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Vw Jetta Emission Scandal

Autor:   •  December 2, 2018  •  3,498 Words (14 Pages)  •  5 Views

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According to Bonazi & Islam (2006), this is where the role of the board of directors plays an integral part. The issues of managers not acting within the best interests of the company and the shareholders may be minimized by providing the appropriate incentives. These may include bonuses, performance-related bonuses and stock options within the company. The separation of ownership (shareholders) and control within a corporation has inevitable agency costs as a result. The costs sprout from monitoring the agent, i.e. management, through the following means:

- Bonding the agent.

- Management prerequisites review.

- Financial audits.

- Limited decision making.

From these monitoring tools the importance of the role of the board of directors is highlighted. It is the board’s responsibility to monitor management in order to ensure that the company is sustainable (Stewart 2015). The board must also consist of representatives elected by shareholders. In the VW Company, there are fundamental conflicts regarding the Agency Theory:

- The representatives elected by the shareholders are not impartial. Many members are internal employees of the company, whilst other members are either the shareholders themselves or have familial ties to the shareholders.

- Ownership and management are not separated at the VW Company, therefore the board cannot successfully monitor management as there are fundamental conflicts between these two entities.

- The monitoring tools used to properly monitor management have not been regulated by the board. Performance driven incentives on the amount of sales made by the automaker and the increase in employment have given management and the board a skew view on what is really best for company’s sustainability.

- The board also took part in financial incentives in the form of performance pay.

- Agency costs occur not only between the board and management but also between shareholders and employees, as it is with a co-determination company.

- The role of the board

In Chapter 1 of the King III Report (2009), both the role and the function of a board are clearly defined under the following principles:

- Must be the focal point for good corporate governance.

- Ensure the corporation acts as a good corporate citizen.

- Promote ethnical culture within the corporation.

- Appreciate that performance, sustainability, strategy and risk are inseparable.

- Sustainability should be an opportunity.

- The CEO shall be appointed by the board and delegation of authority established.

- Risk management.

- Must always act in adherence to what is best for the company.

- Conflicts of interest must be managed.

- A risk-based internal audit process must be in place.

- The integrity of financial reports must be ensured.

- Internal financial controls must be reported on.

- Material matters that may concern the company must be disclosed by the company.

- Disputes of either internal or external nature must be resolved in an effective and efficient manner as soon as possible.

- Ensure the corporation has a compliance framework that is implemented to ensure no contravention of any regulations or laws.

- When financial stress is place upon the company, the board must have rescue proceedings in place.

From the principles specified by King III, it is not difficult to comprehend the manner in which the board of VW did not fulfil their role. Principle (i) is not adhered to by the VW board, as they do not have effective control over management and the company. They did not exercise leadership, integrity and good judgement in directing the company, as is evident from the scandal and the time period such deceit was able to exist. The board did not ensure that the company act as a good and responsible corporate citizen, as they violated laws and regulations and undermined the company’s sustainability of both its natural and social environment.

The board does not promote an ethical structure within the company, and the different ethical theories applicable to this case shall be discussed in Section 2.4. The board’s goals are also in conflict with each other, therefore not ethically sound. Sustainability is a key component when dealing with and deciding strategic processes, risk and the purpose of the company. The board of VW did not keep the sustainability of the company in mind or consider it as a business opportunity (discussed further in Section 2.5). It would also seem with Ferdinand Piëch as chair of the board, the proper delegation of power was not achieved. His influence was particularly noted when he appointed his fourth wife as a board member, despite objections from other members of the board. She had no experience business or business processes, being a former kindergarten teacher (Stewart 2015).

The board did not or was not able to act within the best interest of the company. The best course of action would have been for the board, once they became aware of the devices and all the complications it courts, to make it public to all shareholders and commit themselves to an internal investigation. This was not the case at VW, as the goals set out by the board was briefly met in 2015, with record sales and employment. Unfortunately, these goals did not take into account the best interests of the company, i.e. sustainable growth and integrity.

Conflicts of interest have played a major role within the VW board of directors and management. King III (2009) clearly states that when a member of the board is also a shareholder/majority shareholder, he/she should accept and recognise possible conflicts of interest and strive to rise above those conflicts and always commit him/herself to what is best for the company. In the VW emissions scandal, directors could have preferred, despite claims to the contrary, to keep using the devices in their vehicles, knowing that as shareholders they will be able to not only profit through performance based on incentives, but also

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