The Corporate Governance Issues at Volkswagen - Case Study Example

Name Class Unit Table of Contents Introduction 2 Outline and summary of the arguments made 3 Context of the readings and issues raised in relation to corporate governance 4 Relevance of the arguments being made in the media 5 Opinion about the issues raised in the article 7 Conclusion 8 References 9 Appendix 11 Introduction In well-functioning corporate governance, transparency plays a major role. Through disclosure, it becomes possible for the companies to be accountable. It makes it possible to have the shareholders who are well informed. The business has a responsibility to the stakeholders, society and the environment (Thomsen & Conyon, 2012). The article of the New York Times is based on the Volkswagen (VW) scandal over diesel emissions. It is a scandal caused by the firm failure to have transparency in their disclosures on the level of emissions from their cars. The business failed to be honest to all stakeholders during disclosure and rigged their diesel cars to cheat on the emission tests (Ewing & Boudette, 2017). This paper discusses the corporate governance issues related to fraud, deception and lack of transparency at VW. The paper will discuss the arguments made in the article and corporate governance issues arising using appropriate theory to show its importance. Lastly, an opinion will be given on the corporate governance issues raised. Outline and summary of the arguments made VW is one of the largest vehicle manufacturers based on Germany. The company was accused of duping the stakeholders on the level of emissions from their diesel engines. The cars were sold with software which made it possible to cheat on the emissions once they were being tested in US (Rhodes, 2016). The company success in US had been based on their huge marketing campaign on low emissions. The marketing campaign was based on deceit and the company lied to their stakeholders including customers, society and the environmental agencies. The engines level of emissions was up to 40 times what is allowed in the US (Ewing & Boudette, 2017). The authors argue that VW has paid heavily on their deception and lack of transparency in their disclosures. The American government has been tough on VW due to their corporate wrongdoing. This is through holding both the firm and executives accountable for duping the stakeholders through overseeing installation of emission cheat device. The authors point out that VW have already admitted to cheating on the level of emissions through use of deceptive software (Ewing & Boudette, 2017). According to the authors, VW pleaded guilty for violating the clean air act and trying to obstruct the justice. In fact, it is stated that six of the executives have already been charged in US and an engineer has already pleaded guilty for conspiracy to defraud US regulators and customers. The company exposure according to the authors’ argument is one of the largest corporate frauds in pollution and safety. The company settlements and fines according to the authors is $22 billion in US alone (Ewing & Boudette, 2017). Based on authors’ argument the firm could face further lawsuits in Europe. Despite this, the authors point out that Volkswagen is trying to avoid costly lawsuits in Europe due to their fraud using poor transparency (Rhodes, 2016). This is due to less consumer friendly laws in the Europe. According to the authors, VW may try to use the EU weak consumer laws to evade compensating their clients. The authors assert that it is possible for VW to continue suffering in future due to their deceptive practices which are against (CSR Ewing & Boudette, 2017). Context of the readings and issues raised in relation to corporate governance Modern stakeholders require more information than what the firms provides in their financial statements (Crowther & Aras, 2008). Firms are valued by more than their financial success which includes nonfinancial success issues such as environmental responsibility. Having transparency in business disclosures lead to high profits (Thomsen & Conyon, 2012). This has led to the need for voluntary disclosures and transparency. Stakeholders are also more concerned by corporate fraud. When a firm commits a corporate fraud through deceiving their stakeholders, they lose customer trust (Lindgreen & Swaen, 2010). Deliberately omitting information or cheating the stakeholders makes it possible to commit a corporate fraud as seen in the VW case. According to the agency theory, one party determines the work while the other party does the work (Lindgreen & Swaen, 2010). This is based on a principle agent arrangement where the principals are the shareholders and the management the agent. While both principal and agent are motivated by their self-interest, this leads to conflicts (McColgan, 2001). This can lead to an agency loss as evidenced on the case. The management of VW overlooked the shareholders risks which might arise through implementation of deceptive practices. According to the literature, the principle agent loss can be minimized through sharing a common interest between the principal and agent (Saltaji, 2013). In addition, there is need for principle to have knowledge of the consequences that may arise from the agent activities (Kultys, 2016). When a firm engages in a corporate crime, it suffers more than just the financial loses. This is due to fact that the firm business reputation faces a major risk. Corporate crime such as one in which VW engaged in is a major threat to business stability (Rhodes, 2016). The business had to suffer from severed business relations, reputation damage and brand power loss. As the car industry transit towards clean energy, honesty is required. This is due to fact that the private sector plays a major role in ensuring that there is smooth transition to clean energy (Orlitzky, Siegel & Waldman, 2011). The issues of corporate dishonesty where there is lack of disclosure can lead to scandal. Analysis of the issues shows that business is susceptible to loss if the agent acts in a manner that goes against the principal’s interests. The principals in this case lacked adequate knowledge on the impacts of the agent’s deceptive business practices (McColgan, 2001). Relevance of the arguments being made in the media The issues raised by the media are important to business and the general public. This is due to fact that the arguments show that engaging in deceptive practices costs the business and affects the stakeholders. From the media analysis VW is about to suffer a major loss associated with its corporate scandal. The argument is that the firm will suffer huge fines in US as well as Europe. When a firm is engaged in a scandal, there are also reputation losses which can also be equated