Corporate scandals

1. Eskom Corruption Scandal (ongoing): Eskom, South Africa's state-owned

electricity utility, has been embroiled in a series of corruption scandals. These
scandals involve allegations of tender irregularities, bribery, and mismanagement
of funds. The misdeeds have contributed to the country's ongoing power supply
challenges and financial strain on the utility.

2. VBS Mutual Bank Scandal (2018): VBS Mutual Bank, a small South African
bank, collapsed after revelations of widespread fraud and looting. It was
discovered that the bank's executives had orchestrated a scheme to divert
depositors' funds for personal gain. The scandal implicated various public
officials and politicians, leading to public outrage and investigations.

3. Trillian and McKinsey Corruption Scandal (2017): Trillian Capital Partners, a

South African consulting and investment firm, was involved in a corruption
scandal along with global consulting firm McKinsey. It was alleged that Trillian
had improper connections to political figures and had received lucrative contracts
through irregular means. McKinsey faced criticism for its association with Trillian
and its role in the scandal.

4. Bosasa (now African Global Operations) Corruption Scandal (ongoing): Bosasa,

a facilities management company, faced allegations of corruption and bribery
involving government officials. The company was accused of paying bribes to
secure lucrative government contracts. The scandal, which came to light through
testimonies at the State Capture Commission of Inquiry, revealed a widespread
network of corruption within government institutions.
Question 1.1

**Description of the Company**

Volkswagen AG, commonly known as Volkswagen, is a German multinational

automotive manufacturing company headquartered in Wolfsburg, Lower Saxony,
Germany. It was founded in 1937 and is one of the largest and most recognized
automotive brands worldwide. The company produces a wide variety of vehicles, from
compact cars to heavy trucks, and owns several well-known brands including Audi,
Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda, and Volkswagen Commercial
Vehicles.

**Overview of the Scandal**

The scandal, commonly referred to as "Dieselgate," broke out in September 2015 when
the United States Environmental Protection Agency (EPA) issued a notice of violation of
the Clean Air Act to Volkswagen. The company had installed software in its diesel
vehicles that could detect when they were being tested, altering the performance to
improve results.

The following are significant points related to the scandal:

1. **Nature of Incident:** The Volkswagen scandal revolved around the company

installing 'defeat devices' - software that could manipulate the car's performance during
emissions tests. This software caused the vehicles to meet emissions standards during
testing, but they would emit up to 40 times the allowable nitrogen oxide pollutants during
regular driving (Ewing, 2017).

2. **When the News Broke Out:** The scandal broke in September 2015 when the EPA
issued a notice of violation to Volkswagen. This was the result of research conducted by
the International Council on Clean Transportation and West Virginia University, which
raised questions about the emissions levels of the company's diesel vehicles.
3. **Signs:** Prior to the scandal breaking, there were several signs that something was
amiss. Researchers had found discrepancies between Volkswagen's emissions test
results and real-world performance. Additionally, Volkswagen vehicles were emitting far
more pollutants in real-world conditions than they did in regulatory tests, leading to
questions about how these vehicles passed emissions standards.

4. **Impact of the Scandal:** The scandal led to a massive loss of consumer trust and
damaged the company's reputation globally. Volkswagen faced billions of dollars in
fines and legal costs, and several top executives resigned or were dismissed in the
aftermath. The company also had to recall millions of vehicles worldwide.

5. **Post-Scandal Response:** In the wake of the scandal, Volkswagen pledged to

change its corporate culture and focus more on electric vehicles. The company invested
heavily in electric vehicle technology and made a commitment to become carbon
neutral by 2050.
Question 1.2

Volkswagen's Diesel Emission Scandal as an example to illustrate the stakeholders and

their roles in corporate governance.

1. Shareholders: Shareholders are individuals or entities that own stock in a company.

They have the right to vote on company matters, including electing the board of
directors, who make major decisions about the company's operations. In the
Volkswagen scandal, the shareholders were directly affected by the drop in the
company's stock price as a result of the scandal. (Shareholder Rights Directive, 2007).

2. Board of Directors: The board of directors is responsible for overseeing the

company's management to ensure that it acts in the best interests of the shareholders.
They also set the strategic direction of the company. In the case of Volkswagen, the
board may have been involved in, or at least complicit in, the decision to install software
to manipulate emissions tests. They failed in their duty to uphold ethical standards and
protect the company's reputation (OECD, 2015).

The board of directors are primarily responsible for providing strategic direction and
oversight of a company's operations. Their role also involves ensuring that the company
adheres to all regulatory requirements and operates in the best interest of the
shareholders (Tricker, 2015). In the Volkswagen scandal, the board's role was critical.
There were allegations that some board members knew about the installation of the
cheat devices (Ewing, 2017). If true, the board failed in their responsibilities to uphold
ethical standards and protect shareholders' interests.

3. Employees: This group includes everyone from top management down to the factory
floor. They carry out the company's operations, and their actions can have a significant
impact on corporate governance. In the Volkswagen scandal, several employees were
directly involved in the development and installation of the cheating software.

