Corporate Governance and the Global Financial Crisis at Volkswagen

This report provides an in-depth analysis of the 2007 Global Financial Crisis and its impact on Volkswagen. It begins with an overview of Volkswagen's operations, market position, and corporate structure. The report then examines the principles of corporate governance as defined by the OECD, assessing Volkswagen's adherence to these principles. A critical aspect of the report investigates the effects of corporate recklessness and negligence on Volkswagen's stakeholders, including shareholders and employees, and how these factors impacted the company's financial performance and share price. The analysis covers the emissions scandal and its consequences, emphasizing the importance of ethical conduct and robust corporate governance. The report concludes by highlighting the significance of corporate governance systems for businesses and the need for ethical practices to protect stakeholder interests and maintain financial stability. The report also mentions the decline in Volkswagen's share price and the loss of investor confidence, emphasizing the importance of transparent and effective corporate governance to prevent such crises.

THE GLOBAL FINANCIAL CRISIS OF
2007

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Brief Overview of the organization........................................................................................1
2 Presenting the aspects of corporate governance by placing emphasis on the principles which
are setting down by OECD..........................................................................................................4
3 Effects of corporate recklessness and negligence on shareholders and employees and its
impact on finance and share price of Volkswegan......................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
The beginning of subprime mortgage crisis in US, banking crisis with collapse of
Lehman Brothers and bail-out of banks lead to global financial crisis in 2007/08. It had drastic
impact on the corporate world and economy. Volkswagen Inc is one of the leading automotive
company which is engage in designing various passenger vehicle, commercial vehicles and
automotive parts. Its corporate governance mechanism constitutes of set of rules and policies
towards all the stakeholders such as employees, shareholders, customers and others. However,
during the period of crisis, company did not comply with the rules. The aim of the paper is to
understand corporate governance with clearly set principles by OECD (Organization for
Economic Cooperation and Development). OECD is the regulatory body that is highly
committed towards protecting economic and social wellbeing through setting various policies.
Moreover, it will critically investigate the impact of Volkswagen recklessness and negligence on
stakeholders.
1. Brief Overview of the organization
Volkswagen Inc is the leading automotive company headquartered in Herndon, Virginia,
US. Englewood Cliffs and New Jersey established the company in 1955. It is primarily
accountable for five marques including Bentley, Lamborghini, Bugatti, Audi and Volkswagen
Cars. A public limited company primarily listed on FSE (Frankfurt Stock Exchange) as Euro
Stock 50 constituent. However, secondary listing of the firm is on the Luxemburg and SIX Swiss
Stock Exchange. It manufactures automobiles and related automotive parts and its product
portfolio includes commercial vehicle, passenger vehicle, engines, turbo-machinery, motorcycle
and other products however service operations includes dealer, leasing, consumer financing
banking, insurance and fleet management. VW credit Inc provides credit and financial services
to the customers (Volkswagen, 2017). In the automotive industry, Volkswagen has the largest
market share in Europe. Currently, it operates through 626,715 employees. According to
Organization International des Constructers automobiles, after Toyota, Volkswagen is the second
largest automaker firm by the volume of production.
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Figure 1 Global Fortune 500 Ranking
(Source: Volkswagen, 2017)
In the Global Fortune 500 list, company is ranked at 6th position. Currently, Matthias
Muller is the CEO of the organization who is the leading decision-making authority of the
company. According to the latest year annual report, company has a total turnover of $240,264m
at 1.5% rise against previous year. Volkswagen is a leading and highly profitable automaker with
total market capital of 60.13 bn and net profitability of $5,937.3m, which is equivalent to 2.5%
on total revenue. German Labor Front has expertise in designing affordable vehicles for the
consumers for the core markets, China and Germany.
