How to Save Volkswagen with Corporate Law

Volkswagen is in a death spiral.

The US Environmental Protection Agency alleged that Volkswagen falsified US pollution tests by installing software to make its diesel vehicles appear cleaner than they were when being tested. Without the defeat devices, the cars would produce up to 40 times the allowed level of nitrogen oxides.

Volkswagen knowingly installed defeat devices in approximately 480,000 diesel vehicles sold in the US during model years 2009-2015.  With civic penalties of up to $41,250 per vehicle, VW faces approximately $20 billion of potential liability under the Clean Air Act alone.   Already over 200 class action lawsuits have been filed against VW in the US.

In addition, up to 11,000,000 diesel vehicles may be effected worldwide.  The cost of the Dieselgate scandal to Volkswagen is estimated to be in the tens of billions of dollars and could sink the company.

To stop the death spiral, VW must act with alacrity to allay the fears of all of its stakeholders – its stockholders, employees, vendors and suppliers, dealers, customers, and the communities and governments in which its facilities are located.  To ensure that its stakeholders feel safe and confident that the company will not only survive but also emerge stronger than ever, Volkswagen must quickly promulgate a viable strategy to navigate the crisis.

VW understands that restoring trust among its stakeholders is the most important thing it can do.  In a recent print ad campaign in German newspapers VW said “We just want to say one thing: We will do everything to win back your trust.”   VW’s new CEO, Matthias Müller, recognizes that the “aim is to restore lost confidence”,  which he says will require transparency, enhanced compliance and governance, and a complete overhaul of VW’s culture.

The crisis requires an-out-of-the-box governance solution because the root cause is the enormous pressure placed on public corporations such as VW to produce consistent short-term, positive financial results at all costs.  VW is not the only world-class corporation to succumb to such pressure.  The financial system with its monomaniacal focus on profit drives good people to make expedient but risky decisions to produce the right numbers.

In short, VW fell victim to the prevailing global corporate paradigm in which the corporation exists solely to maximize stockholder welfare and lied to avoid admitting in 2008 that a multi-year, multi-billion dollar effort to develop a cleaner and more efficient diesel engine had failed. Rather than take a short-term financial hit, VW misapplied its engineering prowess to create software defeat devices that allowed it to sell vehicles with such engines anyway.  VW’s need to maximize stockholder welfare and produce positive financial results trumped the truth and the company’s values, and ultimately, the interests of its stockholders, society and the environment.

VW’s deception not only harmed the environment with increased greenhouse gas production but also risks harm to society at large.  VW’s demise, for example, would put hundreds of thousands of people out of work and stress Germany which is already burdened by the Greek debt crisis and the influx of refugees.  In addition, stockholders have already lost billions of dollars of value as VW’s stock price has declined due to this scandal.

To restore trust, VW could become the first multinational corporation to legally commit to do the right thing by stockholders, society and the environment by adopting new corporate governance architecture that allows it to balance the interests of stockholders with those of society and the environment, and uphold its values.  Dieselgate gives VW an opportunity to become the global leader in corporate governance by putting the power of law behind its renewed commitment to be a trustworthy corporation.

The US benefit corporation, which has been adopted by 31 states, including Delaware, provides a useful model for VW to follow.  For starters, VW could immediately convert its US subsidiary, Volkswagen Group of America, Inc., into a Delaware public benefit corporation.  A Delaware public benefit corporation is a new for-profit corporation that commits to operate in a “responsible and sustainable manner” and sets forth one or more public benefits in its certificate of incorporation.  Directors of such corporations must balance the pecuniary interests of stockholders with the interests of those effected by corporate behavior and the corporation’s chosen public benefit(s) and are afforded liability protections for doing so.

VW could translate its purpose and values from its Code of Conduct into a ‘charter’ that is set forth in its certificate of incorporation, using Kickstarter’s charter as a model and by following Unilever whose US subsidiary Ben & Jerry’s Ice Cream is a benefit corporation.  VW could adopt a heroic purpose as its public benefit such as producing only zero emission vehicles by 2030. VW could then use the legal architecture in its US subsidiary as a model for designing similar governance structures within the framework of existing corporate law in Germany and the other countries in which it has subsidiaries.

By elevating its purpose and values to the status of law, VW would signal to the world that it is truly serious about restoring trust and could credibly apologize to all of its stakeholders and ask for their help to successfully work through this crisis and preserve the enterprise for the good of all.

To complement its new governance architecture, Volkswagen needs an aggressive approach to internal governance to restore management’s credibility.  It’s not enough to have a new CEO. VW should replace a majority of its supervisory board with qualified outside directors, including a new outside Chairman of the Board powerful enough to help the new CEO hold the field to make the necessary reforms.  New blood and a fresh perspective at the top levels of management will help VW transcend the weakness in its culture that enabled Dieselgate in the first place.  VW’s current supervisory board has a conflict of interest because it is ultimately responsible for the Dieselgate crisis.  At a minimum, any board sub-committee investigating the situation should be comprised of a majority of independent directors.

To prevent the next Dieselgate, VW should put the power of law behind overhauling its culture and improving governance.  VW needs an upgrade of its governance architecture and supervisory board to create and support a culture where it is safe to do the right thing. It would be inspiring to see VW use Dieselgate as an opportunity to become a leader of corporate governance and business as a force for good by upgrading its governance to set the new global standard.

 

Comments

  1. We’re currently studying VW in our crisis communication program. The idea of using corporate law to save Volkswagen is an intriguing idea. From a PR perspective it could potentially work. If VW was using corporate law to completely restructure the set up and remove all those involved it could give a lot of potential good press to the company. I’ll be sending this to my professor, thank you for the post.

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