Employees, especially those in management roles, are responsible for implementing the
strategic decisions made by the board of directors and ensuring that the company
operates within the bounds of the law (Ferrell & Fraedrich, 2015). In the Volkswagen
scandal, certain employees were directly involved in developing and installing software
that manipulated emissions tests. Their actions were not only illegal but also a breach of
their ethical duties to the company and its stakeholders.

4. Customers: Customers are a major stakeholder in any company. They are directly
affected by a company's actions and decisions. In the Volkswagen case, customers
were deceived into buying cars that were marketed as environmentally friendly but were
actually not.

5. Government/Regulatory Bodies: These are responsible for enforcing laws and

regulations. In the Volkswagen scandal, the U.S. Environmental Protection Agency
(EPA) played a crucial role in uncovering the deceit.
Government and regulatory bodies, like the U.S. Environmental Protection Agency
(EPA), have the responsibility to ensure companies comply with laws and regulations.
They act in the interest of the public by enforcing regulations and issuing penalties for
non-compliance (Environmental Protection Agency, 2015). In the Volkswagen case, the
EPA played a critical role in uncovering the scandal, demonstrating its important
function as a regulator to hold corporations accountable for their actions.

6. Society/Environment: The society at large and the environment are also

stakeholders. Volkswagen's deceitful actions negatively affected air quality and
contributed to environmental harm.

The top management and board of directors hold the highest level of responsibility in an
organization. They are entrusted with making strategic decisions, upholding ethical
standards, and ensuring regulatory compliance for the organization (Tricker, 2015).

Who is to be held responsible?

In the Volkswagen scandal, it was revealed that these parties either knew or should
have known about the cheating devices installed in their vehicles to manipulate
emission readings. Evidence presented in court showed that several high-ranking
executives and engineers were aware of the software manipulation (Ewing, 2017).

Given their role in providing oversight, and the evidence indicating their awareness of
the deception, it is reasonable to hold the top management and the board of directors
as the most responsible party for the scandal.

To critically evaluate, the board of directors and top management were primarily
responsible for the scandal. They either knew or should have known about the unethical
practices, yet failed to prevent them. The shareholders, customers, and regulatory
bodies were more so the victims of the scandal.
Question 1.3

Without the specific details of the scandal or personality risks identified in Question 2, I'll
provide a generic response that discusses how the given headings can serve as
mechanisms to manage personality risks in corporate governance. Once the specific
details are available, these can be tailored accordingly.

1. Hard Law/Criminal Law: Legal compliance is paramount for any organization. Hard
laws like criminal law, financial regulations, and corporate laws exist to deter and
penalize any unethical or illegal behavior. Personality risks could manifest in unlawful
actions, such as fraud, embezzlement, or other criminal activities. To manage these
risks, organizations should have stringent compliance systems, regular audits, and clear
consequences for violations of law. Implementing a robust legal compliance system
reduces personality risks by deterring harmful behavior and holding individuals
accountable for their actions.

2. Soft Law/Self-Regulation: Self-regulation mechanisms such as corporate policies,

codes of conduct, or ethics guidelines can also help mitigate personality risks. While not
legally binding, these mechanisms create a culture of ethics and integrity within the
organization. Management should ensure that employees at all levels understand and
adhere to these standards. Regular training and reinforcement of ethical norms, coupled
with a robust mechanism for reporting and addressing violations, can significantly
reduce personality risks.
3. Professionalism and Certification: Ensuring that employees have the necessary
qualifications, skills, and professional ethics for their roles can significantly mitigate
personality risks. This can be achieved through rigorous hiring practices, ongoing
professional development, and certifications. By focusing on professionalism,
organizations can ensure that their employees are competent and ethical in their roles,
thus minimizing the risk of misconduct or unprofessional behavior.

4. Information and Disclosures: Transparency is a powerful tool in managing

personality risks. Clear, honest, and regular communication about the organization's
activities, policies, and any issues that arise can build trust and deter unethical
behavior. This involves being open about any misconduct or problems and taking swift,
decisive action to address them. In addition, organizations can use disclosures to
communicate their commitment to ethical practices, which can serve as a deterrent to
potential misconduct.

Implementing these mechanisms involves an ongoing commitment to good governance

and ethical conduct. This requires leadership from the top, with senior executives
setting the tone for ethical behavior, along with a concerted effort to build a culture that
values integrity, professionalism, and transparency.

The implementation of any mechanism will depend on the nature of the scandal, the
identified personality risks, and the specific circumstances of the organization. For
instance, if the scandal involves illegal activities, then reinforcing hard law compliance
may be a priority. Alternatively, if the scandal reveals a lack of professionalism or ethical
conduct, then the organization may focus more on improving their self-regulation
mechanisms and professionalism standards.
Questions 1.4

Applicability of the King IV Code

The King IV Report on Corporate Governance for South Africa, often referred to as the
King IV Code, is a comprehensive and widely accepted benchmark for corporate
governance. It is particularly relevant for South African companies, but its principles and
recommendations have global applicability (IoDSA, 2016). The code is relevant to any
organization looking to uphold high standards of corporate governance and ethical
conduct.

