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Individual Assignment

Globalization, Societies and Institutions - 30282

The article Volkswagen: A System Failure written by Richard Mylne (Financial Times-

November 4, 2015) outlines the challenges faced by the German carmaker amidst a huge public

relations crisis. Interestingly enough, the article opens up by linking all three big Volkswagen

(VW) scandals to the factor of “the so-called VW system” (Mylne, 2015). This system is one

where connections run deep within management, workers and the government, all the while

seemingly disrupting the company’s corporate culture. And, taking the definition of corporate

culture to be “the behaviors that determine how a company's employees and management

interact and handle outside business transactions” (Tarver, 2019), these behaviors are further

complicated by the fact that Volkswagen is largely family-owned, a characteristic that brings its

own set of difficulties to the table.

The latest VW scandal was that of tampering its vehicles’ emissions software in order to

make it seem like the cars were not emitting as much CO2 as they were and thus be able to

pass the strict US emissions tests (Mylne, 2015). A fraud that, funnily enough, would not have

been discovered had it not been for three university students in West Virginia measuring

emissions in passenger cars for the Center for Alternative Fuels Engines and Emissions (Welch,

2019). This essay will explore first and foremost, who, if anyone, was responsible for this

massive and incredibly relevant scandal amidst a climate change campaign that has become

more energetic than ever. Secondly, the essay will investigate whether or not the subsequent

changes made to VW after the crisis were sufficient and last, consider whether or not this

particular VW scandal came about as a failure of the infamous German model of capitalism.
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To understand the corporate governance model of VW, one must first understand the

origins of the German company. It was founded by Hitler in 1937 at a time where it was critical

to raise German morale and produce a relatively inexpensive car for the people. In fact,

Volskwagen means “the people’s car” in German (Encyclopedia Britannica, 2020). From the

beginning, Ferdinand Porsche was responsible for designing the car and a factory was built in

the Lower Saxony state. However, before they could even begin mass production, World War II

began, and the factory was used to build military equipment instead. After the war, the British

rebuilt the by-then destroyed factory and by 1960, the company had sold 60 percent of its stock

to the public, effectively becoming privatized (Ibid).

Nowadays, VW has several dominant shareholders including the Porsche, Piëch, Qatar

and Lower Saxony families (Mylne, 2015) and to say its internal structure is complex would be

an understatement. Firstly, strangely enough, there is no one board of directors. Rather, there

is a supervisory board and a shareholders’ board. In the supervisory board, half of the seats are

reserved for workers, all of which are currently German. In the shareholders’ board, a majority

of the members come from one of the aforementioned families and those who don’t still have a

very close relationship with the families and the company (Ibid). The management of the

company was clearly compromised with a strong conflict of interest and the former chairman

Ferdinand Piëch can largely be blamed for the emissions scandal given that it was he who

allowed an atmosphere of confusion and inefficiency to persist in the company for many years.

In other words, VW was a company that unfortunately fell trap to its origins of close

relationships among management, preventing actual positive change from ever happening

because the families were constantly protecting each other.

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After the public relations crisis, VW underwent significant changes in its supervisory

board, with a new chairman taking over, Matthias Müller as well as a new head of brand,

Herbert Diess (Mylne, 2015). Since his induction, Dr. Diess has put in place a new program

called Transform 2025 which has, at its core, a transformation of the company in order to

improve brand positioning (Welch, 2019). Not only is it clear that the company has learned the

right lesson from the scandal in that it pledges to decentralize management in the following

years, but also, it attempts to right its wrongs through the Transform 2025 initiative by

investing funds into e-mobility and electric cars, with some even calling the company a

potential competitor for Tesla (Welch, 2019). The initiative additionally plans on entering a

niche market in the USA with large SUVs and limousines (Ibid), giving the impression that VW

admits its mistake in the North American country but will regardless fiercely battle for a share

of the market in a nation it tends to underperform in (McGee, 2018).

However, this is not all to say that the changes made in VW in management and

Transform 2025 are sufficient. In reality, the company still has long ways to go if it truly wants

to achieve its goal of decentralizing management. Mr. Müller and Dr. Diess were perhaps great

candidates to take over VW but this does not take away from the fact that the former used to

hold an executive position at Porsche and the latter was formerly a BMW executive (Mylne,

2015). It is clear that the corporate governance still does not possess sufficient independence

between the directors to truly, efficiently oversee management, but it is a start. This “start” is

further evidenced by the fact that as of 2018, the company had paid off close to two thirds of

what was owed in compensation and fines for the scandal. Additionally, though many critics

saw the scandal as the end of VW, it managed to recuperate by cutting down costs and raising
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profitability- to the point that it is now outperforming Toyota and General Motors in sales.

