Toxic governance: an overview of the Volkswagen saga

Friday, 13 November 2015


    The emissions scandal at Volkswagen has highlighted a number of governance issues relating to board oversight, director independence and corporate culture.

    Volkswagen: System failure

    Financial Times, November 2015

    Problems at Volkswagen Start in the Boardroom

    New York Times, September 2015

    In September 2015, Volkswagen AG (Volkswagen) admitted to installing illegal software (known as a “defeat device”) on up to 11 million cars worldwide, including 91,000 vehicles in Australia.

    The illegal software was deliberately designed to represent lower nitrogen oxide (NOx) emissions to satisfy levels required by testing agencies in the US. However, under normal driving conditions, the vehicles produced emissions that were up to 40 times higher than permitted levels.

    Since making these admissions, Volkswagen has been under investigation in the US, Germany and France. It has also been undertaking its own internal review.

    Volkswagen has also admitted that it understated the carbon dioxide and fuel consumption figures on approximately 800,000 vehicles.


    It is unclear at this stage who, within Volkswagen, authorised the installation of the “defeat device” software and/or had knowledge of its use.

    It has been suggested that the illegal software may have been installed as early as 2008, shortly before Volkswagen introduced its new generation of “clean diesel” vehicles to the US market.

    Volkswagen has temporarily suspended a number of executives, managers and engineers as part of its own internal review, including some board-level executives at Volkswagen subsidiaries.  

    Separate to the NOx emissions scandal, Volkswagen engineers have admitted to fabricating certain carbon-dioxide and fuel consumption figures. The engineers claim to have manipulated the data due to alleged “unreasonable demands” of Volkswagen’s former CEO, Dr Martin Winterkorn.

    The investigation is yet to reveal whether any of the 20 directors on Volkswagen supervisory board had knowledge or involvement in the emissions scandal.


    The emissions scandal has revealed a number of issues with Volkswagen’s governance and corporate culture. It has also highlighted key differences between German and Anglo-Saxon governance systems.

    In Germany, publicly listed companies have a two-tier governance system, which includes a supervisory board and a management board. The supervisory board includes non-executive directors appointed by the shareholders and, in companies with over 2000 employees, elected representatives of its employees.

    The German Corporate Governance Code (DCGK) requires that supervisory boards of publicly listed companies have an “adequate number” of independent directors. At least one independent director must have financial expertise to chair the audit committee.

    Volkswagen’s supervisory board has a unique governance structure which reflects its origins as a company built on alliances between private, government and union interests. Its shareholders include the Porsche-Piëch family (52.2% / 5 seats), the state of Lower Saxony (20% / 2 seats), Qatar Investment Holdings (17% / 2 seats) and the sole independent director, Ms Annika Falkengren (10.8% / 1 seat).

    The remaining 10 seats on Volkswagen’s supervisory board include a mandatory member of its Management Board, 3 Union representatives and 6 Works Council representatives, which together represent Volkswagen’s 600,000 employees.

    Commentators have suggested that Volkswagen’s governance structure provided greater stability for shareholders and creditors by allowing the company to take a longer-term view on strategy and operations.

    Other commentators have suggested that the lack of independence in Volkswagen’s governance structure increased the risk of “entrenchment”. Power struggles between controlling shareholders and unions may have discouraged open discussion and led to the board’s monitoring function being compromised.  

    It has also been claimed that Volkswagen’s corporate culture “fostered a climate of fear” among its employees, which may have contributed to the scandal. Volkswagen’s former Chairman, Mr Ferdinand Piëch, was known to favour an autocratic style of leadership that centralised decision making among a small group of advisors. Volkswagen’s former CEO has also been said to have utilised “high pressure management methods” and fired executives who did not meet aggressive sales target 

    Volkswagen Group of America, Inc.’s CEO, Michael Horn, has stated that Volkswagen’s culture involved “pressure in the system” as well as “cost pressure”, and this may have resulted in corporate profits being put before people.


    Volkswagen has made a number of changes to its governance arrangements and corporate culture since the crisis, including the appointment a new CEO, Mr Matthias Müller, and a new Chairman, Mr Hans Dieter Poetsch.

    Mr Poetsch has described the present crisis as “an existence threatening crisis for the company”. Mr Müller has also publicly stated that Volkswagen will “develop and implement the most stringent compliance and governance standards in [the] industry”.

    Volkswagen has also announced that it will appoint a former German federal judge as its first management board member for integrity and legal affairs. Volkswagen has also taken on a new chief of corporate strategy as it decentralises into four holding companies which will run its 12 different brands.

    The appointment of independent directors and public statements from the supervisory board may signal a new era in Volkswagen’s governance and culture.

    "We need in future a climate in which problems aren't hidden but can be openly communicated to superiors" said Mr Bernd Osterloh, Chairman of the General and Group Works Council of Volkswagen.

    "We need a culture in which it's possible and permissible to argue with your superior about the best way to go."


    The emissions scandal at Volkswagen highlights the critical importance of good governance and organisational culture and provides a number of key lessons for Australian boards and directors:

    1. Reconsider your board composition: The lack of independence on Volkswagen’s supervisory board may have hindered its oversight of management. Boards should also consider whether their boards have the appropriate mix of skills and expertise, and also ensure that the size of the board does not become unwieldly in making decisions.
    2. Consider the importance of ESG: Following the emissions scandal, it is likely that stakeholders will place additional scrutiny on governance arrangements as well as disclosure of environmental data. Political pressure on disclosures of ESG data is also likely to increase in the lead up to the UN Climate Change Conference in Paris.
    3. Check for conflict between the Chair and CEO: Volkswagen’s former Chair, Mr Piëch, resigned from Volkswagen’s supervisory board in April 2015 after a failed attempt to oust its former CEO, Mr Winterkorn. Boards should consider whether underlying differences between the Chair and CEO (e.g. personality or leadership style difference) are hindering board decision making or organisational culture.
    4. Set the tone from the top: Some commentators have suggested that enhanced whistle-blower policies may be an effective way to monitor issues within a company. However, a good organisational culture set by the management and board may deem this unnecessary. 

    At the root of corporate crisis is culture”, says Lady Barbara Judge, Chairman of the Institute of Directors in the UK. “If you train your employees to do the right thing they will, but it starts from the top. You need a lot of effort to regain their trust."

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