In September 2015, Volkswagen (hereafter VW) made news headlines all of a sudden regarding recalls of nearly 500,000 diesel cars in the United States, branded as VW and its upscale Audi. Within a few days, VW saw a massive sell-off of its stock, wiping out $16.9 billion of company’s market value. Later, VW admitted that its 11 million diesel vehicles in the world were equipped with a defeat device that disguised emission levels in laboratory diesel-exhaust emissions tests. After the scandal erupted,
VW ’ s economic situation was damaged from worldwide recalls, loss of sales, and decreased stock market price. The total cost of VW ’ s losses was yet to be determined due to the immense calculations and early period of the scandal.
However, experts estimated the scandal would cost tens of billions of dollars or beyond to the company.
Inject Outside Perspectives and Monitors
Corporate governance can benefit from outside influence. The VW management was dominated by two owner families (the Porsche and Piëch families). Although the
government of Lower Saxony and the unions participated in the supervisory board of VW, since they shared a common goal of full employment and production, they rarely
found reasons to object to key strategic decisions of the owner families. As the old saying goes, “stagnant water rots.” Without injection of fresh ideas and perspectives
from the outside, interest groups are often enticed to satisfy their own interests. In this regard, recent research on the relationship between corporate governance and
corporate social responsibility (CSR) gives useful hints. For example, on average, CSR positively affects a firm ’ s
financial performance (at least in the long run) (Barnett & Salomon, 2012 ; Margolis & Walsh, 2003 ). However, not all firms make commitments to CSR to the same degree.
One of the drivers of CSR is outside directors (Chang, Oh, Jung, & Lee, 2012 ). Not only are their incentives less dependent on internal managers, but by leveraging their
knowledge and network outside the firm, outside directors can monitor and influence managers’ decisions and actions. Likewise, firms, including VW, can benefit from
talents and balancing power from the outside.
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