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This article was previously published on the Leadership Foundation website.

Volkswagen: a failure of corporate governance?

The acknowledgement by Volkswagen (VW) that it had cheated on emissions tests by installing software to allow its diesel engines sold in both North America and Europe to record a lower level of emissions has led to questions about the company’s corporate governance, as well as its culture. It also led to the company’s then chief executive, Martin Winterkorn, resigning in September 2015, while continuing to say that he knew nothing about the company’s cheating.

One explanation as to why VW has found itself in its current predicament is its corporate governance. Many commentators have pointed that a key weakness of the company's corporate governance is the lack of diversity amongst the membership of the company's supervisory board. While VW is a global company the majority of the 20 members on the company’s supervisory board are drawn from Austria or Germany, with an equal representation of shareholders and worker representatives. Further, the company’s major shareholders (i.e. family holdings, Qatar and the regional government) hold the majority of positions filled by shareholders. The suggestion is that amongst the members of the supervisory board there is only one truly independent director.

Concerns about VW corporate governance has been voiced for some time, so it will be interesting to see whether one of the consequences of the company’s current difficulties is a reshaping of its supervisory board, with a view to increasing the diversity and expertise of the membership. In the immediate term, VW has a major challenge dealing with the expected legal actions threaten by the different national regulatory authorities, and seeking to address the reputational damage it has suffered in an effort to ensure its future sales of cars are not adversely affected.

One early impact on VW has been for Standard and Poor's (S&P), the credit rating agency to downgrade the company's credit rating. Press reports indicate that S&P's decision is based on 'material deficiences' in management and governance, and on 'inadequate' internal controls.

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