission test designed by the US regulators. The
defeat devices were less of a device than a mere code in reality on the electronic control module
of the car that could detect whether the car is run in the labs for the testing purpose or they are
run the roads for their actual usage (Siano and Vollero 2017, 27). While in the laboratory the cars

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could clear the emission test it was generally observed by the environmental protection agencies
that the cars were actually emitting nitrogen oxide 10 to 40 times more of what was ideally
allowed as per the standards of US market (Armstrong 2017).
The stock prices of Volkswagen were considerably higher prior to the opening up of the scandal
on part Volkswagen group as it was successfully operating as the largest manufacturer in the
world as it was owning the most notable brands across the world such as Volkswagen, Porsche,
Lamborghini and Audi (Volkswagen AG 2018). The company was highly recognized for its
branded cards that offered maximum satisfaction to its customers. Volkswagen group was
operating its business as a family controlled company because the Porsche and Piech families
were owing almost 52% of the company’s voting rights. Also, the 20% of the Volkswagen’s
voting rights were owned by Lower Saxony and the State of Qatar held 17% voting rights in the
company. Due to this, the external shareholders were holding only 11% of the overall voting
rights of the company. Soon after the acceptance of the fraud commitment by the company in
response to the notice of EPA for the violation of federal rules of emission, the stock prices of
the company declined by 20% on the stock exchange on the very first day after the investigations
report went public and on the next day the prices of the company’s share further fell down by
12%. The stock prices kept on falling down further which made the shareholders of the company
suffer heavy losses (Leggett 2018). The Qatar which has the major holding the major stake in the
company lost near about five billion dollars as a result of scandal revelations. Also, there was a
great impact of the scandal reports on the sales of the company as it declined by 24.7% in 2015
in comparison to the sales of 2014.
There were various factors that contributed to the major scandal that was undertaken by the
Volkswagen Group. The intense competition in the market pressurized the engineers of the

Diesel Fraud by Volkswagen 3
company to design such software that could defeat the federal emissions test in US. It was the
extreme greed for the substantial growth of the company by its management that induced the
engineers to take up such illegal practices of cheating on the regulatory bodies of US (Milne
2015). Volkswagen was struggling to supersede Toyota as well General Motors to achieve the
top most position in the car market globally. The corporate skulduggery was the prime reason
why the managerial persons of the company supported their engineers in their illegal and
unacceptable practices. Corporate Skulduggery is the economic phenomenon which represents
the behavior of an average individual to the opportunities and constraints (Zhan, Veijalainen and
Denis 2016). To achieve the aim of global leadership, the company had US as its obvious target
market because of its small presence. Moreover, the corporate governance structure lacked the
appropriate control system that was required to protect the interests of the shareholders of the
company (McGee 2017). The family controlled business was the key factor that contributed to
the emission crisis because of its fractious as well as unfocused board which was not accountable
to anyone except the trade unions (McGee 2017).
The key actors of the emission fraud were the engineers of Volkswagen as they were the only
parties who were directly involved in the designing of the devices that could cheat on the federal
tests by implementing the illegal software in the devices that could be turned on only at the time
of laboratory emissions testing to meet the US standards for nitrogen oxide emission from the
cars but in real world practice they were not activated to control the emission of harmful nitrogen
oxide gas that caused intense air pollution in the entire environment (Crête 2016, 25). The
engineers were indulged in such activities because they were instructed by the managerial
persons of the company to hit the target, both in terms of performance and price. But,
unfortunately it required huge money and promotion to meet the desired target and therefore, the

