Learning From an Act of Corporate Stupidity: The Volkswagen Scandal
This week on You Legal TV, and in my latest article, I discuss the Volkswagen emissions scandal. Watch our summary below or read on our blog for the full details!
See below for complete transcript of this episode -
Hello and welcome to You Legal TV.
The high-profile Volkswagen scandal has taught business leaders around the world a valuable lesson: the importance of corporate governance and role it can play in securing a company's reputation. The scandal had deep roots in Volkswagen's governance, which had long been criticised. For other companies, even a minor scandal is capable of destroying the entire company, so now is a good time for you to ensure that your company is well equipped with an effective compliance program because having a system that protects you as a leader is important.
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Learning From an Act of Corporate Stupidity: The Volkswagen Scandal
The high-profile Volkswagen scandal is a reminder for leaders around the world of the importance of corporate governance and the role it plays in securing a company’s reputation. Reports indicate that the scandal had deep roots in Volkswagen’s governance, which has long been criticised as one of the worst of German corporations. With its enormous scale and 79 years of history, Volkswagen was lucky enough to survive this crisis. With the New Year just beginning, now is a good time for you to review your company’s compliance program.
Increase in Whistle-Blowers
Compliance has never been as important to companies as now, due to the unprecedented increase in the number of whistle-blowers since the Global Financial Crisis. The United States estimates that there is now an average of 4000 whistleblowing reports per year. A 2015 study by the Association of Certified Fraud Examiners also suggests that 42.2% of all reported corporate fraud incidents were picked up through whistle-blowers. Thus, any breach of compliance will be likely exposed.
Board Diversity and Conflicts of Interest
Despite Volkswagen’s historical success, its toxic governance structure has been under continuous criticism. You will be surprised to know that some even compares its autocratic characteristics and centralised decision-making to that of North Korea. In fact, it has been observed by commentators that Volkswagen shares have always been trading at a discount to reflect this.
It all started with Volkswagen’s board. In the first place, note here that German companies have both a supervisory board and a management board. The allocation of responsibilities between the two boards is unclear, and this strongly hinders a culture of social responsibility. Further, Volkswagen’s 20-member council is simply too large. A board this size means that it is relatively easy for the chief executive officer to obtain control.
Volkswagen also severely lacks diversity on its board. Out of its 20-member council, it only has one independent director. The majority of the remaining 19 directors are dominated by representatives of its three largest shareholders, including the Porsche family. As a business leader, you very well know how important diverse opinion and expertise is towards sound decision making. Without an outside voice, it was almost inevitable that Volkswagen induced itself into a downward spiral. Of course, this centralised board composition and large family holdings also gave birth to many power struggles, where directors have pursued their personal interest at the cost of shareholder interest.
Volkswagen also long suffers from the conflict of interest syndrome. It has been inherently difficult for Volkswagen to eliminate conflicts of interest given its autocratic environment. After the scandal was exposed, Volkswagen has appointed a new CEO and chairman, who previously held senior executive positions in the Volkswagen group. Whilst this provides numerous upsides, it makes it virtually impossible for the two to lead proper investigations into the scandal without incriminating themselves.
The inherent flaws in Volkswagen’s governance are best demonstrated through its 2012 appointment of its chairman’s wife to the board. She is a former kindergarten teacher and has no management experience whatsoever.
Having said these, you should re-examine your board and shake it up to introduce diversity and minimise entrenchment of thought. We recommend an ideal board size of 10 directors, with diversity in representation, gender, experience, diversity, and ethnicity.
A Culture of Transparency and Social Responsibility
Transparency across all levels of your company is crucial if you want your board to pick up the slightest risk of non-compliance. If lower levels of management at Volkswagen promptly exposed the malicious technology to the board, then perhaps it would have avoided a full-blown scandal. Unfortunately, however, the extremely centralised and autocratic nature of decision-making at Volkswagen made open communication impossible. Yes, it is embarrassing for your junior managers to point fingers at you, but it’s for the benefit of your company to ensure that they feel comfortable enough to do so.
It is likewise important for your employees to recognise and respect their social responsibilities. In the case of Volkswagen, employees are convinced by the autocratic executives that their sole responsibility is to achieve profit targets. Evidently, it was observed that its former CEO, Mark Winterkorn, regularly dismissed executives who failed to meet aggressive performance benchmarks. If there was a greater sense of moral obligation in the company, then perhaps employees would have exposed to the board the legal risks involved in employing the rogue technology.
All in all, for the long-term viability of your company, you should promote a culture of open dialogue. You need to capture the valuable opinions of your employees.
An Effective Compliance Program
You need to take a proactive approach to compliance. The right company culture mentioned above also needs to be complemented by a systematic compliance program. Your compliance program needs to contain formal procedures and a team of astute independent compliance officers equipped with the necessary investigative talent. The bigger your business grows, the more distanced your executives will be from everyday employees. Accordingly, you need to have an effective compliance system that identifies and prevents corporate wrongdoing.
The Bottom-line
Your company has unlimited potential and you need to know if your governance structure is stopping it from moving forward. You witnessed how Volkswagen’s toxic governance has led to its scandal and knocked $32 billion off its market value (in US dollars). Don’t be like Volkswagen. Ensure that your company has the ability to promptly identify and cater for the slightest violations of compliance.
What Should I Do Next?
Contact us if you would like further legal advice on Corporate Governance. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.