Automobile Industry and Corporate Governance †MyAssignmenthelp

Question: Discuss about the Automobile Industry and Corporate Governance. Answer: Introduction: The multinational automobile companies advertise corporate governance and socially responsible operations as integral components of their modus operandi. Their official publications like annual reports and official websites exhibit their corporate government policies and their environmental protection activities which they carry out on a global scale. However, the top automobile companies in the world are often caught responsible breaching pollution standards when their car models emit high levels of toxic pollutants like nitrogen dioxide. These socially irresponsible incidences have severe corporate governance implication on the current and future business generation of the companies involved. The basis of the discussion would be an article published in the Independent on February 19, 2018 which states that the German Court may ban diesel run vehicles from plying on the German roads. This drastic action was partly directed by Volkwagens infringing diesel exhaust test (independent.co .uk 2018). The verdict if actually passed would have great implications on the business of the automobile manufacturers around the globe. First, the models of high priced cars claiming technological marvels exceeding permissible limits actually contradict the corporate social responsibility claims made by these companies. The second issues is that the contradiction also have bearing on the goodwill and customer perception of the companies which have long term business implications. The third issue is that the environmental pollution have devastating on the health of the society including the consumers, shareholders and employees. The fall of market goodwill results in repelling customers and investors, thus devastating the business of the companies. These factors also have damaging impact on the business generation of the automobile companies in their other markets. The short term impacts are increasing legal expenditures to fight litigations filed against the automobile companies b y stakeholders like governments and environment conservational groups. The paper would delve into these issues and their implications based on three corporate governance theories namely, agency theory, stewardship theory and stakeholder theory. The above discussion reveals two types of issues pertaining to corporate governance, namely long term and short term issues, all of which are interrelated. The long term issues the automobile companies would be facing by their car models exceeding the permissible pollution limits would be contradicting their own CSR policies and loss of goodwill. The high level of environmental pollution would harm the investors, customers and employees, thus showing lack of corporate government which would go a long way in hampering their business in other markets as well. They would lose investors, customers and employees, thus becoming financially and strategically weak. The short term business implications would be exceeding legal expenditure which would eat into the profits. The issues would be discussed on the basis of the following corporate governance models: Agency model: The agency model recognizes two groups of people, the shareholders or owners and the employees of the company as agents. The shareholders or the owners, according and the executives or the agents according to the theory have contradicting interests. The shareholders invest in the global automobile companies like Volkswagen which form the basis of their robust capital structure as shown in the figure below. The global automobile companies provide the shareholders with high returns on their investments. The shareholders or the owners of these companies are not concerned about corporate governance or the environmental impacts of their operations. They are more interested in the returns on their investments which points out the contradictory attribute of the owners and the agents as per the theory. The stewardship theory considers that against the owners and the agents work towards common goals of ensuring high organizational performances of the company. The shareholders empower the executives to take business decisions and operate to ensure that the organization like Volkswagen earn high profits. The stewardship theory stresses that the shareholders invest capital in the companies which the later uses to acquire, train, manage and maintain human resources. This trained human resources account for the high organizational performances of the companies which attribute them with high revenue generation from their international market operations. The above figure shows that the sales revenue of Volkswagen rose to 230682 million Euros in 2017 from 217267 million Euros in 2016. The table also showed that the earnings attributable to the shareholders also rose in 2017 and 2016. This analysis shows that the shareholders or owners today support the executives to perform highly in the market in order to get high ROIs. This is because the market performances of the automobile companies directly impact their ROIs. The