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Corporate governance is a system comprised of rules that targets to balance the interests of a company’s stakeholders such as customers, suppliers, management, shareholders, society, and government. Governance essentially means setting up rules to control policies and behaviors (Jin et al., 2013, p.18). In thecase of corporate governance,it means implementing rules that will control corporate policies and behaviors. Corporate governance has considerable impacts on corporate performance as these rules will decide how a company would reach its goals keeping in mind the welfare of all its stakeholders and society (Tricker and Tricker, 2015).
1.Principles of corporate governance Theory
a.The Agency Theory of corporate governance:
This theory segregates the corporate organization between the two participants namely managers and shareholders (Chan and Suen, 2014, p.116). The theory also describes that employees or managers of a corporate organization works with self-interest. The company states the relationship between the managers and shareholders of the organization.
b.Stewardship Theory of corporate governance:
The theory focuses upon the maximization of the shareholders wealth through firm’s performance so that the utility function of the shareholder can be maximized. So the company executives and managers have to work at the fullest to maximize and protect the shareholders wealth
c.Stakeholder Theory of corporate governance:
This theory refers that managers in organizations work via a network of suppliers, employees and business partners in order to serve the shareholders and this network cluster is more important rather than the owner-manager-employee relationship as per the agency theory.
d.Theories of ethics related to corporate governance
There are various theories of managerial ethics that has impact on corporate governance and ethical business practice. The utilitarian approach to managerial ethics sates that for maintaining corporate governance and corporate social responsibility the manager or decision maker must analyse the effects weather positive or negative on all the stakeholders. However, the individual approach states that any act on the best interest of individuals is deemed as ethical. The moral rights approach gives each stakeholder the rights to free consent, privacy, freedom of conscience, due process and rights to life and safety. The justice approach implements the concepts of distributive justice, procedural justice and compensatory justice each of which emphasizes on the decision making process which implements the concept of well being of all stake holders and serves justice to them.
1.Benefits of corporate governance
Principles of corporate governances outlined by OCED majorly advocate the rights of all stakeholders. Stock performance
The simplest way of calculating a company’s performance is measuring its stock prices. Higher stock prices correspond to higher company performance. Researchers agree to a fact that tight corporate governance leads to improved stock prices (Luo et al.,2015, p.129).
Strong corporate governance results in fewer management turnovers. Frequent management turnovers or change in leadership results in poor performance in business. Only companies with poor performance have loose corporate governance leading to afrequent change in leadership (Bottenberg et al.,2016, p.1).
Accounting irregularities are a result of lack of good corporate governance. Studies on the scandals of Enron and WorldCom in the early 2000s are an example of this case. It had been found that these firms tricked account details in their financial reports to show more profit than they actually made. They hid theirslosses by these unethical practices (Eccles et al.,2014, p.2838). Such unethical practices are a result of relaxed governance and managerial opportunism.
Tight corporate governance practices lead to environment-friendly decisions. There have been many documented case which shows that tight corporate governance by astrong board of directors leads to business practices that are more ethical and causes lesser harmful impacts. Moreover, it has also been seen that lack of good corporate governance among huge business organizations lead to unethical business practices that resulted in major environmental harm (Endrikat et al.,2014, p.739). One such case is the Volkswagen’s famous “diesel-gate” or “emissions-gate” scandal that came tosurface in 2015.
3.The “diesel-gate” or “emissions-gate” scandal
In the past, we have witnessed many scandals that are related to company ethics, ethical dilemmas faced by organizations and lack of corporate governance. It can be argued that when there is low corporate governance, even huge names in the corporate world enter into unethical business practices. One such incident is related to the famous German car brand Volkswagen. In 18th September 2015, a scandal surfaced about Volkswagen and tainted their unmarked reputation in the business world when Volkswagen cheated in the emissions test knowingly (Hotten, 2015).
