Corporate Governance Case Study

Case Study: Volkswagen AG

Volkswagen AG is a German multinational automotive company that designs, manufactures, and distributes cars, trucks, and commercial vehicles. In 2015, the company became embroiled in a major scandal when it was revealed that Volkswagen had been cheating on emissions tests for its diesel engines. The scandal had significant implications for Volkswagen’s corporate governance, as well as its reputation and financial performance.

Corporate Governance Issues

The Volkswagen emissions scandal raised several corporate governance issues, including:

1. Board oversight: The Volkswagen board of directors had a responsibility to oversee the company’s operations and ensure that it was complying with relevant laws and regulations. However, it was revealed that the board had failed to adequately oversee the development and implementation of the diesel engines in question.
2. Executive leadership: The Volkswagen CEO at the time, Martin Winterkorn, was criticized for failing to take responsibility for the scandal and for not taking action to address the issue when it was first discovered. This raised questions about the effectiveness of the company’s executive leadership and their commitment to ethical behavior and responsible decision-making.
3. Risk management: The Volkswagen scandal highlighted weaknesses in the company’s risk management practices. The company had failed to adequately assess the risks associated with cheating on emissions tests, and had not developed adequate contingency plans to address the potential consequences of such actions.
4. Transparency and disclosure: The Volkswagen scandal raised questions about the company’s transparency and disclosure practices. It was revealed that Volkswagen had not been transparent about its emissions testing practices, and had not disclosed the potential risks associated with cheating on these tests to investors or regulators.

Corporate Governance Response

In response to the scandal, Volkswagen took several steps to improve its corporate governance practices, including:

1. Board changes: Volkswagen appointed a new board of directors, with greater representation from outside the company. The new board was tasked with overseeing the company’s operations and ensuring that it complied with relevant laws and regulations.
2. Executive changes: Volkswagen replaced its CEO and several other executives implicated in the scandal. The new leadership team was tasked with implementing changes to the company’s culture and practices to ensure that ethical behavior and responsible decision-making were prioritized.
3. Risk management improvements: Volkswagen implemented new risk management practices, including a more robust risk assessment process and improved contingency planning.
4. Transparency and disclosure improvements: Volkswagen committed to improving its transparency and disclosure practices, including more frequent and detailed reporting to investors and regulators.

Conclusion

The Volkswagen emissions scandal was a major corporate governance issue that had significant implications for the company’s reputation and financial performance. However, the company’s response to the scandal demonstrated a commitment to improving its corporate governance practices and addressing the issues that had led to the scandal. By implementing changes to its board, executive leadership, risk management practices, and transparency and disclosure practices, Volkswagen was able to begin rebuilding its reputation and regaining the trust of its stakeholders.

Case Study: Enron Corporation

Enron Corporation was an American energy, commodities, and services company that became embroiled in one of the largest corporate scandals in history. The company’s collapse in 2001 raised serious questions about corporate governance practices and the role of auditors in ensuring the integrity of financial statements.

Corporate Governance Issues

The Enron scandal raised several corporate governance issues, including:

1. Board oversight: The Enron board of directors was criticized for failing to provide effective oversight of the company’s operations, including the use of off-balance sheet transactions to conceal debt and inflate earnings.
2. Executive compensation: Enron executives, including CEO Jeffrey Skilling and CFO Andrew Fastow, were found to have received excessive compensation through the use of stock options and other incentives. This raised questions about the alignment of executive compensation with company performance, and the potential for conflicts of interest.
3. Auditing: Enron’s external auditor, Arthur Andersen, was found to have provided inadequate auditing services and to have colluded with Enron executives to cover up financial irregularities. This raised questions about the role of auditors in ensuring the integrity of financial statements and their independence from the companies they audit.

Corporate Governance Response

In response to the scandal, the US Congress passed the Sarbanes-Oxley Act in 2002, which introduced new requirements for corporate governance, including:

1. Board changes: The Sarbanes-Oxley Act required companies to have a majority of independent directors on their boards, and to establish audit, compensation, and nominating committees with independent members.
2. Executive changes: The Act introduced new requirements for executive compensation disclosure, and for CEOs and CFOs to certify the accuracy of financial statements. It also imposed penalties for fraud and increased the potential liability of executives for wrongdoing.
3. Auditing changes: The Act introduced new requirements for auditor independence, including prohibitions on certain non-audit services provided by auditors to their clients. It also established the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession and to enforce compliance with auditing standards.

Conclusion

The Enron scandal was a watershed moment for corporate governance and led to significant changes in the regulatory environment for public companies. The scandal highlighted the importance of effective board oversight, the need for alignment between executive compensation and company performance, and the critical role of auditors in ensuring the integrity of financial statements. The Sarbanes-Oxley Act introduced new requirements for corporate governance, including changes to board composition, executive compensation, and auditing practices. These changes helped to improve transparency, accountability, and trust in the US public markets, and set a new standard for corporate governance practices globally.

Case Study: Satyam Computer Services Ltd.

Satyam Computer Services Ltd. was an Indian IT company that became embroiled in a major corporate governance scandal in 2009. The scandal raised serious questions about corporate governance practices in India and the role of auditors in ensuring the integrity of financial statements.

Corporate Governance Issues

The Satyam scandal involved the falsification of financial statements, misappropriation of funds, and a lack of transparency in the company’s operations. The scandal raised several corporate governance issues, including:

1. Board oversight: The Satyam board of directors was criticized for failing to provide effective oversight of the company’s operations, including the approval of related-party transactions and the appointment of key executives. The board was accused of being too closely aligned with the company’s founder and not independent enough to challenge his decisions.
2. Auditing: Satyam’s external auditor, PriceWaterhouseCoopers (PwC), was found to have provided inadequate auditing services and to have colluded with Satyam executives to cover up financial irregularities. This raised questions about the role of auditors in ensuring the integrity of financial statements and their independence from the companies they audit.
3. Related-party transactions: Satyam was accused of engaging in related-party transactions that were not in the best interests of the company and its shareholders. This raised questions about the transparency and fairness of such transactions, and the potential for conflicts of interest.

Corporate Governance Response

In response to the scandal, the Indian government introduced new requirements for corporate governance, including:

1. Board changes: The Securities and Exchange Board of India (SEBI) introduced new regulations for the composition and functioning of boards of listed companies. The regulations required a majority of independent directors on boards, and established audit, nomination, and remuneration committees with independent members.
2. Auditing changes: The Institute of Chartered Accountants of India (ICAI) introduced new auditing standards and guidelines to improve the quality of audits and the independence of auditors. The ICAI also introduced new disciplinary procedures to hold auditors accountable for professional misconduct.
3. Investor protection: SEBI introduced new regulations to protect the interests of minority shareholders and to improve transparency and disclosure in corporate governance practices.

Conclusion

The Satyam scandal was a wake-up call for corporate governance practices in India and led to significant changes in the regulatory environment for listed companies. The scandal highlighted the importance of effective board oversight, the need for transparency and fairness in related-party transactions, and the critical role of auditors in ensuring the integrity of financial statements. The regulatory changes introduced by SEBI and ICAI helped to improve transparency, accountability, and trust in Indian public markets, and set a new standard for corporate governance practices in the country.