Chapter 10 - Mini Case: The Volkswagen Emissions Scandal

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Chapter 10 - Mini Case

The Volkswagen Emissions Scandal

Case Synopsis

Group members 8

Ashutosh Dhanju

Gaurav Agrawal

Hishila Tamrakar

Nirvana Shrestha

Yuzen Amatya
Questions:

1. Define corporate governance and explain why it is used to monitor and control top-level
managers’ decisions.

Corporate governance is a system of rules, practices, and processes that a company


directs and controls. Corporate governance basically involves balancing the interests of many
stakeholders in a company, including shareholders, senior management, customers, suppliers,
financial firms, governments, and communities. Corporate governance describes the activities
and decisions that are made to explain how a company operates and develops infrastructure and
frameworks for competition within the market. Corporate governance can create value for a
company, enhance the effectiveness of the company's BOD, increase the transparency of the
company's operations, maximize the value creation of stakeholders and shareholders, and
provide incentives to executives. It is used to monitor and control manager decisions. Corporate
governance provides tools to increase corporate accountability and investor transparency, and to
address the concerns of legitimate stakeholders such as sustainable environments and social
development. It contributes to development and increased access to capital encourages new
investment, boosts economic growth and provides employment opportunities. There are many
types of decision-making, including CEO selection, succession development, director-level
employee monitoring and goal setting. Factors that corporate governance has received frequent
attention from shareholders, business press writings, and academia include many corporate
governance that have failed to monitor and control many of the decisions made by top-level . It
is also important to note that, better the proper corporate governance system, the greater the
competitive advantage of the company. In addition, companies are more accountable and
transparent to investors in order to minimize shareholder expropriation and injustice. Corporate
governance is necessary not only for the overall interests of the company and its shareholders,
but also for the economy in which it operates. Effective corporate governance needs to manage
management decisions because it creates consistency between the decisions made by
management and the interests of the shareholders of the company. When it comes to strategic
decision making, it plays an important role. Usually, conflicts occur when deciding on a common
answer to move forward with for instance, selection of top level managers, deciding their
payment and the overall structure and hierarchy of the organization. Therefore, when it comes to
decision making and monitoring and controlling the top level management, it must include
factors such as corporate strategy, risk assessment and management, accountability, transparency
and ethical business practices.

2. Explain why ownership is largely separated from managerial control in organizations.

Separation of ownership and management in corporate governance involves placing the


owner of a company under the responsibility of a professional who is not its owner. Company
owners may include shareholders, directors, government agencies, other companies, and the first
founders. This separation allows skilled managers to run the complex business of running a large
company.

There are many benefits to separating ownership and control. Separation ensures business
sustainability through management by a team of professionals with the diverse skills needed to
run the company effectively. This ensures continuity within the business, even if future heirs are
not particularly interested in becoming part of their day-to-day operations. In today's enterprise,
ownership is separate from business management. This means that the shares or shareholders are
separated from the day-to-day operations of the business.Separation also facilitates capital
maximization. All shareholders in a business naturally have investment preferences, but
identifying the best ones and identifying how they can effectively manage their business assets to
ensure the best profits for all shareholders. It will be the job of the manager. It also drives the
growth of the company by creating a new professional management team separate from the
owner and using professional management skills to manage the operation of the company.
Managers can make effective decisions without having to buy shares in the company. The main
reason for the separation of ownership and business management in a company exists to ensure
that personal interests and benefits do not influence management decisions. This is to ensure that
the decisions made are in the best interests of the organization and are not biased towards others.
3. Define an agency relationship and managerial opportunism and describe their strategic
implications.

The division of owners and managers makes an agency relationship. An agency


relationship exists when a principal hires an agent as a decision-making pro to perform a
service. A few issues that result from the office relationship between owners and
managers incorporate the potential for a uniqueness of interface and a need for coordinate
control of the firm by shareholders. Managerial opportunism is the looking for
self-interest with cunning. It is both an attitude and a set of behaviors, which cannot be
superbly anticipated from the agent's reputation. Best executives may make key choices
that maximize their individual welfare and minimize their individual chance, such as over
the top product diversification. Decisions such as these avoid the maximization of
shareholder wealth, which is gathered to be the beat executives' priority. In spite of the
fact that shareholders actualize corporate governance mechanisms to ensure themselves
from managerial opportunism, these mechanisms are blemished.Agency costs include the
costs of managerial incentives, observing costs, enforcement costs, and the individual
financial losses caused by principals (owners of the firm) since governance mechanisms
cannot ensure total compliance by the agents (managers).

