Vw Jetta Emission Scandal

1.  INTRODUCTION

The year 2015 was witness to one of the largest scandals that rocked the automotive industry, affecting millions of loyal customers, shareholders and stakeholders worldwide (Milne 2015).  The scandal, better known as ‘The Volkswagen Emissions Scandal’, was and is still as of today the subject of global speculation, disbelief, corporate analyses and outrage.  Volkswagen is one of Germany’s largest companies specialising in the automotive industry, with 202.5 billion euro’s in sales and a German workforce of 600 000 employees in 2014 (Stewart 2014).  The company\s primary goal is to become the world’s largest automaker company in sales, which was briefly achieved in 2015, whereas the secondary goal is to provide full employment to the German population (Stewart 2014).

In essence, the scandal involved the installation and use of “cheating software devices” by VW (Volkswagen) engineers, that enabled the vehicles to pass various environmental requirements by ‘gaming’ the system (Moore Stephen 2015), which was discovered by US (United States) scientists whilst doing an emissions experiment on various car brands and models.  According to Thompson et al. (2014), the US legal emissions limits according to EU law for diesel vehicles and light trucks are 0.043 g/km.  The US team of scientists from West Virginia University tested 0.016 g/km and 0.022 g/km for VW Passat and Jetta, respectively.  However, the team also wished to investigate ‘real-time’ emissions from the vehicles and found measurements of 0.610 – 1.500 g/km and 0.34 – 0.67 g/km for VW Passat and Jetta, respectively.  For the VW Passat, the ‘real-time’ emissions exceeded US limits by as much as a factor of 35 and a factor of 20 for the VW Jetta.

The device in question is specially designed to be installed into the engine’s management unit, where it is able to detect whether the vehicle is undergoing a diagnostic emissions test (Burt 2015).  If the device detected a test in process, it limited the amount of emissions but, once the device detects that the vehicle is not undergoing an emissions diagnostic, the controls are switched off to increase fuel efficiency and allows the engine to once again release large amounts of nitrogen oxide into the atmosphere (Burt 2015).

In SA (South Africa), the US emissions limit of 0.043 g/kg for diesel vehicles and light trucks is also considered a benchmark of the South African automotive industry.  The VW emissions scandal affected approximately 11 million vehicles globally, making it a problem for various markets (Armour 2016a).  Due to the problematic lack of good corporate governance, this paper shall strive to review the case, how the tools of good corporate governance were not applied, the impact of such a scandal and corporate governance behaviour has on the sustainability of VW and lastly, to make recommendations to both the Department of Trade and Industry and the SA Government to prevent such a happening from occurring.

1. DISCUSSION

A considerable amount of speculation exists regarding the VW emissions scandal.  Speculation whether such a scandal should not have occurred earlier due to the nature of the VW corporate structure, culture and history (Stewart 2015).  Other authors speculate whether the ‘gaming’ of emission protocols by VW was premeditated by management or if they really were none the wiser, or perhaps knew but due to wrongly applied incentives chose to ignore what was occurring (Armour 2016b; Chaleff 2015 and Stewart 2015).  Is it perhaps a problematic culture that hinders VW to embrace transparency and integrity as stipulated in King III?  The problem that exists at VW could have developed from a combination of all of the above.  Therefore this paper analysis the tools of good corporate governance, what they are, why they exist, how they should be implemented and how VW was sorely lacking in that particular aspect.  The subjects for consideration are the following:

1. The role of regulatory framework;
2. The influence of the Agency Theory;
3. The role of the board of directors and;
4. Ethical Theories.

1. Regulatory Framework

A good regulatory framework consists of a mix between regulation and self-regulatory measures, all guided by legislation and legal guidelines that may differ between countries (OECD 2015).  According to OECD (2015), a good regulatory framework assists corporate governance in transparency, as it promotes compliance to legal other regulatory requirements.  In the case of the VW scandal, there are several regulatory frameworks from several institutions/companies that were not in place, causing regulatory failures and the probability of such deceit and illegal behaviour to take place in the corporate environment.

1. Volkswagen

For several authors (Elson et al. 2017; Jung & Bin 2017 and Armour 2016a) the lapse in implementing a proper regulatory framework at VW was no surprise.  The corporate structure of the company and how the board is assembles have long since been under scrutiny, seen as an unhealthy situation (further discussed in Section 2.3).  With such a unique corporate governance structure, also known as ‘co-determination’, it is not implausible for regulatory failures to take place, making the deceit and illegal actions of the company possible.  Such failures in regulation could have resulted in management not knowing, at first, what was occurring down the supply chain.  The regulatory framework between the supervisory board (management) and employees failed, as the company claimed it was the engineers that did the deceiving.  These failures also result in the inability of the board to scrutinize management for improper behaviour, making it hard for management to meet the requirements as determined by legal and regulation authorities.

1. European Commission and other national regulators

The VW emissions scandal has shown the inability of the European Commission and other national regulators to implement legislation regarding the use of illegal software to ‘cheat; emission tests.  These institutions were unable to verify if inspections for such devices were ever conducted, since they were declared illegal in 2007 (Oliver et al. 2017).  The framework also seems outdated, as some regulators claimed they did not have a right to the carmaker’s software.  In order to properly regulate and implement the requirements set by legislation, the regulatory frameworks of these institutions need to be modernised.

1. Agency Theory

In the corporate environment, it is important to separate ownership from management, hence the Agency Theory (Saltaji 2013).  In a corporation, shareholders are classified as principals, and managers are classified as agents.  In essence, agents represent and protect the interests of the principals and are rewarded with incentives (Saltaji 2013; Bonazzi & Islam 2006).  The problem in the corporate environment is that the agents, i.e. the managers, may not always hold the interests of the shareholders in sight, but rather focus on themselves to promote personal achievement, job security and personal wealth (Saltaji 2013).