The 2nd Principle of the King IV Code

The second principle of the King IV Code asserts that: "The governing body should
govern the ethics of the organisation in a way that supports the establishment of an
ethical culture" (IoDSA, 2016). This principle emphasizes the importance of ethical
leadership and the role of the governing body in establishing and upholding an ethical
culture in the organization.

Recommendations within the 2nd Principle

The second principle offers several recommended practices to establish an ethical

culture, including:
1. The governing body should set the direction for how ethics should be approached
and addressed in the organization.

2. The governing body should ensure that the organization’s ethics are managed
effectively.

3. The governing body should ensure that the organization’s ethical performance is
assessed, monitored, reported and disclosed (IoDSA, 2016).

Assessment of Volkswagen's Compliance with the 2nd Principle

The Volkswagen scandal, often referred to as the "Dieselgate," erupted when it was
revealed that the company had installed software in its diesel cars to manipulate
emissions tests (Ewing, 2017). This scandal fundamentally contradicts the second
principle of the King IV Code.

- With regards to setting the direction for ethics, Volkswagen failed. The very fact that
the company chose to cheat on emissions tests indicates a lack of ethical direction set
by the governing body.

- In terms of managing the organization's ethics effectively, Volkswagen again fell short.
The emissions scandal suggests a significant ethical oversight, indicating that the
company's ethics management was flawed.

- Lastly, regarding the assessment, monitoring, reporting, and disclosure of the

organization's ethical performance, Volkswagen was found wanting. The company not
only failed to report its unethical practices but actively hid them, which goes against the
principle of transparency outlined in the King IV Code.

In summary, Volkswagen's actions in the Dieselgate scandal indicate a failure to comply

with the second principle of the King IV Code. This suggests a need for substantial
reform in the company's governance practices to align with the principles of ethical
leadership and transparency.

Question 1.5

Elements of GRC

Governance, Risk, and Compliance (GRC) is a strategic framework that aligns IT with
business objectives, while effectively managing risk and meeting compliance
requirements. The common elements that go across successfully integrated
governance, risk, and compliance policies, processes, and procedures include:

1. Governance: This element pertains to the decision-making processes and structures

within an organization. It includes the strategies, policies, and procedures that dictate
how an organization operates and pursues its objectives (Mallin, 2015).

2. Risk Management: This involves the processes of identifying, assessing, and

mitigating risks that could affect the organization's operations or ability to meet its
objectives. Effective risk management helps ensure that risks are understood and
managed within acceptable levels (Mallin, 2015).

3. Compliance: This relates to the processes and systems in place to ensure that an
organization adheres to all applicable laws, regulations, standards, and ethical
practices. Compliance programs help organizations avoid legal issues and maintain a
positive reputation (Mallin, 2015).
Application of Each Element

Using the Volkswagen scandal as a case study:

1. Governance: The Volkswagen scandal, often referred to as "Dieselgate," revealed a

significant governance failure. The decision to install software that manipulated
emissions tests suggests that the governance processes and structures did not foster
ethical behavior or uphold the law (Ewing, 2017).

2. Risk Management: The scandal indicates a lack of effective risk management. The
risks associated with cheating emissions tests—both legal risks and reputational risks—
were seemingly either not identified or not properly evaluated and mitigated (Ewing,
2017).

3. Compliance: The actions of Volkswagen in the scandal directly violated regulations

regarding vehicle emissions, highlighting a significant compliance failure. This led to
legal issues and reputational damage for the company (Ewing, 2017).

Evaluation of Volkswagen's Embrace of GRC

In light of the Dieselgate scandal, it appears that Volkswagen had not adequately
embraced the principles of Governance, Risk, and Compliance (GRC) at the time of the
scandal. The decision to cheat on emissions tests represents a failure in governance,
risk management, and compliance, suggesting significant shortcomings in Volkswagen's
GRC framework. While the company has taken steps to address these issues in the
aftermath of the scandal, the actions leading up to the scandal demonstrate a clear
failure to effectively implement and integrate the elements of GRC (Ewing, 2017).

References

Mallin, C. A. (2015). Corporate Governance. Oxford University Press.

Ewing, J. (2017). Faster, Higher, Farther: The Volkswagen Scandal. W. W. Norton &
Company.

References

Institute of Directors in Southern Africa (IoDSA). (2016). King IV Report on Corporate

Governance for South Africa 2016.

Ewing, J. (2017). Faster, Higher, Farther: The Volkswagen Scandal. W. W. Norton &
Company.

- The Shareholder Rights Directive (2007/36/EC). European Union.

- G20/OECD Principles of Corporate Governance, OECD, 2015.

- U.S. Environmental Protection Agency (2015). "VW Notice of Violation", EPA.

Tricker, B. (2015). Corporate Governance: Principles, Policies, and Practices. Oxford

University Press.

Ewing, J. (2017). Faster, Higher, Farther: The Volkswagen Scandal. W. W. Norton &
Company.
Ferrell, O. C., & Fraedrich, J. (2015). Business Ethics: Ethical Decision Making &
Cases. Cengage Learning.

U.S. Environmental Protection Agency (2015). "VW Notice of Violation", EPA.