Volkswagen Emission Scandal: Corporate Governance and Financial Impact

This report provides a comprehensive analysis of corporate governance, defining its core principles and importance for businesses. It uses the Volkswagen emission scandal as a case study to examine the real-world impact of poor corporate governance on a company's value, performance, and stakeholder relationships. The report details the scandal's financial repercussions, including declining sales, profitability, and brand image damage. It explores the reasons behind the value changes and discusses the scandal's influence on Volkswagen's corporate governance policies, highlighting the need for strong internal controls and ethical practices. Furthermore, the report offers insights into how Volkswagen can mitigate future risks by developing robust corporate governance systems, ethical policies, and effective risk management frameworks. The report also touches on the agency problem and how executive compensation can align the interests of investors and management.

1
Corporate governance

2
Answer 1:
Introduction
This report mainly deals with providing the explanation of the corporate governance
and its importance for businesses. This is mainly carried out by providing an explanation of
the emission scandal of Volkswagen and its impact on the corporate governance policies of
the company.
Explanation of Corporate Governance
The term’ corporate governance’ refers to the rules, policies, procedures and
mechanism by which a corporation is controlled and directed. It implies to the development
and establishment of an internal governance framework based on the principles of ethics and
morals within the workplace that forms the basis of carrying out its all operational activities.
It involves balancing the interests of its wide range of stakeholders such as shareholders,
customers, employees, government, investors and the community.
It is highly essential that companies should have high quality corporate governance
for maintaining the interest of its wide range of stakeholders that is necessary for promoting
its sustainable growth and development. It mainly helps in achieving the confidence of the
investors thus enabling a company to raise its capital in an efficient manner.
Analysis of Emission Scandal of Volkswagen
Impact on the Value and Performance of Volkswagen since the occurrence of Emission
Scandal
Volkswagen is a German multinational involved in automotive manufacturing and is
recognized as one of the largest company in terms of revenue across the global automotive
sector. The company brand image has been highly negatively impacted since the occurrence
of the emission scandal than involves use of software in about 11 million of its vehicle for
cheating on emission tests (Ruddick, 2015). The software was able to sense when the vehicles
are put to tests and the installed equipment tends to reduce the emissions. The softer is known
as defeat device and it has been identified by the Environment Protection agency (EPA) that
VW cars use this device for changing their performance and reducing the emissions. The
company has also admitted to the use of such a system for reducing the amount of emission
from its vehicles when they are in testing phase (Kollewe, 2016).

3
The profitability position of the company has been negatively impacted since the
occurrence of the scandal with decline in its car sales. It has suffered a first annual loss in 20
years of its history in the financial year 2015 mainly due to paying huge costs for the scandal
of about €16.2 billion (Kollewe, 2016). The decline in the sales of its automotive vehicles in
its major markets across the world such as the UK, US and Germany has further lead to
decline in its operating profits. The decline in the sales is mainly due to loss of trust and faith
of its customers who feels cheated as they has bought the diesel cars in the belief that they
are highly fuel efficient (Gates, 2017). The recall of the affected vehicles by the company has
also lead to increase in the frustration of the consumers and also it has caused VW to face the
threat of legal action from the customers and its shareholders. The customers are also
concerned on the resale value of their car and as they had developed a negative perception of
the vehicles regarding its future performance (Lebeau, 2015).
Reason of the Change in Value and Impact on the Corporate Governance Policies of
Volkswagen
The decline value of the VW vehicles in the mind of its customers and shareholders
has lead to negatively impacting the company value due to reduced sales of its vehicles. The
scandal has lead to posing questions regarding the ineffective of corporate governance
policies of the company to identify the occurrence of such unethical practices. The scandal
has highlighted the negative impact of corporate misconduct and placed importance on
developing strong internal control framework to reduce the risk of occurrence of such
unethical practices. The development of an effective corporate governance system within the
company is very essential to prevent the occurrence of such corporate misconduct in the
future and promoting the sustainable growth of the company (Hotten, 2015).
Discussion of ways to mitigate risk going forward
VW can mitigate the risks of occurring of such scandals in the future by developing a
strong system of corporate governance that ensures the development and implementation of
ethical policies and procedures within the workplace. The governance policies should lead to
development of an internal control risk management framework that can identify any type of
operation risk in advance so that the occurrence of such unethical practices can be minimized
(Bryant, 2015).
Conclusion

