Corporate Governance 1st individual assignment

I think that the Volkswagen scandal is a corporate governance failure because it provides
evidence of the fact that the companys corporate structure lacks an appropriate control system
ensuring that the management pursues the shareholders interests. In fact, one of the main tasks of
effective corporate governance should be the one of minimizing the agency problems, which arise
from the discrepancy in the interests of shareholders and management. In the Volkswagen case, it is
clear that the system of checks and balances is defective and therefore the management interests
have prevailed.
This view is also supported from real data. In fact, some of the analysts had already raised
doubts upon Volkswagen corporate structure.1 For instance, the Morgan Stanley Capital
International (MSCI) has developed the MSCI Corporate-Governance Quality Indexes aimed at
assessing the profitability of a company based on sustainability of corporate governance structures.
Volkswagens corporate governance score was far below the one of its competitors, being in the
28th percentile of MSCIs raking. Moreover, VWs score has been decreasing since 2014 and this
could have been a red flag of corporate governance scandal.
Several players are responsible for the scandal. First of all, managers of the company failed to
act in the shareholders interests. Instead, they acted in their own interest of enhancing personal
wealth. Their aim was the one of increasing short-term profitability of the company and promoting
the increase in stock prices so that they would have personally benefited in terms of compensations.
Secondly, I think that shareholders failed to exercise the appropriate amount of control and
oversight over the companys operations. Shareholders have the ultimate control over the
companys management through their votes in the general meetings. Therefore, even though they do
not have direct management power, they still have the most important role in the companys
decision making.
I think that the major shareholders are the ones who have been damaged the most by this
scandal. In fact, their returns will be drastically lower due to economic losses in terms of fines, legal
charges and mostly in terms of lost profits. The costs for the company will be huge. The fines that
the company will have to pay amount almost to 20 of billions of dollars. Moreover, the company
might have to refund the retailers and to compensate for damages caused to consumers. However,
the most important damage to the company concerns its reputation. Environmental concerns used to
represent an important element of differentiation for the companys image. As a consequence, this
scandal undermines the credibility of Volkswagen and will have serious repercussions in the future
of the business. In order to face the costs of the scandal, the company has announced a saving plan
that will allow to reduce expenses by 1 billion a year. In addition, some observers believe that
Volkswagen might also be forced to sell one of its divisions or increase its share capital. As we have
seen shareholders suffered an important damage and, indeed, they sued the directors claiming a 40
billion damage.
I think that the appointment of Matthias Mller was fundamental in order to reestablish a good
reputation of Volkswagen. It is a good signal for the market. Mller might be the right person to
help the company rise from the scandal thanks to its competences in the automotive industry since
he has worked for both Audi and Porche. Moreover, he is an external player to the scandal,
contrarily to other former VW directors and this is also a favorable aspect.
1 Grene, S. and Marriage, M, VW investors ignored corporate governance warnings,
Financial Times.