The Bug at Volkswagen: Lessons in Co-Determination, Ownership, and Board Structure

Abstract

Although the primary cause of the emissions scandal at Volkswagen appears to have been misfeasance and malfeasance on a corporate-wide scale, we argue that such a problematic culture existed at Volkswagen because of the composition of the board itself in combination with the unique governance structure known as “co-determination,” that defines many German companies, including VW. There are three major problems from a corporate governance standpoint with the Volkswagen board. First, is the interest-conflicting nature of the dual-class stock held by the dominant shareholding Porsche and Piech families. Second, is the presence of a government as a major shareholder. And third is the organization of its characteristically German “two-tier” board around the principle of co-determination, which mandated significant labor representation. We argue that each of these elements of the VW ownership and governance structure contributed in varying degrees to the board failure of oversight that led to the management decision to evade emissions regulations.

Keywords: co-determination, dual class stock; government equity ownership

JEL Classification: CMBO