VW saga: Lessons for Australian boards

As the recent Volkswagen (VW) emissions scandal continues to attract headlines, several commentators have taken aim at the carmaker’s corporate governance and culture.

In September 2015, VW admitted to installing illegal software which falsely showed better performance on emissions outputs during testing than on the road. The scandal has led to internal and regulatory investigations, which has seen some board-level executives within the VW group temporarily suspended, and revealed a number of issues with the carmaker’s governance and corporate culture.

Commentators have suggested that the lack of independent directors on VW’s supervisory board may have increased the risk of “entrenchment” and that power struggles between its shareholders and worker representatives may have led to the board’s monitoring function being compromised.

It has also been claimed that VW’s corporate culture “fostered a climate of fear” among its employees. Former chair, Ferdinand Piëch, was known to favour an autocratic style of leadership while former CEO, Martin Winterkorn, was said to have used “high pressure management methods” and aggressive sales targets. VW engineers have recently admitted to manipulating fuel emission data because of the alleged “unreasonable demands” set by Winterkorn.

The scandal highlights the critical importance of good governance and corporate culture and provides a number of key lessons for Australian boards:

  1. Reconsider board composition: The lack of independence on VW’s supervisory board may have hindered its oversight of management. Australian boards should consider whether their directors have the appropriate mix of skills, expertise and independence.

  2. Consider the importance of ESG: Following the scandal, it is likely that stakeholders will place additional scrutiny on governance arrangements as well as disclosure of environmental data. Political pressure on disclosures of environmental, social and corporate governance (ESG) data is also likely to increase in the lead up to the UN Climate Change Conference in Paris next month.

  3. Check for conflict between the chair and CEO: VW’s former chair, Piëch, resigned from Volkswagen’s supervisory board in April 2015 after a failed attempt to oust its former CEO Winterkorn. Boards should consider whether underlying conflicts are hindering board decision-making or organisational culture.

  4. Set the tone from the top: Some commentators have suggested that enhanced whistle-blower policies may be an effective way to monitor issues within a company. However, a good organisational culture set by the management and board may deem this unnecessary. “At the root of corporate crisis is culture”, says Lady Barbara Judge, chair of the Institute of Directors in the UK. “If you train your employees to do the right thing they will, but it starts from the top.”

For more information, visit the Governance Leadership Centre.