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#VolkswagenScandal. Why did nobody stop the malpractice at the People’s Car? Is the German two-tier board system part of the problem?

27 Sep


According to SPIEGEL ONLINE (September 27, 2015), Volkswagen was alerted by Bosch already in 2007 for what the wrongdoing is concerned. In the recent edition of DER SPIEGEL (September 26) reference is made to the European Union-Law No. 715/2007, which prohibits the use of systems that manipulate the analyses of car emissions; a law to be enforced by no later than 2009. That article is titled German Double Standards (“Deutsche Doppelmoral”) for German politics have not yet been enforcing that law in practice. In 2011, according to SPIEGEL ONLINE (September 27), Volkswagen’s Internal Audit department addressed the matter.

It is unclear at this point, who knew what and when. As a matter of fact, nobody stopped the malpractice. Another four years on, in September 2015, energy emission fraud eventually hit Volkswagen, the People’s Car. Then, all happened rapidly. The CEO was forced to step down. The share price dropped over 40% within two days. The stock value melted from EUR 80 billion to EUR 55 billion within a week. A lot of money lost. Even worse, reputation went downhill. Nobody likes fraud and fraudster.

Volkswagen is about to get back on its feet. Rebuilding trust will be more demanding than smoothening crumpled paper. That is expected to take a decade as a supervisory board member states (DER SPIEGEL, September 26, 2015) – if at all successful. I very much hope so.

I ask myself, why did nobody stop the malpractice at the People’s Car? I wonder whether the German two-tiers board system is part of the problem. The German corporate governance context is characterized by two-tier board structures with a Management Board (Vorstand or Geschäftsführer depending on the type of legal entity) and a separate Supervisory Board (Aufsichtsrat). In Germany, Senior Management is generally regarded as the chief stakeholder of Internal Audit as it is common practice for the Chief Audit Executive to report directly to the Management Board, while the Chief Audit Executive may or may not have direct access to the supervisory body or a sub-committee thereof, such as the Audit Committee. Thus, in the German two-tiers board system the risk is that Internal Audit’s reports to the Supervisory Board/Audit Committee may be filtered by Senior Management in such a way that only what is palatable to Senior Management is communicated (2tier).

I am keen on learning the information flow to the Supervisory Board / Audit Committee @ Volkswagen. What did they know? Who informed them? How was that done? What did the Internal Audit report from 2011 actually say? Etc.

In order to “get the boss right”, strategically positioning the Internal Audit Function closer to the Supervisory Board to help the Internal Audit Function’s performance and effectiveness, may be worthy of consideration.

What do you think?