Corporate Governance and the Volkswagen Emission Scandal Analysis

This report provides a comprehensive analysis of the Volkswagen emission scandal, focusing on the failures in corporate governance and the impact of leadership decisions. It examines the circumstances leading to the crisis, including the pressure to meet sales targets and the opportunity to cheat emissions standards. The report identifies key actors such as the CEO, engineers, and Daimler AG, and assesses their culpability. It also details Volkswagen's responses to the scandal, including the suspension of managers, technical fixes, buyback programs, and the hiring of an internal investigation firm. Finally, the report explores broader governance lessons learned from the scandal, emphasizing the importance of ethical leadership, transparency, and robust internal controls to prevent future crises. The analysis highlights the critical role of corporate culture in shaping ethical behavior and the consequences of prioritizing profits over integrity.

Running head: CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Comparative Corporate Governance and International Operations
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1CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Executive Summary
Corporate governance decides the rules, practices and processes for managing the directing the
organizational processes. The study has focused on the profile of the Volkswagen during the
time of its emission scandal in 2015. The study has also demonstrated the circumstances and
contributing factors in the crisis. It has been found that the pressure from the organizational
leaders led the engineers to install the defeat software in the cars for achieving the emission
standards of USA and increase the sales volume. The study has also described the actors
involved in the scandal and learning of governing bodies of the organization from this scandal.

2CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Table of Contents
1.0 Introduction................................................................................................................................3
2.0 Profile of Volkswagen during Crisis.........................................................................................3
3.0 Circumstances and Contributing Factors Leading Crisis..........................................................3
3.1 Circumstance Leading Emission Scandal..............................................................................3
3.2 Factors Leading Emission Scandal........................................................................................5
3.2.1 Pressure...........................................................................................................................5
3.2.2 Opportunity.....................................................................................................................5
3.2.3 Rationalization................................................................................................................6
4.0 Key Actors and Their Culpability..............................................................................................6
4.1 CEO and Top Leaders...........................................................................................................6
4.2 The Engineers........................................................................................................................7
4.3 Daimler AG Automotive Company.......................................................................................7
5.0 Organization Response to Crisis................................................................................................8
5.1 Suspension of Engineers and Managers and Halting the Production....................................8
5.2 Technical Fixing....................................................................................................................8
5.3 Buying Back Program............................................................................................................8
5.4 Hiring Internal Investigation Firm.........................................................................................9
6.0 Broader Governance Lessons....................................................................................................9
7.0 Conclusion...............................................................................................................................10
Reference List................................................................................................................................11

3CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
1.0 Introduction
Corporate governance is the process, mechanism and relation through which an
organization is directed and controlled1. The study will be concerned with the governing bodies
of Volkswagen during their emission scandal in 2015. The study will describe the profile of the
organization during the time of crisis and explore the circumstances and contributing factors in
the crisis situation. The study will also be concerned with the organization response and learning
for governance of Volkswagen in respect to the emission scandal.
2.0 Profile of Volkswagen during Crisis
Martin Winterkorn was the CEO of Volkswagen during the time of emission scandal. The
CEO took responsibility of the organization in the year 20062. At the time of crisis, the
organization was having extreme low market share in the USA market. Moreover, the
organization was facing the uncertainty of making any profit in the market of USA. At this time,
the CEO of the organization decided to make transmission in organizational goals for being the
largest company in the world.
1 McCahery, Joseph A., Zacharias Sautner, and Laura T. Starks. "Behind the scenes: The
corporate governance preferences of institutional investors." The Journal of Finance 71, no. 6
(2016): 2905-2932.
2 Wang, Tianyang, Michael Jerrett, Peter Sinsheimer, and Yifang Zhu. "Estimating PM2. 5-
associated mortality increase in California due to the Volkswagen emission control defeat
device." Atmospheric Environment 144 (2016): 168-174.

4CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
3.0 Circumstances and Contributing Factors Leading Crisis
3.1 Circumstance Leading Emission Scandal
Volkswagen itself admitted the reason behind its diesel emission scandal is the result of
several failures within the company. During 2006, the organization wanted to increase its
extremely low market share in the United State. The intension of the organization was to be the
largest car maker company in the world. Martin Winterkorn, the CEO of Volkswagen of crisis
time targeted to sell 10 million cars within a year. The CEO realized that the organization should
triple its sales volume in USA for achieving its target. Upping sales mean that the engineers had
to produce more fuel efficient and powerful diesel cars, whose emission rate could pass the
stringent pollution regulation of the USA3. In such situation, the organization dropped the idea of
competing with the rivals in hybrid car market and instead decided to elect building diesel cars.
However, diesel cars always generate significantly more power pollution compared with gas
powered cars. Hence, the engineers of the organization faced issues in this idea.
At the same, the engineers of Volkswagen were always under the pressure of autocratic
leadership style, where the leaders forced superior performance by the “terrifying his engineers”.
During this time, the CEO tossed the idea of making team with Daimler Company, who used
BlueTec invention software as the substance of neutralize nitrogen oxide emission from the cars.
Hence, the engineers of Volkswagen solved the daunting challenges imposed by the demanding
leaders through installing the cheating software for passing the emission regulations of USA in
the car testing lab. Ultimately, the discovery of defeat software was investigated in the year 2014
by the researchers, who examined the diesel technology for its cleaner effectiveness4. In such
3 Mansouri, Nazanin. "A Case Study of Volkswagen Unethical Practice in Diesel Emission
Test." International Journal of Science and Engineering Applications 5, no. 4 (2016): 211-216.
4 Core, John E., Robert W. Holthausen, and David F. Larcker. "Corporate governance, chief
executive officer compensation, and firm performance1." Journal of financial economics 51, no.

5CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
circumstances, in 2015, all the diesel cars of Volkswagen had been halted with the car emission
scandal.
3 (1999): 371-406.

6CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
3.2 Factors Leading Emission Scandal
3.2.1 Pressure
Extreme pressure from the top authority of the organization to achieve the organizational
goals was intense contributor in the emission scandal of Volkswagen. The employees of the
organization were ostensibly trained in ethics in business ethics. Such ethical training seemed to
be irrelevant with the autocratic leadership style of the organization5. Moreover, in the
organization, the single minded goals of the autocratic leaders were supposed to be achieved at
any cost6. In this way, the pressure from the CEO to achieve the sales target of cars in USA
market led the employees to manufacture diesel cars with cheating software.
3.2.2 Opportunity
The opportunity to cheat was also the reason for leading the emission scandal. Moreover,
with the cheating software BlueTec invention software, the engineers came up with the solution,
where the software can detect the car testing and crank up the emission of pollution from the
cars7. In this cheated way, the engineers become able to pass the environmental regulation of
USA through their newly invented diesel cars and it encouraged them to lead the emission
scandal.
5 Barrett, Steven RH, Raymond L. Speth, Sebastian D. Eastham, Irene C. Dedoussi, Akshay
Ashok, Robert Malina, and David W. Keith. "Impact of the Volkswagen emissions control defeat
device on US public health." Environmental Research Letters 10, no. 11 (2015): 114005.
6 Kucuksahin, Habib, and Ender Coskun. "The Examination Of The Volkswagen Emission
Scandal's Impact On The Stock Price Movements." European Scientific Journal, ESJ 12, no. 10
(2016).
7 Tanaka, Katsumasa, Marianne T. Lund, Borgar Aamaas, and Terje Berntsen. "Climate effects
of non-compliant Volkswagen diesel cars." Environmental Research Letters 13, no. 4 (2018):
044020.

7CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
3.2.3 Rationalization
The engineers of Volkswagen knew that the organization installed defeat device in
1970’s for cheating with the newly developed emission standards. However, the punishment for
this cheating was just a mere of $120,000 fine8. In this way, it became the concept among the
engineers that they might punish with minimal fine even if they became revealed with such
defeating software. It encouraged the employees to repeat the action with the huge rationale of
detecting the car testing and controlling the car emission during car testing.
4.0 Key Actors and Their Culpability
4.1 CEO and Top Leaders
The car emission scandal of Volkswagen reflects a major issue of corporate culture.
Moreover, the autocratic leadership style of the CEO and top leaders of the organization forced
the employees to achieve the organizational targets of selling 10 million cars in the USA at any
cost. Such demanding pressure from the top leaders had forced the engineers to take the
unethical decision of using defeat software for detecting car testing and controlling emission
during car testing9. The top leaders of the organization used to fire the employees, who used to
contradict with their single minded organizational decision. Such pressure from the top leaders
and CEO led the engineers to take such unethical initiatives.
8 Li, Larry, Adela McMurray, Jinjun Xue, Zhu Liu, and Malick Sy. "Industry-wide corporate
fraud: The truth behind the Volkswagen scandal." Journal of Cleaner Production 172 (2018):
3167-3175.
9 Raj, A. Sridhar. "The Volkswagen Way, Profits over Sustainability." Journal of Marketing
Vistas 7, no. 2 (2017).

8CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
4.2 The Engineers
The engineers of Volkswagen were directly responsible for causing the car emission
scandal. The rule breaking mind set of the organization led them to take such unethical action.
Moreover, the engineers realized that they would not be able to hit the emission target of US for
diesel cars in permissible way. Hence, they adopted such unethical way of using defeat software
for reducing emission rate during car testing for passing the test of stringent car emission
standards in the USA10. The individual misconduct and mistake from the engineers led to the car
emission scandal in Volkswagen.
4.3 Daimler AG Automotive Company
Though Daimler AG Company might not be involved in the emission scandal of
Volkswagen directly, still it has huge contribution in this emission scandal. Martin Winterkorn
took the idea of teaming with Daimler, which was a competitor of Volkswagen. This competitor
company used to use the defeat software namely BlueTec invention for neutralizing nitrogen
oxide during car testing11. In this way, this organization had indirectly influenced the engineers
of Volkswagen to install such defeat software in their cars for the same purpose.
10 Stanwick, Peter, and Sarah Stanwick. "Volkswagen Emissions Scandal: The Perils of Installing
Illegal Software." International Review of Management and Business Research 6, no. 1 (2017):
18.
11 Kucuksahin, Habib, and Ender Coskun. "The Examination Of The Volkswagen Emission
Scandal's Impact On The Stock Price Movements." European Scientific Journal, ESJ 12, no. 10
(2016).

9CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
5.0 Organization Response to Crisis
5.1 Suspension of Engineers and Managers and Halting the Production
Just after revealing the emission scandal, Volkswagen suspended 9 managers, who were
involved in the deception. Such managers were from supervisory board, engine design, quality
control and assurance, plant managers and some sub managers from Porsche and Audi. The
organization also halted the production of cars immediately after revealing the emission
scandal12. In this way, the organization adhered with the legal constraints for ensuring the
prevention of more cars having defeat software.
5.2 Technical Fixing
In USA, the Volkswagen took the decision of fixing the technical issues defeat software
in almost 500,000 affected cars. Moreover, the organization ensured that by 2016, it would fix all
the technical issues installed in the cars in regards to defeat software13. In this way, the
organization took initiatives towards resolving the issue of installation of defeat software.
5.3 Buying Back Program
One of the most important initiatives of Volkswagen towards resolving the issue of car
emission scandal is buyback program. The organization has taken this initiative for buying back
the cars having defeat software installed those cars. Moreover, the organization paid almost $7.4
billion to US customers for buying back their cars. It sent almost 437,273 letters to US customers
12 Whiteman, Gail, and Harry Hoster. "Vehicle emissions: Volkswagen and the road to
Paris." Nature 527, no. 7576 (2015): 38.
13 Masulis, Ronald W., Cong Wang, and Fei Xie. "Globalizing the boardroom—The effects of
foreign directors on corporate governance and firm performance." Journal of Accounting and
Economics 53, no. 3 (2012): 527-554.

10CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
in which the organization offered $8 billion in compensation and buybacks for compensating the
car owners14.
5.4 Hiring Internal Investigation Firm
The organization hired internal investigation firm for checking any fraudulent activities
in the business operation. It will keep the organization engaged with performing the ethical
jobs15. In this way, the organization would be able to ensure ethical business performance in
further days.
However, such initiatives are not enough for the organization. The organization should
mostly focus on its organizational culture, where the leaders should follow supportive leadership
style, instead of autocratic leadership style. It would never pressurize the employees to achieve
the goals at any cost, which will keep the employees away from the unethical activities.
6.0 Broader Governance Lessons
The governing bodies of Volkswagen should learn that that they should focus more on
employees rather than the shareholders for the long term success. Moreover, autocratic
leadership style is not at all effective for leading high level of business performance. The
governing bodies of the organization should be supportive enough to the employees and help
them in achieving the organizational goals. Apart from that, relying on single minded decision,
the organizational leaders should always take decisions in collaboration with the employees for
14 Bowen, Robert M., Shivaram Rajgopal, and Mohan Venkatachalam. "Accounting discretion,
corporate governance, and firm performance." Contemporary Accounting Research 25, no. 2
(2008): 351-405.
15 Klapper, Leora F., and Inessa Love. "Corporate governance, investor protection, and
performance in emerging markets." Journal of corporate Finance 10, no. 5 (2004): 703-728.

11CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
better organizational performance. Less pressure from the governing team would always keeps
the employees away from the doing any unethical activities.
7.0 Conclusion
While concluding the study, it can be said that huge pressure from the organizational
leaders to sale 10 million cars in the USA led the engineers of Volkswagen to install defeat
software in the cars. The intension of the installing such fraud software was to detect the car
testing and control the emission rate during the car testing for passing the stringent emission
standards of the USA. The top leaders of the organization were indirectly involved in this
scandal through pressurizing the engineers in achieving the goals. The engineers of the
organization were directly responsible for leading the emission scandal. Hence, the organization
should learn that the organization should be more focused on employees rather than shareholders
for having sustainable organizational performance.