Corporate governance is the system for controlling and directing corporations (Wheelen, Hunger, Hoffman, & Bamford, 2015). Corporate governance identifies how various stakeholders in a corporation share responsibilities and rights. The separation of the ownership and management in large corporations creates agency problems. Managers who act as agents of the shareholders might pursue objectives that are detrimental to the shareholders wealth. To ensure that the interests of the managers align with the interests of the shareholders, the decision-making processes in a firm must impose constraints on the kind of objectives that managers can pursue. Principles of good corporate governance require corporations to design clear processes for establishing and pursuing organizational objectives.
After the U.S Environmental Protection Agency (EPA) uncovered the Volkswagen emission scandal, the companys stock value and performance declined. The efficient markets hypothesis postulates that stock prices reflect the information available to investors (Brigham and Ehrhardt, 2013). An increase in the stock price of a firm suggests that investors hold positive sentiments about the firm, and these sentiments result in an increase in the demand for the firms shares. If the demand for the shares outstrips their supply, the stock price of a firm will increase. On the other hand, if investors hold negative sentiments about a firm, they will sell that firms shares in anticipation of a decline in the value of those shares. Negative sentiments about a firm result in a situation where many investors seek to sell their shares, leading to the supply of the shares exceeding the demand for the shares. In the case of Volkswagen, the emission scandal created a negative sentiment among the investors, resulting in a sharp decline in the stock price immediately after the emission scandal emerged.
Although Volkswagens stock performance increased after the decline that followed the emergence of the emission scandal, the stock price has never reached the high it attained shortly before the EPA uncovered the scandal. Volkswagens unscrupulous conduct seems to have brought a long-term impact on the sentiments of investors. The slight improvement in the companys stock performance suggests that its response to the scandal sent positive cues to some investors, causing them to change their sentiment.
The impact of the emission scandal has made Volkswagen improve its corporate governance policies. Volkswagen has reconstituted the risk management committee of the board of directors in order to prevent lapses in regulatory compliance. The board of directors has also changed the mandate of the risk management committee as part of the measures for increasing the committees effectiveness in preempting incidences like the emission scandal. The enhanced role of the risk management committee of Volkswagens board of directors attests to the importance of good corporate governance in ensuring that managerial actions do not undermine the interests of a firms shareholders.
Volkswagen can mitigate the risk of events such as the emission scandal occurring in future by ensuring its performance management system does not incentivize employees to engage in unethical behavior. The performance pressures might have forced the employees to resort to any means possible in order to meet performance targets. An employee under the pressure to deliver high sales targets could not have seen an ethical problem with cheating in an emission test; if this pressure were non-existent, the employee would not engaged in unethical conduct. Volkswagens performance management systems ought to consider the contingencies influencing employees productivity.
Brigham, E. and Ehrhardt, M., 2013. Financial management: Theory & practice. Boston, M.A: Cengage Learning.
Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E., 2015. Strategic Management and Business Policy: Globalization, Innovation and Sustainability. New Jersey: Pearson Higher Ed.
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