stewardship theory, contradictory to the agency theory mentions that the shareholders take direct interests in the functioning of the executives. This is because failure of the automobile companies to comply with the ethical norms have devastating impacts on their revenue generation and the consequent fall in ROIs the companies give to the investors. This was evident from the financial outcomes Volkswagen suffered when it was caught breaching the pollution laws of the European Union. The automobile giant had to retrieve millions of cars from its global market which required it to maintain a contingency fund of 6.7 billion Euros and still suffered a loss of 2.5 billion Euros in first quarterly loss (bbc.com 2018). This falling in revenue impacted the companys power to give high ROIs to the shareholders which was evident by the fall in share prices towards late 2015 and early 2016. This interdependence between ethical business operations by companies, the revenue generation and the ir power to give returns to investors have made the shareholders today emphasize on their ethical corporate governance. Stakeholder theory: The stakeholder states that business organizations should work towards the benefits of all the stakeholders. The stakeholders are the parties which are capable of impacting the business organisations through their actions. The stakeholders consists internal stakeholders and external stakeholders. the internal stakeholders consist of management bodies and employees. The management forms decisions to ensure strong internal corporate governance while the employees execute these strategies. This shows that the management and employees decide the level of organizational performances by their actions. Thus, the organizations are expected to work ethically to benefit these stakeholders like paying legitimate remuneration to the employees. The external stakeholder groups consist of parties which are not parts of the companies but are capable of influencing its operations. The governments makes laws which form the base of the corporate governance framework of the companies. The customers who purchase the cars of these automobile companies like Volkswagen provide the company with the revenue and can influence their market positions. The stakeholder theory also consider suppliers and competitors which are capable of influencing the strategies of the companies. The society in general also form a significant stakeholder because the society provides companies with customers, investors and employees. This analysis shows that the society is capable of controlling the operations of organizations both internal and externally. Lack of cooperation from the society can attract legal actions against the companies launched by governments, loss of customers to competitors and consequent loss of investors or even closure of the busines s operations. This importance of the stakeholders have made it important for companies to maintain strong corporate governance and act ethically towards their benefits to enjoys their continuous support (Schaltegger, Hansen and Ldeke-Freund 2016). Importance of issues of the corporate governance: The issues Volkwagen faces discussed above have serious impact on the business performances of the company both in the long run and short run. An analysis of the three theories would show that they are interdependent. The agency theory mentions that the shareowners or owners and executives of the agents have contradicting interests. However, in the light of the present business situation one can point out that customers play pivotal role in the market performances of the organization and its consequent returns to shareholders (Dyllick and Muff 2016). Thus, in reality the shareholders are dependent on the perceptions and purchase patterns of the consumers. One can also point out that breach of laws by companies and its subsequent promotion in the society can pose serious issues to the companies, to avoid which they require to act responsibly to benefits the stakeholders. This fact was evident when Volkswagen had to suffer losses worth 2.5 billion Euros in spite of maintaining a contin gency fund o 6.7 billion Euros to counteract the sales return of millions of cars from its international market. The share price of the company to fell during end of 2015 and early 2016. These outcomes point out that lack of ethical operations can result in loss of revenue and consequent loss of capital bases. These two issues can lead to third issue of losing competitive advantage and market goodwill to powerful competitors from emerging markets like Asia which are also acquiring companies in Europe, thus posing threat to Volkswagen even in its home market. This fact is evident from acquisition of Land Rover by the Asian automobile giant Tata Motors (nytimes.com 2018). The fifth issue which lack of corporate governance can use is increase in expenditure due to litigations launched by governments and corporate governance groups against these companies. The interdependence on the performances of companies and the ROI they give back of investors have made the shareholders align their objectives with the ethical operations of the