4. Explain the use of three internal governance mechanisms to monitor and control
managers’ decisions.

Ownership concentration, the board of trustees, and executive pay are the three internal
corporate governance structures. The number of large-block shareholders and the
proportion of shares they own determine ownership concentration. Institutional buyers,
such as mutual funds and hedge funds, with large holding percentages, are often able to
manipulate top executives' strategic decisions and actions. As a result, centralized
ownership produces more direct and aggressive oversight of top management, as opposed
to diffuse ownership, which continues to result in comparatively poor monitoring and
regulation of administrative decisions. Institutional investors are becoming a more
dominant force in corporate America, consciously leveraging their positions of
consolidated equity of private firms to force managers and boards of directors to make
decisions that optimize a firm's worth. Poorly performing CEOs have been fired by these
owners (for example, CalPERS). The board of directors is made up of insiders, associated
outsiders, and outsiders who are chosen by shareholders. The board of directors is a
control structure that shareholders trust to manage the company in such a manner that
shareholder equity is maximized. Outside directors are supposed to be more independent
of a company's top executives than people in the company's top management roles. A
board with a high number of insiders is less effective at overseeing and influencing
management decisions. Boards of directors have been chastised for their ineffectiveness,
and there is a growing trend to more formally assess the success of boards and their
individual members. Executive pay is a widely recognizable and often questioned
governance process. Salary, salaries, and long-term rewards such as stock options are
designed to compensate senior management for aligning their priorities with those of
shareholders. The board of directors of a company is responsible for deciding the extent
to which executive pay works in managing management conduct. However, since
evaluating top executives' success is complex, executive pay is often tied to financial
metrics that do not actually represent the effectiveness of the executive's decisions on
long-term shareholder results. Furthermore, several external influences influence a firm's
results. Furthermore, success reward programs may be manipulated by managers. As a
result, executive pay is a far from ideal governance tool.

5. Discuss the nature and use of corporate governance in international settings, especially in
Germany, Japan, and China.

Corporate administration structures utilized in Germany and Japan vary from one another
and from the ones utilized in the United States. Generally, the U.S. administration
structure has zeroed in on amplifying investor esteem. Banks have been at the focal point
of the German corporate administration structure in light of the fact that as loan
specialists, banks become significant investors in the organizations. Investors ordinarily
permit the banks to cast a ballot their possession positions, so banks have dominant part
positions in numerous German firms. The German framework has other novel highlights.
For instance, German firms with in excess of 2,000 representatives are needed to have a
two-level board structure, isolating the board's administration management work from
different obligations that it would ordinarily act in the United States for e.g., selecting
new board individuals. Truly, German heads have not been committed to the expansion of
investor esteem, since private investors seldom have significant proprietorship in German
firms, nor do bigger institutional financial backers assume a critical part.

Mentalities toward corporate administration in Japan are influenced by the ideas of


commitment, family, and agreement. Japan keeps on after a bank-based monetary and
corporate administration structure contrasted with the market-based monetary and
corporate administration structure in the United States. Moreover, Japanese firms have a
place with keiretsu, gatherings of firms integrated by cross-shareholding. Much of the
time, the fundamental bank relationship of the firm is essential for a keiretsu. Be that as it
may, the impact of banks in checking and controlling administrative conduct and firm
results is starting to diminish and a minor market for corporate control is arising.

Chinese corporate administration has gotten more grounded lately. There has been a
decrease in value held in state-claimed endeavors, yet the state actually rules the
procedures utilized by most firms. Firms with higher state possession will in general have
lower market worth and greater unpredictability in those qualities over the long run. From
a wide perspective, the Chinese administration framework has been pushing toward the
Western model lately. For instance, YCT International reported that it was reinforcing its
corporate administration with the foundation of a review advisory group inside its top
managerial staff, and delegating three new autonomous chiefs. Likewise, late exploration
shows that the pay of top heads in Chinese organizations is firmly identified with the
earlier and current monetary presentation of the firm.
6. Describe how corporate governance fosters ethical decisions by a firm’s top-level
managers.

Governance processes are designed to ensure that managerial decisions are made
in the best interests of shareholders, the most relevant stakeholder. However, along with
commodity market stakeholders (e.g., consumers, vendors, and host communities) and
organizational stakeholders, shareholders are only one type of stakeholder (e.g.,
managerial and nonmanagerial employees).

These stakeholders are also important. Therefore, at least the minimum interests
or needs of all stakeholders must be met by the company's measures. Otherwise,
dissatisfied stakeholders will withdraw support from one company and make it available
to another (e.g. employees leave the company and look for another employer, customers
look for other suppliers, etc.). Some believe that ethically responsible companies design
and apply governance mechanisms to ensure that the interests of all stakeholders are
protected. Managers are monitored by the Board of Directors. All stakeholders in the
company are susceptible to unethical business conduct. When the company's image is
tarnished, the image of customers, suppliers, shareholders and directors is also tarnished.

Executives, as agents charged with making decisions that are in the best interests
of shareholders, are ultimately responsible for developing and maintaining an
organizational culture that allows for decisions and behaviors that violate ethics. The
board of directors has the authority and the responsibility to enforce this expectation. The
decisions and actions of a company's board of directors can be an effective deterrent
against unethical behavior. The board has the power to hold executives accountable for
unethical acts as they can hire and fire such managers. So the board of directors, which
holds a position above the firm's highest-level managers, holds considerable power over
top-level executives and can set and enforce standards for ethical behaviors within the
organization.

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