4
It can be stated from analysis of emission scandal of VW that it has negatively
impacted the value of the company in the mind of its stakeholders. The scandal has
highlighted the importance of developing a strong corporate governance system for ensuring
that all business operations are carried out in an ethical manner and preventing the occurrence
of such misconduct on the part of corporations.

5
Answer 2:
Introduction
The agency problem often occurs when owners delegate the power in other hand to
make decisions and to provide returns to owners. In public limited company, shareholder’s or
investors are the real owners and they act as the principals through delegating the power to
make decision in hand of executive of board. Interest of investors and management can be
aligned only when management works only for the shareholders.
Difficulty Faced by investor
In the given scenario, investor want that management should take risk and invest in
risky investment opportunity available to the company. It will help investor to make better
returns as compared to normal returns. Management is in opinion to make investment in less
risky asset looking at the probability of failure of investment in more risky asset. Here
investors cannot force the management at the company to make investment in available
investment opportunity as it will be sole discretion of management and board of directors to
make decision (Monks and Minow, 2011).
Arrangement available to align the interest of investor and management
Best arrangement available with the company to align the investors and management
is to develop the executive compensation plan that support the investor wealth as well as
profit maximization. The executive compensation should be the combination of fixed
compensation and variable compensation. Variable compensation should be aligned with the
profit of the company and also with dividend paid to the investors. So, in this way
management will surely take decision that will improve the overall return paid to investors
and investor’s interest can be aligned with management interest (Rosplock, 2017).
Conclusion
Investor’s interest can be easily aligned with the management through drafting the
effective executive compensation plan that forces the management to increase the wealth of
shareholders.

6
References
Bryant, C. 2015. Volkswagen’s ‘uniquely awful’ governance at fault in emissions scandal.
[Online]. Available at: https://www.cnbc.com/2015/10/04/volkswagens-uniquely-awful-
governance-at-fault-in-emissions-scandal.html [Accessed on: 08 May 8, 2019].
Gates, G. 2017. How Volkswagen’s ‘Defeat Devices’ Worked. [Online]. Available at:
https://www.nytimes.com/interactive/2015/business/international/vw-diesel-emissions-
scandal-explained.html [Accessed on: 08 May 8, 2019].
Hotten, R. 2015. Volkswagen: The scandal explained. [Online]. Available at:
https://www.bbc.com/news/business-34324772 [Accessed on: 08 May 8, 2019].
Kollewe, J. 2016. VW profits down 20% after diesel emissions scandal. [Online]. Available
at: https://www.theguardian.com/business/2016/may/31/vw-volkswagen-profits-down-20-
diesel-emissions-scandal [Accessed on: 08 May 8, 2019].
Lebeau, P. 2015. Volkswagen dealer: Biggest fraud I have ever seen. [Online]. Available at:
https://www.cnbc.com/2015/10/07/vw-dealers-customers-feel-betrayed-by-emissions-
cheating-scandal.html [Accessed on: 08 May 8, 2019].
Monks, R.A.G. and Minow, N. 2011. Corporate Governance. John Wiley & Sons.
Rosplock, K. 2017. The Complete Direct Investing Handbook: A Guide for Family Offices,
Qualified Purchasers, and Accredited Investors. UK: John Wiley & Sons.
Ruddick, G. 2015. VW customers demand answers and compensation over emissions
scandal. [Online]. Available at: https://www.theguardian.com/business/2015/oct/15/vw-
customers-demand-answers-and-compensation-over-emissions-scandal [Accessed on: 08
May 8, 2019].