companies like Volkswagen. This aligning of interests of shareholders with the companys gave rise to next theory, the stewardship theory. This analysis shows that the stewardship theory is actually an extension of the agency theory studied from the point of view of the company besides considering the shareholders interests. The stakeholders theory encompasses both the agency and the stewardship theory and stresses on the need of the organization to ensure benefits of all their stakeholders including the shareholders and the management. One can infer from the discussion that in order to avoid or at least minimize legal actions from governments and powerful international organizations like the EU, the automobile companies like Volkswagen should manufacture car models causing minimum pollution. This compliance would enable it to comply with the laws and abide by these important key stakeholders. This would in turn enable the company create a strong goodwill and sell more cars, thus generating higher revenue. Companies like Volkswagen would as a result give high returns to the shareholders, benefits the latter. Thus, it one can summarise that following the stakeholder theory can enable the companies satisfy the previous theories as shown in the figure below. This would also enable companies like Volkswagen gain stronger competitive position to counteract challenges from new companies, thus ensuring their long term financial sustainability. As far as short term issues like increasing legal expenditures are concerned, th e analysis shows that companies can also deal the issues by benefitting the stakeholders and abiding the laws. The newspaper article mentions that Volkswagen infringed the environmental laws made the European Union by releasing cars which cause high pollution while plying (independent.co.uk2018). This conduct of the company clearly points to the lack of corporate governance on the side of the senior management and the middle level managers including the production managers (Dyllick and Muff 2016). This also points out to the sole emphasis of the company to ensure high profits and high ROIs to the investors at the expenses of the social benefits. This irresponsible behaviour would have serious issues both to it and to the general public which are discussed below: Issues to the general public: The public or the society in general face serious issues due to the high amount of pollution diesel run cars manufactured by companies like Volkswagen cause. The immense amount of exhaust which the cars give out contain toxic chemicals nitrogen dioxide like nitrogen dioxide. This means that the irresponsible decision of automobile manufacturing companies like Volkswagen to release cars causing high level of pollution. It must be pointed out that the major markets of the automobile companies are concentrated in North America, Europe and Asia, all of which experienced high death rate due to air pollution. This means that the irresponsible attitude of the management of Volkswagen is causing various health issues for the public as the uncontrolled pollution that the cars of the company are producing. In this regard it can be said that due to the significant release of nitrogen oxide in the atmosphere may cause formation of ground level ozone, acid rain and smog and these all are related with adverse health effects like respiratory problems, bronchitis, inflammation of the airways an many more (Dyllick and Muff 2016). It is seen that high level of NO2 may cause harmful effects on the vegetation making their growth stunted. When these cases became transparent to the world, the share prices of the company got decreased immensely and that made the CEO of the company to declare that they will invest a sum of more than 6 million Euros to fix the cars they have sold with issues earlier. In this context, it would be worthwhile to mention that in order to overcome the agency problems the European commission or EPA may make more detailed outlines and for an example, it can be said that if EPA can otherwise choose selection and screening mechanism in order to decrease information symmetry. Importance of issues to the company: The discussion of the corporate governance theories above shows that the infringement of EU pollution policies would have long term and short business impacts on Volkswagen (ec.europa.eu 2018). It would also have several impacts other impacts on the company. This first impact would be increasing legal actions from the governments (Dyllick and Muff 2016). In this context it can also be said that if they had hired responsible employees, the management of the organization would not have to face this type of issue. It can be said that if there were no NGO companies like ICT, the scandals like this would not have been get disclosed to public and that would have make the situation more concerning as no one would have the basic idea of the situation. It is seen that nearly after one month after the release of the situation publicly, the EU officials gathered in Brussels to discuss the issues and subsequently failed to come up with an alternate method of testing that would count the level of harmful emissions emitted by