In what ways did volkswagen fulfill the requirements of effective corporate governance?

Volkswagen Board Structure

In contrast to a conventional English system, where one board is responsible for both management and monitoring of a business, Volkswagen adopts a two-tier corporate structure, consisting of two independent boards working together to govern the firm. The dual boards are comprised of both a Management Board and Supervisory Board.

The Supervisory Board should be “responsible for monitoring the Management and approving important corporate decisions”(Volkswagenag.com, 2016), however “investors and governance experts say the emissions scandal shows that it lacks the independence and authority to do this” (Milne, 2016).

Detailed breakdown of the Board Structure

Volkswagen’s Supervisory Board is comprised of an equal number of shareholder and employee representatives. Members of the supervisory board include the Porsche and Piëch families (5 seats), the State of Lower Saxony (2 seats), and Qatar Investment Holdings (2 seats). Combined, these shareholders account for almost 90% of the voting rights of the shares. Please see the chart below for a more detailed breakdown of this structure. The only outside member of the supervisory board, Ms. Annika Falkengren, is the chief executive of Swedish Bank SEB, adviser to one of Volkswagen’s 12 brands – Scania. This sole independent director is therefore not entirely independent. Further, the German Corporate Governance Code (DCGK) stipulates that “supervisory boards of publicly listed companies have an ‘adequate number’ of independent directors” (Companydirectors.com.au, 2016).

Implications of this Board Structure on effective management at Volkswagen

It is evident that this corporate hierarchy in which the shareholders “have a stranglehold on half of the board” (Gordon, 2016) results in a breakdown of the purpose of the Supervisory Board, namely to monitor the actions and decisions of Management. Volkswagen’s finance director at the time of the scandal, Hans Dieter Pötsch, had a close relationship with the Porsche-Piëch family. This familiarity results in a lack of independence between both tiers, which impacts the ability of the Supervisory Board to monitor the actions of Management independently. In summary, the deficiencies that led to both the emissions scandal itself, and delayed discovery of the scandal, are a result of “ineffective internal controls to uncover improper activity and poor risk management by VW’s Management and Supervisory Boards” (Seymour, 2016).

Additionally, Lower Saxony, holding 20% of the voting rights “has a blocking minority normally reserved for investors with at least 25%” (Gordon, 2016). A major priority for the state is to protect jobs and employment, and as a result “sides more naturally with the employee and trade union representatives who make up the other half of the board” (Gordon, 2016). This indicates that the priorities of board members were not always consistent, and the board were not always focused on what was most important for the company.

With regard to a change in Volkswagen’s corporate structure that has been deemed “responsible for fostering a dysfunctional corporate culture at VW” (Milne, 2016) it is clear the structure of the supervisory board must change. It has been suggested that the Porsche and Piëch family, the state government and Qatari fund all give up half of their seats on the supervisory board. This will “represent fresh blood to re-establish credibility, that is a prerequisite for a return to normality” according to Christian Strenger, member of Germany’s corporate governance commission (McAleer, 2016).

How goals of firm growth may have hazed judgement

Despite the emissions scandal, VW has achieved remarkable rates of growth in the past few years. During the time of the scandal, VW’s CEO, Martin Winterkorn had set a goal of becoming the largest car maker internationally. Ironically, it achieved this in the first quarter of 2015, with "Group Sales Revenue up 10.3% on the prior year figure" (Volkswagen AG, 2015). This poses the question, did the so-called “defeat device” contribute to Volkswagen's global success?

Well, yes. There is a tough market in America for cars, and as previously discussed there are strict emissions standards in the US. With VW cars appearing to be very efficient, this would have likely boosted their sales across the ocean - as well as on the home continent.

However, it is seems that size may have contributed to the unawareness of the defeat device installation in thousands of VW cars. Winterkorn's goal was to increase the growth of the firm; this would most likely have resulted in the introduction of steep targets for the firm's members. With these kind of targets comes pressure. This pressure could indeed have played a key part in convincing employees to push the boundaries and cheat the system. Not only this, but as mentioned earlier, with performance-related pay on the cards - which is said to have racked up to the grand total of €63m across the VW board (Prately, 2016) - there is even more incentive for these targets to be met.

With all this in mind, judgement may have swayed away from maintaining a high standard of ethical behaviour. Therefore, a fair judgement would be that the provision of performance-related pay may be tied directly to the governance failure of Volkswagen.

Internal Controls

Many officials at Volkswagen were unaware of any wrongdoing, although this suggests the company can be salvaged and there are people at the top that can help turn this back around. It does also highlight the need for serious improvement in terms of the firm's internal controls. For issues on a scale as large as this, there should be a sound whistle blowing system in place to alert the correct people of such instances, so action can be taken before any issue further escalates. 

Additionally, with regards to internal controls, another department that may need to focus on improvement is that of Human Resourcing (HR). It seems logical that those that participated in the design and implementation of the cheat device in any way should not have been employed by the firm to begin with. Clearly, to be willing to participate in a scandal such as this, the employee would not be meeting ethical standards of the company. Could a more rigorous employment process be introduced to stop people with these capabilities from slipping through the fingers of HR's controls?

Surfacing of the truth

Moshinsky, B (2015) reports how authorities confronted VW on their findings of evidence on the software scandal. Independent testing group, The International Council on Clean Transportation, were left intrigued at how VW could clean its diesel fuel with impressive environmental effects. The group tested three models of VW cars, including BMWs X5 SUV. Findings reported levels of emissions exceeding the nitrous oxide cap by 15-35 times. This raised concerns and the group alerted the EPA in 2014 who put the findings to VW. On September 3rd 2015, VW finally admitted the allegations of installing cars altered with an illegal device.