German automaker Volkswagen Group got a notice of infringement of the Clean Air Act from the United States Environmental Protection Agency (EPA) after it was found that Volkswagen (VW) had intentionally customized turbocharged direct injection (TDI)diesel motors to set in movement certain discharges controls just for the span of research facility emanations testing. The vehicles' NOx yield could meet US gauges amid administrative testing because of the program however in genuine driving the cars release up to 40 times more NOx. Volkswagen's "Defeat Device" is not a physical machine but rather a program in the motor programming that empowers the engine to perceive on the off chance that it is being driven under test conditions and exactly at that point initiates all the counter contamination stops. Nevertheless, at times infusing a urea-based solution to deliver NOx harmless was utilized however not in most Volkswagen autos (Makortoff, 2015).
The question is how the auto-detected whether it is being tricked or not? Much of the time, the test vehicles subjected to keep running at a specific speed for a specific time on rollers and afterward at another known speed for another known period. The focal PC of the auto can identify whether the sources of information match those normal in test conditions (GATES et al.,2015). AnNGO named the International Council on Clean Transportation (ICCT), performed autonomous and vitally on-street outflows tests, on the VW Jetta, the VW Passat, and a BMW X5. These tests took after five courses like the EPA reproductions: country up/downhill, rural, urban and parkway driving (Morley, 2017). The emanations execution of the Volkswagen autos was a great amount of more regrettable than desired however, the BMW's outcomes were better similarly. The ICCT ran additional tests on a dynamometer.
4.Outcome of the scandal
The head of brand improvement Heinz-Jakob Neusser alongside Porsche innovative work head Wolfgang Hatz and Audi innovative work head Ulrich Hackenberg were suspended. In order to repay Volkswagen reported arrangements to burn through US$7.3 billion on amending the outflows issues which later rose to US$18.32 billion (Makortoff, 2015). Later on, they likewise wanted to refit the influenced vehicles as a component of a review battle. In June 2015, German prosecutors expressed that, Mr. Winterkorn was under scrutiny for market misuse since he had held up longer than expected to discharge that the organization was confronting a request over the emanations embarrassment (Topham et al.,2015). On July 19 2015, a common protest was documented against CEO; Matthias Müller in the interest of the New York lawyer general associated. This outrage had achieved the top level of Volkswagen administration (Auto Express., 2017).
5.Analysis of the case
1.Role of ethics
Numerous higher level managerial and administration personals confronted enormous legitimate and moral issues because of this outrage. This episode broke numerous morals and business rules. On the off chance that we take this occurrence, for instance, to talk about upon the hypotheses of theadministrative issue already explained, we will find that this episode broke no less than two of the four prime moral speculations of administration. In the event that we scrutinize this embarrassment from utilitarian approach then we will see that it was ethically erroneous for the management body of the organization to undermine particle emissions tests. Environmental protection acts are in place to serve an individual's health needs as well as to shield the nature from harm (Goetsch and Davis, 2014). Also, the CEO of VW avoided telling thepublic the truth about e whole scandal for a much longer period of time. Consumers unknowingly purchased faulty vehicles making them apartner in crime without their consent and knowledge.
From the perspective of moral right approach, this embarrassment risked the ethical privileges of the partners. Individuals who put resources into the shares of the organization endured gigantic misfortune without knowing the truth (Veríssimo and Lacerda, 2015, p.37). They broke purchaser's trust. From the partnersperspective, it broke their entitlement to free advice, theright of theflexibility of inner voice and in addition their privilege of life and wellbeing (Frisch and Huppenbauer, 2014, p.29). Aside from these two, this occurrence additionally abused the Justice approach (Crane and Matten, 2016). As the organization broke many standards and carried out unethical business practices by bamboozling in the crucial tests with the goal for them to obtain authorization to dispatch these vehicles.