the Volkswagen cars. Conclusion: Thus to conclude, it can be said that what the management of Volkswagen did by manipulating the software that detects the harmful emissions of the car was very unethical as this type of action potentially exposed human population to various diseases that can be harmful for health and can potentially bring in various health diseases like bronchitis, asthma, inflammation of the airways of the human body and many more. The uncontrolled emission of Nitrogen oxide can make the growth of vegetation stunted and can impact on the world negatively. Thus it can be said that the impact of this uncontrolled harmful emission from the Volkswagen cars have a negative impact on the environment that can last significantly long. When this scandal got publicly disclosed, in many countries the management had to fix the software at their expenses and in a significant manner the saleability of the organization got decreased and that made the situation concerning for the management of Volkswagen. In variou s countries of Europe people stopped buying diesel cars and that had potentially ruined the car business for quite a long time. Even it was decided that in Europe the diesel cars will be banned and this rumour made the saleability of the diesel cars reduced by a huge parentage. It is a matter of fact that this incident shook the automobile business in the market of Europe and in various countries for a while as people could not trust the cars with diesel engine after the scandal of Volkswagen got disclosed publicly. This had impacted immensely on the share prices of the diesel car makers and the management of Volkswagen had to incur immense loss due to this. The management of the organization thus should engage in regaining the reputation that they have lost due to the scandalous activity they got engaged in earlier. The incident had ruined the reputation of Volkswagen in the global market and it can be said that regaining that reputation after such a scandal has become somewhat imp ossible if they do not come up with a plan that can eradicate the allegations against them and can potentially contribute significantly for the cause of the environment. It can be said that, nowadays if the management of the organization extensively participate for the best interests of the company. Thus, precisely it can be said the management of the organization should cleanse their past deeds to capture the fair share of the market to gain the competitive advantage. Thus for the best interests of the company, the management of Volkswagen should dedicate all their efforts to re-establish the company in the global market and for this they can choose tactics like rebranding and join independent verification agencies that can be looked at as more feasible and easy to attain. Reference list Bajaj, V. 2018.Tata Motors Finds Success in Jaguar Land Rover. [online] Nytimes.com. Available at: https://www.nytimes.com/2012/08/31/business/global/tata-motors-finds-success-in-jaguar-land-rover.html [Accessed 6 Apr. 2018]. Barrett, S.R., Speth, R.L., Eastham, S.D., Dedoussi, I.C., Ashok, A., Malina, R. and Keith, D.W., 2015. Impact of the Volkswagen emissions control defeat device on US public health.Environmental Research Letters,10(11), p.114005. BBC News. 2018.Volkswagen: The scandal explained. [online] Available at: https://www.bbc.com/news/business-34324772 [Accessed 6 Apr. 2018]. bloomberg.com. 2018.VOW:GR. [online] Available at: https://www.bloomberg.com/quote/VOW:GR [Accessed 6 Apr. 2018]. Climate Action - European Commission. 2018.Road transport: Reducing CO2 emissions from vehicles - Climate Action - European Commission. [online] Available at: https://ec.europa.eu/clima/policies/transport/vehicles_en [Accessed 6 Apr. 2018]. Dyllick, T. and Muff, K., 2016. Clarifying the meaning of sustainable business: Introducing a typology from business-as-usual to true business sustainability.Organization Environment,29(2), pp.156-174. Ewing, J., 2015. Volkswagen says 11 million cars worldwide are affected in diesel deception.The New York Times,22. Oldenkamp, R., van Zelm, R. and Huijbregts, M.A., 2016. Valuing the human health damage caused by the fraud of Volkswagen.Environmental pollution,212, pp.121-127. Reitze, A.W., 2016. The volkswagen air pollution emissions litigation.Browser Download This Paper. Schaltegger, S., Hansen, E.G. and Ldeke-Freund, F., 2016. Business models for sustainability: Origins, present research, and future avenues. Schiermeier, Q., 2015. The science behind the Volkswagen emissions scandal.Nature News. Taylor, E. and Wacket, M. 2018.German court to rule on whether cities can ban heavily polluting cars. [online] The Independent. Available at: https://www.independent.co.uk/news/business/news/germany-diesel-emissions-ban-cities-court-ruling-air-pollution-volkswagen-bmw-daimler-a8217341.html [Accessed 6 Apr. 2018]. volkswagenag.com. 2018.Volkswagen Konzern - AR 2017 - Results of Operations. [online] Available at: https://annualreport2017.volkswagenag.com/group-management-report/results-of-operations.html [Accessed 6 Apr. 2018]. Wilkinson, P. and Haines, A., 2015. Diesel in the dock.BMJ (Clinical research ed),351, p.h5415.