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Figure 2 Vehicle Production location of Volkswagen
(Source: Volkswagen Annual Report, 2016)
Europe is the most important production region of Volkswagen production, which owns a
great market share. In the production activities, company consider environmental management as
Volkswagen Poznan Plants are design with closed water circuits, chemical substance
management, heat recovery and hazard management to maintain ecological integrity for the
public. Volkswagen uses the best technologies, utility system and devices to reduce negative
impact on the environment. Virtual technologies are use to increase the car models to develop
innovative products. In today’s technology led world, Volkswagen uses Mobile Augmented
Reality Technical Assistance (MARTA), Spatial Augmented Reality (SAR) and other latest
technologies to manufacture the standard quality products. Recently, Volkswagen had designed
“TOGETHER-Strategy 2025” programme that lay down the foundation to become a global
leader. The strategy is based on current prevailing trends i.e. digitalization, electrification and
changing technologies to gain championship in the industry. The strategy set out a challenging
target to launch 30 plus electric cars by the end of 2025 to gain competitive success (Volkswagen
Group, 2016).
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2 Presenting the aspects of corporate governance by placing emphasis on the
principles which are setting down by OECD
Corporate governance may be served as a system of rules, practices and processes that is
undertaken by the business unit direct as well as control operations. The main aim behind
undertaking corporate governance practices is to balance the interest of stakeholders such as
shareholders, customers, suppliers, financial institution, government authority and community.
Hence, in the present times, practices pertaining to corporate governance gained high level of
importance in every sector including automobile (Volkswagen). There are several principles
which are setting down by OECD to streamline the aspects of corporate governance (OECD
Principles of Corporate Governance, 2017). Hence, principles which are setting down by OECD
is highly related to the rights of shareholders and equitable treatment, key ownership functions,
role of stakeholders in governance, disclosure as well as transparency.
On the basis of OECD principles, Volkswagen needs to ensure the basis for an effective
corporate governance framework. Relative principles presented by Volkswagen entails that firm
should develop corporate governance framework by considering the aspect it places positive
impact on overall economic performance and market integrity. In addition to this, business unit
needs to ensure that all the legal and regulatory aspects that have an impact on corporate
governance practices must be in correspondence with the rule of law. Along with this, it should
be enforceable and transparent which in turn makes the governance arrangement highly
prominent. From assessment, it has found that practices of corporate governance are highly
influenced from legal domains such as company law, securities regulation, accounting and
auditing standards etc. Thus, in this regard, Volkswagen can ensure effectual enforcement
through the means of allocating accountabilities for supervision and implementation.
In addition to this, corporate governance practices lay high level of emphasis on
protecting the rights of shareholders. In accordance with such principle of OCED, Volkswagen
investors have right in relation to obtaining relevant or material information about business on a
periodical basis. Further, such principle states that Volkswagen Inc needs to offer voting rights to
the shareholders pertaining to electing and removing members from board. Along with this,
principles introduced by OECD exhibits that shareholders who fall into the category of same
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series must be treated equally. Further, as per the framework of OECD impediments related to
cross border voting should be eliminated to a great extent. According to the same, insider trading
and practices related to self trading should be prohibited. OECD framework or principle also
showcases the role of stakeholders in corporate governance (G20/OECD Principles of Corporate
Governance, 2017). Thus, considering the same, it can be presented that framework related to
corporate governance should recognize or considers the right of stakeholders that are established
by law. Hence, it can be depicted that Volkswagen should consider the rights of stakeholders
which are based on mutual agreements. Besides this, such automobile firm has accountability to
consider mechanism that enhance or raise employee participation.
Disclosure and transparency is one of the main principles that are setting down by OECD
for offering protection to the concerned stakeholders. Considering such principle, it can be
presented that it is the accountability of automobile firm to furnish timely and appropriate
information to the stakeholders about financial performance as well as matters related to
ownership & governance. Besides this, sixth principle of OECD states that board should treat all
the stakeholders fairly (OECD Principles of Corporate Governance, 2017). Along with this,
such automobile firm needs to make focus on applying high ethical standards by keeping in mind
the interest of stakeholders. Hence, it can be presented that by following all the above aspect
Volkswagen would become able to ensure proper balance in the interest of stakeholders and
would become able to revitalize its image.