to cost (Smith, 2003). The firm has already harmed its trading partners as well as customers who are part of the stakeholders. From the media, VW cheating on emissions was an issue which will expose the business to more risks and affects public trust (Ewing & Boudette, 2017). From the media, it is clear that corporate fraud cannot be hidden for long. This is relevant to the general public and business as they seek transparency. Despite the efforts to conceal their deceptive acts, VW actions were revealed. It is important for the business and general public to be aware that deception is unethical and against CSR (Kühn, Stiglbauer & Heel, 2014). The media argues that the cheating was a deliberate action by VW who thought they had low probability of getting caught. The article asserts that VW have been involved in other pollution scandals and this is just one of the exposures among other. Another importance to business and general public is that the auto industry has a responsibility in being honest with the stakeholders on their efforts in ensuring safe environment (Smith, 2003). From the article, it is clear that VW is facing a lot of resentment from all stakeholders and they are also having guilt. It also points out on the role of the authority in protecting the consumers from deceptive business practices that goes against CSR (Montiel, 2008). Lastly, the media article shows a stark difference between corporate laws in USA and Europe. This is due to fact that there is lot of laxity in prosecuting VW corporate behavior in Europe compared to USA (Rhodes, 2016). While USA has strong environment laws, there are a lot of loopholes in UK environmental laws. If VW will be forced to pay fines and lawsuit settlements in UK, the costs will be more than $300 billion which can destroy the company. From the article, it is clear that VW will continue facing lawsuits and challenges based on their deceptive practices which are against corporate governance ethics (Ewing & Boudette, 2017). Opinion about the issues raised in the article From the article, I feel that the scandal shows that corporate culture matters in modern business. Poor corporate culture lead to scandals and loss of revenue as evidenced in the VW case (Kühn, Stiglbauer & Heel, 2014). Being a family controlled business there were low level of accountability by the board. The poor and unaccountable corporate governance led to deceptive practices. The attempt to cheat the emissions tests went against the firm CSR and was a breach of the firm disclosure and transparency (Lyon & Maxwell, 2008). This is what has cost VW a lot of revenue in fines and settlement and a damaged reputation. The prosecution shows that corporate greed is an economic phenomenon which has to be addressed. The firm greed for growth led to practices which corrupted the corporate culture. It shows that agents can become over ambitious and engage in practices which ruin the principle value (McColgan, 2001). Business must be ready to adopt CSR measures that ensure accountability and transparency. This is due to the current level of stakeholder activism where business transparency has gained a lot of momentum (Matten & Moon, 2005). The firms such as VW must be ready to adopt increased transparency and become more accountable. This includes being able to disclose environmental and social impacts of the given products. Having further responsibilities to the society and stakeholders in general leads to better business (Lindgreen & Swaen, 2010). There is need for the automotive industry to adopt a life cycle approach to CSR. This is through ensuring that all phases of automotive production are based on CSR. This involves a commitment to reduce emissions and utilization of alternative fuel (Orlitzky, Siegel & Waldman, 2011). The costs suffered by VW is an indication that failure to follow CSR can lead to financial and reputation to the firm. Conclusion To sum up, it is clear that corporate governance plays a vital role in a business. VW deceptive actions to cheat on emissions led to fines, lawsuits and a damaged reputation. The company failed to be transparent and disclose the levels of emissions in their vehicles. The outcome was a lost consumer confidence and lawsuits. This is a lasting damage to the society and environment which will take time to clear. The deceptive act shows poor CSR and acts as a proof that the firm has poor commitment to environmental sustainability. References Crowther, D., & Aras, G. 2008, Corporate social responsibility, Bookboon. Ewing, J., & Boudette, N. 2017, As VW Pleads Guilty in U.S. Over Diesel Scandal, Trouble Looms in Europe, The New York Times. Retrieved from https://www.nytimes.com/2017/03/10/business/volkswagen-europe-diesel-car- owners.html Kühn, A. L., Stiglbauer, M., & Heel, J. 2014, ‘Does mandatory CSR reporting lead to higher CSR transparency? The case of France’, Corporate Ownership and Control, Vol.11, no.2, pp.29-45. Kultys, J. 2016, ‘Controversies about Agency Theory as Theoretical Basis for Corporate Governance’, Oeconomia Copernicana, Vol.7, no.4, p.613. Lindgreen, A., & Swaen, V. 2010, ‘Corporate social responsibility’, International Journal of Management Reviews, Vol.12, no.1, pp.1-7. Lyon, T. P., & Maxwell, J. W. 2008, ‘Corporate social responsibility and the environment: A theoretical perspective’, Review of environmental economics and policy, Vol.2, no.2, pp.240-260. Matten, D., & Moon, J. 2005, ‘Corporate social responsibility’, Journal of business Ethics, Vol.54, no.4, pp. 323-337. McColgan, P. 2001, ‘Agency theory and corporate governance: a review of the literature from a UK perspective’, Department of Accounting and Finance Working Paper, 6, 0203. Montiel, I. 2008, ‘Corporate social responsibility and corporate sustainability separate pasts, common futures’, Organization & Environment, Vol. 21, no.3, pp.245-269. Orlitzky, M., Siegel, D. S., & Waldman, D. A. 2011, ‘Strategic corporate social responsibility and environmental sustainability’, Business & society, Vol.50, no.1, pp.6-27. Rhodes, C. 2016, ‘Democratic Business Ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty’, Organization Studies, Vol.37, no.10, pp.1501- 1518. Saltaji, I. M. 2013, ‘Corporate governance and agency theory how to control agency costs’, Internal Auditing & Risk Management, Vol.8, no.4. Smith, N. C. 2003, ‘Corporate social responsibility: Whether or how?’ California management review, Vol.45, no.4, pp.52-76. Thomsen, S., & Conyon, M. 2012, Corporate governance: Mechanisms and systems, Berkshire, UK: McGraw Hill. Appendix Ewing, J., & Boudette, N. 2017, As VW Pleads Guilty in U.S. Over Diesel Scandal, Trouble Looms in Europe, The New York Times. Retrieved from https://www.nytimes.com/2017/03/10/business/volkswagen-europe-diesel-car- owners.html Read More