The chiefs ought to have considered the ethics and morals of the circumstance before carrying out such wrongdoings. The circumstance requests for the managers and leaders to undergo procedural justice and additionally compensatory acts. To acertain degree, steps were taken in order to compensate the stakeholders who suffered huge losses after the scandal came into public knowledge. The organization deluded the general public to a huge extent and their half-heartedeffort to compensate the stakeholders with a mere $1000 compensatory amount along with roadside assistance wan, not enough. As indicated by Yotam Lurie, a senior teacher of business morals at theBen-Gurion University of the Negev in Israel, it was stunning that the engineers of Volkswagen neglected and overlooked their liability and their oath to do no harm as experts (Wu et al.,2015, p.823). Regardless of the possibility that it was less effective or profitable, it was their responsibility to stop such acts against nature and human being. Offices like the EPA uphold standards and experts bend these principals of standards as they see fit as long as their theft does not get caught. It suggests that it is alright to disregard rules unless you are exposed for your misdeeds.
2.Role of corporate governance
As indicated by Friedman (2002), the main social obligation of business is to utilize its assets and participate in exercises proposed to increase its benefits the length of it remains inside the standards of the diversion, which is to state, it includes open and free rivalry without misrepresentation or trick (Endrikat et al.,2014, p.724). Volkswagen misled both governmental agencies and additionally clients. The question arises why such unethical practices happened in the first place? To answer this question there is a need to consider the possibility of lack of corporate governance. The organization’s heads or the board of directors were entitled with the duty to enforce rules to the managers in order to maintain good business practices. As the failed to do so and only think of making aprofit at any cost, the managers were either instructed to overlooks the particle emission test results or they decided to do so, on their own. Whichever might be the case, we must acknowledge the fact that the company lacked corporate governances. Once the scandal came into public knowledge, the company’s stock prices fell rapidly. Therefore, in relation to the previous theory stated earlier that a company’s stock prices correspond to the performance, it can be said that the overall performance of the company decreased. Their brand image was tarnished as well.
If we consider the major areas covered by the OCED namely the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency, and the responsibilities of the board we will see that Volkswagen failed in multiple scenarios (Eccles et al.,2014, p.2839). First, they violated the right of the shareholders to know the complete truth and right of choosing whether they want unethical practices to occur or not. Secondly, as they denied their right to chose they did not treat their shareholders equally. Third, they forget to acknowledge the role of stakeholders in corporate governance and decided it was fine to cheat the emissions test for profit gain. Fourth they obviously failed to abide by the principle of transparency and complete disclosure when they decided to disclose thetruth about the vehicle to thegeneral public, consumers,government, and society. Lastly, the governing board of the company ignored their responsibility to practice managerial ethics and their corporate social responsibility or CSR. They failed to implement tight corporate governance, as a result of which the managers of Volkswagen decide that it is okay to cheat on tests, confound authorities and consumers as long as greater profits are generated.
No one in the company blew the whistle to stop these actions. They failed to do so either because they completely lacked work ethics of they feared for their job security. Government authorities, law, and order, human rights are in place to regulate actions that should have encouraged at least a few professionals to come clean. There are many laws against wrongful termination from job hence, they should not have feared for their job. However, if there is a lack of work ethics it simply cannot be repaired by force. Tight regulations in corporate governance may be at place and could be of help but in the end, it becomes a question of personal responsibility and morals.
Volkswagen could have avoided the scandal by incorporating the concepts of ethics in their practices of corporate governance. By implementing the theories of managerial ethics in their corporate governance practice, they could have ensured that systems that do not have such faults were used in the cars that caused such huge environmental pollution. Moreover, implementing the above-mentioned theories of corporate governance and ethics could have ensured that false claims to the general public and associated stakeholders regarding the functionality of the cars were avoided. Even after the scandal, the leaders avoided coming out in the open with the truth. This could have been ensured through ethical decision-making process.
Conclusion and recommendation
In conclusion, it can be said that stronger leaders with appropriate values, morals and ethics should be placed in charge to outline the managerial ethics to be performed by firms. Such leaders should be in charge of regulating corporate governance to increase company performance. Few recommendations can be made in this context. Each organization head should tightly monitor the business practices and decisions taken by upper-level managers. A cross check is necessary for every major business decisions. Decisions should be taken keeping in mind the general welfare of the society and stakeholders. In case any unethical business practice is exposed to the governing body, strict disciplinary actions should be taken to set an example in order to avoid further similar incidents.
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