(McGee, 2018)

The German model of capitalism combines unlikely actors together: labor unions and

“corporate efficiency” for one as well as well-paid workers with substantial unemployment

benefits all the while keeping actual levels of unemployment fairly low. Under this model,

bosses and workers cooperate in an extraordinary change of circumstance as the country was

once called “The Sick Man of Europe” (Philips, 2015). Germany has seen massive economic

growth in the past few years and some observers assert German capitalism as the catalyst for

this change. In particular, the system seems to work well thanks to the “opening clauses” in

labor contracts. These allow companies who are undergoing financial stress to “opt out of

union contracts”. By 2005, three fourths of firms had contracts including such clauses and they

were put to test throughout the financial crisis of 2009. Germany was able to minimize

unemployment during that time because the government came in with subsidies to prevent

inevitable layoffs. This allowed “German manufacturers to keep tie with skilled workers” and

keep producing despite the crisis (Ibid).

On the other hand, the German model of capitalism is nowhere near perfect, and the

VW scandal proves that. The so-called “VW Law” that was put into place by Peter Hartz

“protects the company from a hostile takeover” (Münchau, 2015) and keeps a large amount of

power centralized in high management. This law maintains government control in a privately-

owned company in a sector that is one of the biggest contributors to employment in the

country (Philips, 2015). The fact that under the German model of capitalism workers and unions

have a strong say in how the company works can push a company to take a risky decision only
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to guarantee that the German stakeholders are supported. Thus, the evidence suggests that the

VW emissions scandal was partly caused by an overreliance on German management. While it

is understandable that the German political system dislikes foreign takeover (Münchau, 2015),

it should also be understood that not including foreign perspective limits the company’s growth

and can lead to close-minded decisions such as tampering with the software that measures

emissions in vehicles.

To conclude, the supervisory board of Volkswagen was largely responsible for the

scandal, despite what any director of the company may say to protect their reputation. What

did not work in VW was that there was no one to act as “counterweights” to the families

(Mylne, 2015) and to challenge what was accepted as traditional management. After the crisis,

Volkswagen definitely learned the right lessons in the sense that they changed management

and came up with a plan that protects the environment to make up for what could be perceived

as carelessness. However, even though the changes are a step in the right direction, they are

not sufficient to make up for the scandal and years of inefficient managing. The company must

keep striving for better and eventually achieve a supervisory board where actors are

independent from one another and have no prior bond to the brand. Lastly, the scandal was a

clear failure of German capitalism which goes to show that while the model may work

sometimes, it may not be best for certain industries such as the automobile industry where a

certain aura of innovation and self-improvement are required to stay alive.

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References

McGee, P. (2018, January 18). What went so right with Volkswagen's restructuring? Retrieved April

23, 2020, from https://www.ft.com/content/a12ec7e2-fa01-11e7-9b32-d7d59aace167

Mylne, R. (2015, November 4). Volkswagen: System failure. Retrieved from

https://www.ft.com/content/47f233f0-816b-11e5-a01c-8650859a4767

Münchau, W. (2015, October 4). Volkswagen's threat to the German model. Retrieved April 23,

2020, from https://www.ft.com/content/82315c6a-68fe-11e5-a57f-21b88f7d973f

Phillips, M. (2015, August 9). Germany's bizarre version of capitalism-where bosses and workers

actually cooperate-is winning. Retrieved from https://qz.com/452076/this-just-in-german-

capitalism-has-won/

Tarver, E. (2020, January 29). How to Tell If Your Corporate Culture Is Healthy. Retrieved from

https://www.investopedia.com/terms/c/corporate-culture.asp

The Editors of Encyclopaedia Britannica. (2020, January 10). Volkswagen Group. Retrieved April

23, 2020, from https://www.britannica.com/topic/Volkswagen-Group

Welch, J. (2019). The Volkswagen recovery: leaving scandal in the dust. Journal of Business

Strategy, 40(2), 3–13. doi: 10.1108/jbs-04-2018-0068