3 Effects of corporate recklessness and negligence on shareholders and
employees and its impact on finance and share price of Volkswegan
During the period of crisis, Volkswagen suffered challenges of decline in their turnover
due to disintegrating customer confidence, stressed business suppliers, over-stretched managerial
team and extremely nervous franchise dealers. During such period, investors had lost their
confidence on the business. The 2008 Global Financial Crisis because of sub-prime mortgage,
company struggled with the lending challenges to the people whose credit position were found
doubtful. Its emission scandal adversely affected its stock prices. Moreover, during the period,
firm faced challenged due to rising cost ratios, which effect profit negatively. Stakeholders are
one of the important entity that have huge impact on the business firm. This is because they
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support business by supporting organization in difficult times. It can be observed that
stakeholders majorly comprises creditors and shareholders etc and they have huge impact on the
firm. In case creditors are providing funds to the firms but if they will not be satisfied then in that
case next they will not give debt to the firm in easy manner. In same way if shareholders are not
given proper amount of return then in that case they would not actively partcipate in the
company annual general meeting and will not give valuable suggestions (Jung, Chilton and
Valero, 2017). Hence, it can be said that reckless and negligence behaviour of shareholder and
employees prove costly to the firm. Those firms that does not listen their stakeholders carefully
face heavy loss in the business and their image get tarnished among customers and creditors etc.
It can be said that it is very important for the business firms to maintain strict control on its
employees and ensured that negligent behaviour is not done from their side. In case firm failed to
treat its stakeholders well it does not receive their support and face huge problems in its business.
In year 2015 Volkswegan highlighted in the news when information spread that automaker
manipulated software and reflect that its cars are emitting less carbon. In reality emission of
carbon was high from car. When this information spread in the market share price decline by
30% in the market and sharehoders face huge loss on equity value. Million of cars were recalled
due to this news that spread in the market. It can be said that it was the negligent behaviour of
Volkswegan due to which share price decline and shareholders face huge capital loss. Moreover,
firm ethcial image also tarnished. All these things have negative impact on employees also
because when these negative facts spread in the market people frequerntly asks question related
to company scandal to the employees which make them uncomfortable (Ferenc, Varmus and
Vodák, 2017). Due to this reason employees resign from their jobs and look for same elsewhere.
Due to all these reasons slowly firm profitability get decline because when experienced
employees leave their job it affect company internal effeciency. All these things lead to earning
of less profit in business and availability of less amount of fund for company. Thus, it can be said
that corporate recklessness and negligence have negative impact on finance and share price for
the company. It can be said that firms must improve their corproate governance system and must
ensure that only reliable employees are controlling entire governance system. This thing ensured
that all operations of the firm will be performed ethically and shareholders interest will remain
safe and unaffected from any person. In current time period more and more firms are giving
much importance to corporate governance at the workplace because it enured that all operations
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will be performed in systematic manner at the workplace (Mansouri, 2016). Rules and
regulations as well as policies need to be prepared very cautiously in the business because by
doing so any malpractices if happened at workplace can be detected easily and solution of
problem can be identified. Hence, it can be said that corporate governance system have due
importance for the business firm and it must make its best practices to improve it as much as
possible.
CONCLUSION
On basis of above discussion it is concluded that there is significent importance of
corporate governance system for the firms because it ensured that all things will be performed in
proper manner at the workplace. It is also concluded that firms must follow OECD principles and
must provide all set of information which are true and fair to shareholders on time because they
are real owner of the company.
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REFERENCES
Books and Journals
Ferenc, P., Varmus, M. and Vodák, J., 2017. Stakeholders in the various field and relations
between them. Procedia engineering. 192. pp.166-170.
Jung, K., Chilton, K. and Valero, J.N., 2017. Uncovering stakeholders in public–private relations
on social media: a case study of the 2015 Volkswagen scandal. Quality & Quantity. 51(3).
pp.1113-1131.
Mansouri, N., 2016. A Case Study of Volkswagen Unethical Practice in Diesel Emission
Test. International Journal of Science and Engineering Applications. 5(4), pp.211-216.
Online
G20/OECD Principles of Corporate Governance. 2017. [Online]. Available through:
<http://www.oecd.org/corporate/principles-corporate-governance.htm>.
OECD Principles of Corporate Governance. 2017. [Pdf]. Available through:
<https://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf>.
Volkswagen Annual Report 2016. [Online]. Available through: <
http://annualreport2016.volkswagenag.com/group-management-report/sustainable-value-
enhancement/production.html>.
Volkswagen Group. 2016. [Online]. Available through:
https://www.volkswagenag.com/en/group.html.
Volkswagen. 2017. [Online]. Available through: http://fortune.com/global500/volkswagen/.
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