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engineers of the company could not manage to achieve this (Bovens 2016, 262). To meet the
targets of the ambitious executives of Volkswagen, the engineers adopted the unethical and
inappropriate ways. The manager, senior managers, board of directors and all other top
management personnel had never restricted the Volkswagen’s engineers to adopt such practices,
for their personal benefits at the cost of causing loss and harm to the shareholders, customer and
employees (Rhodes 2016, 1501).
The top executives of Volkswagen along with the CEO of the company named as Martin
Winterkorn felt extremely guilty for breaking the truth and faith of the customers as well as the
regulatory bodies as Volkswagen promised to cooperate with the US regulators. The company
called for an external investigation to be carried out by the independent parties and also it has
conducted an internal probe in response to revelations of its illegal practices (Parloff, 2018). The
formal acknowledgement of deception on part of the company was made by its executives in
Germany and US to the officials of the EPA. The company has also paid all the imposed fines
and penalties for deceiving the regulators (Krall and Roger 2015, 12).
From the Volkswagen’s case two lessons about the corporate governance can be learned. The
role of the top management of the company is literally a face work where they merely have to
represent their organization to the outer world and hence they are represented as the face of the
company. However, the major decisions about the business of the organization are left with the
middle level managers who are charged with the responsibility of transforming the visionaries of
the top management into the real actions. If the expectations of the key stakeholders such as
shareholders, government and mass media changes, the façade of the organization and its

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personnel must also be changed to accommodate the requirements of its stakeholders so as to
satisfy them. This was the real scenario in the case of Volkswagen’s CEO Martin Winterkorn as
he was the main face of the company and was representing the company through his identity
(Makortoff 2017). Changing faces to adopt the changed expectations of the stakeholders helps
the company to stay the same internally whereas the external impression to the outsiders is that
significant changes have been made to satisfy them at the best. But its opposite also holds true as
rotating the top managers of the company to indicate the change to the outer world while
remaining static. Useful illegality is the second lesson that can be learned from the above case of
Volkswagen. It means the deliberate deviations from the company’s formal rule (Chadwick
2017). The deviations from the rules are not have any idea about the people who are actually
responsible for the emission scandal because those people could not be easily and directly
identified. The illegal deviations from the rules are not always the sabotages. Rather, they allow
the things to be done in the quickest and more efficient ways by following the ‘red tape’. The
invention of any device that can save ample of time and resources in producing law conforming
diesel engines is actually useful (Ewing 2017, 65).
Further, from the above case, it is clear that although the shareholders are not involved in the
internal activities of the company though they hold the absolute right to be protected for their
interests in the company. The main rule of corporate governance requires the top management
personnel and other management persons to remain accountable towards its shareholders and
their interests in the company (Mansouri 2016, 2011).
No, the efforts of Volkswagen did not prove to be the suitable steps to prevent the scandal from
its further occurrence. The corporate culture since the scandal has become worst as the
management is collecting bonuses and variables pays irrespective of the losses incurred by the

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company. The appointment of new board member by Volkswagen to deal with the legal affairs
of the company has raised more concern towards its integrity (Geuss 2017). Further, the rule of
corporate governance says that all accountable actions must be taken to restore the trust of public
in the company but the company does not seems to take any such action and hence there cannot
be seen any improvement in the corporate governance structure of Volkswagen (Neate 2018).
Conclusion:
From the overall discussion carried out in this report it can be concluded that corporate governance plays
a crucial role in the long term survival and success of the company. The controlling and directions from
the top management of the company should be given considering the interest of all the stakeholder groups
such as employees, government, environment and shareholders. In the case of Volkswagen being
discussed in this report it came quite clearly that corporate governance must be strong to achieve long
term growth. Volkswagen was running business smoothly with good profitability until the scandal came
out in the news. When the scandals came out, the financial performance of the company hampered.
Further, the company also lost goodwill, faith and trust of the customers. The Stock price fell down
severely affecting net worth of the shareholders negatively. The company faced reduction in demand
which badly affected the operations of the company. The overall impact of this mess was not perceived
only on the wealth of the shareholders but also on the other stakeholders such as employees, environment,
and government. Therefore, it is quite evident from the discussion that the long term success of the
business is dependent upon the corporate governance of the company.

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