CIA – 3(A)

Financial Management
Company – Volkswagen

Submitted By

Litty Chacko- 2027649

Abhimanyu Singh- 2027607
Kenneth Tony George- 2027620

Submitted to

Prof. Aniruddha Oak

MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST (DEEMED TO BE UNIVERSITY), BANGALORE
 Volkswagen Emission Scandal
Introduction

The agency problem is generally a conflict of interest inherent in any courting wherein one
party is predicted to act in every other's best pursuits. In corporate finance, and the agency
trouble refers typically to a struggle of interest between a business enterprise's control and its
stockholders.

The agency problem doesn't exist without a connection between a principal and an agent. In
this circumstance, the agent plays out an errand for the benefit of the principal. Agents are
usually drawn in by administrators because of various ability levels, diverse work positions, or
limitations on schedule and access. The organization issue doesn't exist without a connection
between an agent and a principal. In this circumstance, the agent plays out a task for the benefit
of the principal. The three main types of agency problems are stockholder’s v/s management,
stockholder’s v/s bondholders/ creditors, and stockholder’s v/s other stakeholders like
employees, customers, community groups, etc.

About the Company

Volkswagen is undoubted "one of the world's leading automobile manufacturers and the largest
carmaker in Europe, with its headquarters located in Wolfsburg, Germany. They are engaged
in the manufacturing of vehicles and engines and the sale of commercial and passenger cars.
Being one of the leading manufacturers, they comprise twelve brands from seven different
countries.

Volkswagen was established in 1937. With the rapid growth in the automobile sector, the
company managed its expansion of operations to an international scale by setting up
subsidiaries in countries like Canada, Mexico, etc. As of May 2015, the company was operating
119 production plants in 31 countries across Asia, Europe, the Americas, Africa.
Furthermore, Volkswagen provides a series of financial services to its customers and dealers,
like customer and dealer financing, banking, leasing, insurance activities, and fleet
management.

Volkswagen's stakeholders can be divided into two categories, external and internal
stakeholders. The internal stakeholders include the company's shareholders, Board of
Management, Supervisory board, and lower-level employees. In contrast, the external
stakeholders include its suppliers, customers, business partners, and local communities and
society.

Agency Problem
Volkswagen currently faces a complex agency problem, which only came to be known
recently as a series of investigations conducted by the International Council on Clean
Transportation (ICCT) in Washington D.C., which tested emissions from three of
Volkswagen's light-duty diesel vehicles under more realistic conditions comparing to those
possible in the lab, revealed that Volkswagen vehicles with diesel engines might be emitting
higher rate of nitric oxide and nitrogen dioxide than what is estimated by laboratory tests

Explanation of the case

Governments around the globe test vehicles to ensure vehicles satisfy mission guidelines.
Holding fast to these guidelines can be costly for automakers, so Volkswagen concocted a
sharp thought: The organization put a particular type of software in around 11 million of its
diesel-controlled vehicles to recognize when those cars were being tested for emissions and
change their results. Software distinguished when vehicles were being tested for consistency
with emissions controls; the software at that point changed the motors, so they passed. Be that
as it may, in typical use, the engines radiated unmistakably more contamination, including up
to multiple times more nitrogen oxide, which adds to asthma, bronchitis, and
emphysema.

In any case, when this alleged "diesel fraud" was found in September 2015, it ended up being
more expensive for the organization than basically keeping the principles. After the
embarrassment emitted, VW's monetary circumstance was harmed from overall reviews, loss
of deals, and diminished securities exchange cost. The total expense of VW's misfortunes was
at this point to be resolved because of the monstrous estimations and early time of the
embarrassment. Notwithstanding, specialists assessed the shame would cost a considerable
number of dollars or past to the organization.

