Corporate Governance Failures at Volkswagen

Every corporation should have a strong, independent board of directors that is well informed about the companys performance, guides and judges the CEO and other top executives, has the courage to curb management actions the board believes to be inappropriate or risky, certifies to shareholders that the CEO is doing what the board expects, provides insight and advice to management, and debates the pros and cons of key decisions and actions. Illustration Capsule 2.4 discusses how weak governance at Volkswagen contributed to the 2015 emissions cheating scandal, which cost the company billions of dollars and the trust of its stakeholders. Although senior managers have led responsibility for crafting and executing a company's strategy, it is the duty of a company's board of directors to the shareholders to play a vigilant role in overseeing management's handling of a company's strategy-making, strategy-executing process. A company's board is obligated to (1) ensure that the company issues accurate financial reports and has adequate financial controls; (2) critically appraise and ultimately approve strategic action plans; (3) evaluate the strategic leadership skills of the CEO; and (4) institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, most especially those of shareholders.

Q1. In what ways did Volkswagen fulfill the requirements of effective corporate governance?

A. Properly oversaw the companys financial accounting and financial reporting practices.

B. Evaluated the caliber of senior executives strategic leadership skills.

C. Critically appraised the companys direction, strategy, and business approaches.

D. Instituted a compensation plan that rewarded actions aimed at increasing shareholder value.

E. Volkswagens board of directors did not fulfill any of its primary obligations to shareholders.

Q2. In what ways did the Board of Directors sidestep its obligation to protect shareholder interest?

A. The board did not feel it had the technical expertise to make decisions on emissions and controls.

B. The board provided oversight to the manufacturing activities.

C. The board was involved in key decisions and actions.

D. The board was made up of independent directors.

E. The board was well informed on all the production issues.

Q3. How could Volkswagen better select its Board of Directors to avoid mistakes such as the emissions scandal in 2015?

A. Select representation from senior managers and shareholders, labor representatives.

B. Select directors who have little knowledge of the industry or the companys performance.

C. Select directors that align with the CEO and his vision for the company and who will not challenge or debate pros and cons of key management decisions.

D. Select a strong independent board of directors.

E.f Select directors from family members and friends.