Based on the in-class video of VWG along with the additional material provided:

What were the causes of the corporate misbehaviour on such a large scale?

Volkswagen Group (VWG) has a global workforce of around 600,000 employees and 118

production locations around the world (Schuetz, 2016). Managing such a large organisation is

a complex task, as it involves meeting both shareholders and stakeholders expectations and

needs, which will influence the decision-making process. Being a manager implies being a

leader for the employees and empowering them. In this managing process, authority relations

are formed; from this, a distinction between power and authority is developed according to

Weber (Pugh and Hickson, 1997). These concepts are not the same: power is based on

control, to force people to obey; while authority is based on obedience, which comes

voluntarily from people. Through these relationships, organisations are being managed to

achieve its goals. However, bad management cannot be stopped from happening.

The VWG scandal is originated by a chain of errors since 2005, as the group claimed itself

(Schuetz, 2016). Behind these errors, there are factors which led to this corporate

misbehaviour from the decision-making until the lack of initiative on stopping those errors.

Volkswagen (VW) was founded by Ferdinand Porsche, who by that time already had the

Porsche Company. Then Ferdinand Piech was named CEO, during decades both VW and

Porsche collaborated mutually on production. VWG headquarters are settled in Wolfsburg,

Lower Saxony, this city became the richest in Germany and VWG employed over half of the

population.

One of the main causes for this type of behaviour is the misuse of power within the top

management held inside the company. The conflict of interest existent within the board

members and nepotism. The Porsche and Piech families owned most of the voting shares on

the supervisory board (Ruddick, 2015). Some directors participated on multiple boards

(Hymowitz and Webb, 2015). Lower Saxony state representatives were part of the board as

well, along with the VWG investors. Their only goal was profit because they were VWG

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owners. The lack of a diversity and multidisciplinary board was one of the factors of this

misbehaviour. Ferdinand Piech, the former VWG CEO, positioned his wife, a former

kindergarten teacher, in the company's supervisory board (Crossland, 2012). Even though the

board was suspicious about her skills and experience, there was no disagreeing on this

nomination. This was a clear case of nepotism and misuse of the power conferred to Piech,

as being CEO and owner, no board member opposed resistance to this. In 2007, Piech

handpicked and groomed Martin Winterkorn, as his successor (Levin 2015). There was not

a meritocratic career within the top management, every action was calculated to meet their

own interests, not the organisational ones.

There were a double moral and ethical issues on the top management. Winterkorn declared

he was shocked by the misbehaviour shown, but emphasized that he was not aware of any

misconduct by any employee. Regardless the fact he admitted he had some responsibility

(Schuetz, 2016). Winterkorn contradicted himself, showing the real face of his management.

Over 11 product lines were involved in the scandal, this was not a minor issue, denial only

exposed the lack of leadership and ethics from the top management. In addition, the power

struggle within the board would impact directly on the decision-making. The disputes between

the Porsche and Piech families led emotions to interfere with decision-making (Jung, 2017).

These deeply divided families, who had been battled for money and power over VWG. The

resulting emotions from these differences kept influencing and complicating the good

judgment and decisions on businesses.

Another cause is the existence of performance issues addressed to the management. By

setting not realistic goals. In 2008, VWG set the Strategy 2018 with specific goals: Become

the largest auto manufacturer; increase sales on more than 10 million units per year;

accomplish a pre-tax profit of 8 percent or more while achieving economic, social and

environmental sustainability (Volkswagen, 2014). This was an aggressive growth strategy,

which did not allow VWG to truly solve the emission problem. Since the investment of a new

technology would mean not being aligned with the strategy. Winterkorn promised to lower the

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CO2 emissions in a 30% by 2015 (Schmitt, 2015). The company was not in the position of

meeting this goal, they did not have either technology or the willingness to achieve it.

Additionally, based on the Strategy 2018, the internal management goals were purely profit

performance oriented (Volkswagen Group, 2013). Moreover, they did not concern about the

regulations or to take some actions to meet them, they were completely blind to the future and

trends. Due to Winterkorns lack of projection into the future and innovative mindset, VWG

immersed itself in this deceit. The organisation only focused on the existing technology instead

of going beyond (Meiners, 2015). Toyota and Tesla developed new technologies in the eco-

friendly automobile industry, VWs only focused on its core business without projecting on new

niche markets. He limited the actions only to meet the requirements of the emission

regulations, and consequently, the opportunities to be ahead of the emerging eco-friendly

automobile market were let go. Related to this, was the clear an inconsistency between what

was said and done. Volkswagen was ranked as a top ten company with outstanding

performance in citizenship, governance and workplace practice (Reputation Institute, 2014).

The work environment and governance were completely authoritarian, there was no concern

on the employees only on the goals set for the top managements interests. VWG has received

many sustainability and environmental awards, including one for sustainable development

from a US organisation in 2014 (Schuetz, 2016).

Moreover, the top management was alerted about these irregularities and there was no action

taken. VWG received internal reports from both a supplier and an employee, back in 2007 and

2011 about the software to cheat the testing (Cremer and Scherer, 2015). These were the first

warnings on this issue; however, they were on the way of reaching Strategy 2018 goals.

Therefore, they did nothing about it, the main concern was profits, as the board was

constituted by mostly the owners, they were unstoppable. VWG admitted knowing that, in May

2014, an employee informed Winterkorn about some alarming results from a private study on

the diesel cars sold in the United States (Ewing, 2016). Michael Horn, head of Volkswagen

North America, admitted he knew about the emission problem since 2014 (Stanwick, 2017).

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Finally, inside the organisation, there was evidence of poor environment and culture. On 1993,

Ferdinand Piech took the CEO position until 2002, he was known for being tough and not

hesitating on firing underperforming employees (Ewing and Bowley, 2015). Furthermore, this

former CEO stood out on his toxic leadership on managing people with an authoritarian and

coercive style (Milne, 2015). After this decade of authoritarian management style, in 2007,

Martin Winterkorn became CEO until after the scandal went to the spotlight in 2015. The new

CEO was no different from his predecessor, he had an aggressive and demanding leadership

style, there was no room for failure (Volkswagen AG (ADR), 2017). Winterkorn is known

for being a perfectionist, and insulting and punishing employees for minute flaws. Under his

management there was no autonomy for subordinates, he nurtured fear and discouraged open

communication across the management hierarchy (Jung, 2017). The environment and culture

of fear were reinforced under the new management.

According to the French-Raven studies, power is divided into 5 different forms, one of those

is coercive power, which forces the individual through fear to obtain obedience (Boddy, 2011).

The more legitimate the coercion the less it will produce resistance and decreased attraction

(French and Raven, 1959, p.268). On the presence of a legitimate authority figure, such as a

manager, the employee will do as commanded without hesitation or questioning. This

management had a negative impact on the behaviour of senior managers and employees.

German press brought to light VWs anticipatory culture (Schmitt, 2015). This system was

based on obedience and reward, by just following orders and not looking for explanations.

Additionally, several VWG departments admitted working in a climate ruled by fear and

authoritarian top management (Cremer and Bergin, 2015). With a reinforced coercive

management and a wicked power culture, absolute obedience and submission emerged. As

an outcome, any initiative on stopping this deliberate scam or exposing it was vanished.

"The company had an environment ripe for breeding the scandal: a clannish executive board

with a strong decision-making power and an engraved culture of hostility against

environmental regulations" (Stewart, 2015).

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