Although the outrage emitted internationally, it influenced Europe more than the rest of the
world since diesel vehicles represent around 41 percent of every European vehicle. The EU
had boosted and financed the creation and acquisition of diesel vehicles over gasoline models.
Germany had the most vehicles outfitted with the thrashing gadget (about 2.8 million cars).
The U.K., what's more, France were the second and third nations, separately, with about 1.2
million and 984,000 VW diesel vehicles with the destruction gadget. A large portion of the
countries with manipulated vehicles was European. The U.S. positioned the fourth with
500,000 influenced cars, while China had just 1,950 impacted vehicles
Number of Volkswagen Diesel cars Affected by the Defeat System by Country

Source:(http://www.ibtimes.com/volkswagen-diesel-scandal-update-2015-affected-countries-
are-largely-north-america-2137284)

Detailed Analysis

Diesel vehicles were known for benefits over gas vehicles, such as strength, cost-sparing of
early fixes, eco-friendliness (i.e., driving up to 30 percent more miles for every gallon) lower
levels carbon monoxide. Numerous vehicle makers, including VW, created turbochargers to
build ignition exactness and innovation to limit nitrogen discharges. VW's diesel vehicles had
a nitrogen oxide trap in their fume’s framework
Volkswagen Diesel emission Deception
Due to well-being concerns, the International Council on Clean Transportation, a not-for-profit
gathering, proposed in 2013 on-street emanation tests for vehicles in the U.S. California
controllers participated in the undertaking, trusting that diesel vehicles in the U.S. produced
fewer toxins than their European partners because of a stricter public norm. California Air
Resources Board, known as CARB in May 2014, left on an examination to test VW diesel
models out and about. Following the request, specialists at West Virginia University found the
extreme degree of nitrogen oxide emanation. The emanations level was multiple times higher
than the U.S. guideline limit. After the examination, the Environmental Protection Agency
known as the EPA and the CARB rejected the offer of VW's 2016 diesel models. The
organization conceded its diesel emanation misdirection in September 2015.

Eleven million of Volkswagen's diesel vehicles were outfitted with the misleading
programming to cheat by mistakenly bringing down the emanations. In detail, the organization
affirmed that Volkswagen-marked cars represented around 5 million out of 11 million. The
remainder of the vehicles were auxiliary marked (i.e., 2.1 million Audi-marked, 1.2 million
Skoda-marked; 700,000 Seat-marked, and so on). Among 11 million, there was an aggregate
of around 500,000 U.S. 4-chamber diesel motor models with the misleading programming
These are the factors that created a climate for the scandal:
1.Austere leadership styles
2.Corporate governance
3.Drawbacks from family feuds and nepotism

Austere leadership styles

• Ferdinand Piëch, who was the grandson of Ferdinand Porsche, served as CEO for 10
years at VW until he became the VW's supervisory board chairman in 2002.
• This ambitious former CEO and engineer were notorious for his toxic leadership style
in managing his employees by being authoritarian and coercive. His influence over his
successors continued
Volkswagen's insular governance

• This was not the first time that VW cheated on emissions standards. In the 70s, VW
was one of the first companies accused of loading their cars with a defeat system to
camouflage the emissions level.
• VW's distinctive, insular governance culture was a roadblock to a problem's
comprehensive inquiries, impeding effective organizational learning, and preventing
repeated errors.
• The owner families (both the Porsche and the Piëch family), the government of Lower
Saxony, and the unions formed under the supervisory board, working very closely
together for a shared goal of full employment and production. This powerful board
approved all the critical decisions of the company.

Drawbacks from family feuds and nepotism

• The feuds between the Porsche and Piëch families in business increased the risks of
letting emotions interfere with making sound business decisions. As referenced by the
history of owner families, Ferdinand Porsche, the Porsche automobile company and the
VW Beetle engineer, had a son and a daughter, who later acquired the surname Piëch
from her husband.
• With extensive power in ownership, the families had been involved in the management
of VW and Porsche. Ferdinand Porsche, Wolfgang Porsche, and Ferdinand Piëch
served as chairmen in Porsche and VW's supervisory board.
• Deeply divided, Porsche and Piëch families had battled over power and money. These
family feuds in business led to spontaneous emotions, often influencing and
complicating business judgment and decisions. For instance, Piëch's attempt to
overthrow Winterkorn triggered a power struggle between the two families.
The economic consequences:

