Volkswagen

Volkswagen: A General Analysis of Corporate Governance

by Dr Alessandro Merendino and Prof. Marylyn CarriganCentre for Business in Society

There seems a dreadful inevitability within business today that sooner or later the greatest colossus are destined to collapse under the weight of frauds and governance scandals. We only have to reflect on some of the major scandals of the last couple of decades: Enron, Wal-Mart and Lehman (USA), Parmalat, Cirio and Alitalia (Italy), Royal Bank of Scotland, Tesco (UK), Veolia (France) and now Volkswagen in Germany.

When scrutinized, there are threads of commonality running through all these scandals.

Firstly, much like a product ‘life cycle’ all companies go through birth, growth, maturity and decline leading to a rebirth or death of the company. We can speculate that VW is experiencing the decline phase, which is not directly connected with the product life cycle. This means that this corporate crisis may not be related to the products’ obsolescence. Indeed, while the car industry is still surviving, VW the organization has now entered in the precarious decline phase that can lead to either a rebirth or a death. The board of directors, also referred to as ‘the fire department’, has been activated to douse the blaze, i.e. the fraud scandal. In some cases, when a firm is about to be dissolved with the inevitable spillover negative impacts in the economy (customers, suppliers, employees, etc.), the government may take over it, as has already happened in previous major company scandals that have been perceived to threaten national, or at the very least, local, stability (e.g. in Italy, in the UK, etc.).

Second, after any major crisis, scandal and fraud, there is a step change in the dynamics of the firm (internally and externally) demanding and driving change. The board of directors, who are tasked with steering the company, has the power to make a difference in this respect. In other words, the top management, or what is often referred to as the ‘elite’ class, needs to be replaced; indeed there are almost immediate stakeholder demands that they are. The new CEO and eventually the new Board now face a pivotal role, i.e. to recover the company’s reputation and financial stability, and to build trust among investors and other key stakeholders. Indeed, it seems that when the scandal breaks, the often silent board members suddenly find their voice as they strive to fix ‘the gaping holes’ within the firm as quickly as possible. Time is one of the key success factors, particularly, as in the case of VW, when share prices seem to be tumbling on an hourly basis, as the scale of each new governance misdemeanour emerges.

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Image: Shutterstock/Simone Mescolini

Thirdly, a renewed version of corporate governance codes or guidelines may be released by regulators and legislators, as has happened in the wake of previous international scandals, in attempts to plug those governance holes exposed by the corporate crisis. The renewed version usually strengthens the role of independent directors (for instance by suggesting an increase in number) and committees that are entitled to monitor and control the top management. Thereby, it seems that regulators are more keen on introducing monitoring tools to prevent future crisis, for instance by increasing the number of independent directors, appointing new internal committees (risk and audit ones), etc. Unfortunately, the world of business does not seem to work so easily. In fact, it is not just by increasing the number of independents that the board could perform better. Indeed, some other internal and behavioural aspects that corporate governance codes cannot encapsulate may play a paramount role. More concretely, will the board members of VW be able to critically and constructively support the new CEO? Will the board members be powerful, charismatic and sufficiently knowledgeable enough to control, advise and provide resources based on their networks to support the new CEO? Will the latter be able to listen to board members and to build a constructive discussion with them? Will the chairperson be capable enough to mediate all the contrasting interests and ‘voices’ coming from CEO and independents? Will the chairperson have the capabilities to stimulate a fair and fruitful debate within the boardroom? And perhaps most importantly, will they possess the strong moral compass that is necessary to guide the company to a more responsible and successful future?

We cannot predict the future of VW but based on past scandals experiences, it seems that VW has all the potential to become again one of the leaders in the cars industry, due to the new CEO, co-operative behaviours among directors and the support of the chairman.

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