• VW experienced enormous economic damage. There was a net loss of $1.84 billion
since the scandal occurred. Volkswagen cars' sales dropped from 2.44 million in
September 2014 to 2.35 million in September 2015. The VW's stock was sold off
enormously on Monday, September 21, 2015.
• It resulted in the loss of $16.9 billion of its former market value (Eisenstein, 2015).
VW's stock price plummeted from $38.03 on September 17 to $23.07 on October 2
after the case was revealed.
• VW's stock was suspended from the Dow Jones Sustainability indexes. Dow Jones
Sustainability indexes ranked high-performance companies in their industries in terms
of economic and sustainable development).
• Furthermore, according to a German online car dealership, VW diesel cars' demand
decreased from 40 to 30 percent. The U.K. price data firm revealed that VW diesel cars'
value exceptionally dropped by 0.2 percent in September during the overall auto market
value increase. For the first time in fifteen years, VW announced its quarterly operating
loss of about $3.9 billion in a third-quarter

Aftermath
It had all been continuing for quite a long time. Numerous workers and executives—to this up
'till today nobody knows the number of—knew precisely the thing they were doing and why.
Here's a rundown of the harm up until now:

1. Damage to the Business: Days after the outrage broke, VW booked a $7.3 billion
charge to income, fully expecting fines, case costs, and other pay-outs. That was
idealistic. To date, the organization has booked $35 billion of charges to income,
offering little motivation to assume that is the last number.

2. Damage to Shareholders: It's challenging to ascertain decisively, however in the

scandal's initial two months, the organization lost 46% of its worth, or $ 42.5 billion.
Currently, Germany's DAX index is about where it was in September 2015, and the
S&P 500 is up 68%, yet VW stock is as yet 35% underneath its pre-outrage cost.

3. Damage to sellers: VW paid its U.S. sellers $1.2 billion to repay them for misfortunes.
However, their all-out misfortunes have not been determined, and misfortunes to many
businesses overall are unknown.

4. Damage to the image of the organization: The estimation of the VW brand plunged
after the scandal. The brand has recuperated a portion of its lost ground in Brand
Finance’s yearly positioning, yet not every last bit of it. Pre-outrage, it was the world's
18th most crucial brand; after five years, it's 25th.
 5. Damage to employees: VW declared in 2016 it would discard 30,000 positions
worldwide as it upgraded activities in the wake of the outrage

6. Resignation: The Chairman of Volkswagen's Board of Management Martin

Winterkorn assumed full liability for this issue, and in the long run, ventured down on
September 25, 2015.

German investigators declared outrage related charges against eight more VW

representatives. VW leader Rupert Stadler initiates the trial is planned to go on until 2022.
Winterkorn's trial, on charges of misrepresentation and market control, hasn't been scheduled
at this point.

Learning

• The critical learning from Volkswagen is the importance of environmental

commitments and their fulfilment.
• Even though Volkswagen heavily emphasizes its concern for the environment and its
commitment to protecting it, recent investigations showed that the company had made
a deliberate attempt, with a unique engine management software program, to
manipulate the results of emissions tests conducted on its diesel vehicles, to underreport
their emissions by a significant margin.
• Volkswagen's transgression of global emissions standards has been doing severe
damage to the environment and will now damage the company in terms of its finances,
sales, and reputation.
• The history of nepotism and authoritarian leadership style has caused them to suffer
various significant markets due to their corporate governance style.

Conclusion:

The Volkswagen scandal case is a unique case where the investigations have shown the world
the flip side of their corporate governance style, which has caused damages to the company in
terms of brand image and revenue. The company's core problem has existed for ages, and the
company must bring reforms in the operation procedure and counter nepotism by bringing in
transparency among the management. Transparency must be maintained at all management
levels to make sure the stakeholders still believe in the company's core idea.

References:
• Jung, Jae & Park, Su. (, 2017). Volkswagen's Diesel Emissions Scandal. Thunderbird
International Business Review. 10.1002/tie.21876.
• McHugh, J. (2015, October 12). Volkswagen diesel scandal update 2015: Affected
countries are largely in North America, Europe, but Asia not immune. International
Business Times.
• 5 years in, damages from the VW emissions cheating scandal are still rolling in. (n.d.).
Fortune. Retrieved:https://fortune.com/2020/10/06/volkswagen-vw-emissions-
scandal-damages/
• McHugh, J. (2015, October 12). Volkswagen diesel scandal update 2015: Affected
countries are largely in North America, Europe, but Asia not immune. International
Business Times.
• Retrieved from:http://www.ibtimes.com/volkswagen-diesel-scandal-update-2015-
affected-countries-are-largely-north-america-2137284