The article that is referenced in the essay can be accessed through the link above.
THE VW SCANDAL AND THE GERMAN MODEL OF CAPITALISM
The article
gives a good overview of the various scandals that the VW was involved in as
well as some basic information with regards to the so-called ‘German model of
capitalism’ and the corporate governance practices that result from it. It was
included in the ‘Big Read’ section (as usual a long, general, in-depth and
opinionated one) and was written by Richard Milne who is the Nordic and Baltic
correspondent of Financial Times. It is seen that the overall point of the
article is to put the VW system (as can be induced clearly from the title
‘System Failure’) and the German model of corporate governance into question.
It is claimed that the scandals that took place in different periods in VW’s
history are caused by the VW system although it may seem that they have little
in common to an outsider. Although, the article does not recommend a specific
direction of change for the system failure, the author seems to believe
strongly in the need of change. We could speculate that this critique of the
VW’s system , a company which can be seen as a quasi-symbol of the German
model, implies that a change is needed in the German model overall in the
direction of the Anglo-Saxon model of capitalism (or Liberal Market Economy
rather than staying as a Coordinated Market Economy following the work of Hall
and Soskice).
With
regards to the question on who is to blame for the scandals, it should be
answered on various levels in my opinion. There have been multiple scandals and
each scandal has its own story and specific people to blame for.
What didn’t
work in the system looks clear; it is the system itself by which I mean the
VW’s system (and in my opinion it would be controversial to extend this failure
to the German system as a whole very confidently although the VW system shares
many aspects with the systems of other companies). It is a corporate governance
failure and shows that the complicated system of VW lacked the control
mechanisms to prevent a corporate misconduct of this scale. Managers failed to
act in the interest of the shareholders, and therefore this scandal has been
extended as a further critique of the German model as a whole which emphasizes
a stakeholder approach. However, VW’s governance was raising some doubts among
analysts prior to the scandal in 2015 and its governance was rated below its
competitors by Morgan Stanley Capital. Furthermore, as indicated by former
employees the decision-making system was flawed, it lacked transparency, some
issues were deemed as taboo (notably with regards to unemployment), thus
overall there were not real discussions taking place on some critical issues.
With regards to the question whether
the VW scandals point to the failure of the German model of capitalism, I would
firstly say that it is too broad of a question and vague as well. The reason
why I find the question too broad is the fact that a system (of this kind
constitutes many dimensions (political, economic, legal, cultural) and the ways
of measuring the overall success of the different systems is disputed. Furthermore,
this ‘varieties of capitalism’ approach is not straightforward and without
problems , as well as being a recent trend (after the end of the Cold War and
especially after the 2008 financial crisis) there are many debates on the
measures/ways of classification between different models and on the
within-country differences that are typically omitted in these studies.
Furthermore, these conceptions, notably the LME and CME distinction made by
Hall and Soskice imply the existence of static models whereas in reality the
different models are in constant flux.
Moreover,
when we take other scandals that major German firms were involved in in the
past years in consideration (international bribery allegations at Siemens and
Deutsche Bank’s mis-selling of mortgage securities in the US) , we see that
these tended to happen outside Germany and especially in Anglo-Saxon countries
where rules that apply in Germany do not apply and vice versa. Thus, there is
the argument that these scandals highlight the weaknesses of the German system
in contexts where the rules are lacking which causes managers to feel less
constrained.
However, to
answer the question whether this scandal posits a general failure of the model
in Germany we need to compare how the other so-called models are faring,
notably the Anglo-Saxon shareholder capitalism. To begin with, there is a
certain irony about the question whether the German model is failing since the
interest in studying the varieties of capitalism surged after the 2008 crisis
due to the decline of trust in the Anglo-Saxon shareholder capitalism , when
people began to question the sustainability and the perceived superiority of
the Anglo-Saxon model (often comparing it to the German model or the
Scandinavian model which actually had a significant impact on public opinion
and political discourse as we can see with the attention Bernie Sanders’
campaign attracted).In our comparison of the models and the scandals
surrounding them, more important than the notorious Enron scandal and the Dotcom
bubble, I believe that the 2008 financial crisis showed us the weaknesses of
the Anglo-Saxon model in many ways and can be considered as the indication of
the failure of the model as a whole since the financial markets and
institutions (which are very central to the Anglo-Saxon model that is
characterized by dispersed ownership of firms , high stock market
capitalization and lack of/fewer state interventions) and failed to function
properly due to failures in regulation and supervision caused by moral hazard ,
collusion , excessive risk-taking and short-termism. The crisis caused many
people to lose their jobs and many businesses to fail as well as contributing
to the European Sovereign Debt crisis. Massive bailouts and expansionary
monetary policy were used in order to prevent a potential collapse of the whole
system which put a significant burden on the public.
The German
economy overall is doing well with a historically low unemployment rate (almost
reaching full employment), a high export quota as well as being innovative
(Industry 4.0 which originates from the high-tech strategy of the German
government proposed by Bosch). The corporate tax level is lower than that of
the US which benefits investors and encourages savings. The industry has a
strong place in the economy with share of industry in gross value added the
highest among G7 countries. Moreover, Germany is ranked 9th in the 2018 Social
Progress Index (which combines the three dimensions of well-being and progress;
basic human needs, foundations of well-being and opportunity) whereas all the
Anglo-Saxon countries are lower in the ranks with the US being ranked 25th. In
my opinion, there is little need to compare the German model with the so-called
Mediterranean model (Italy, Spain , Greece , Turkey) that is characterized by
‘’a large agrarian sector , recent history of extensive state interventions
that have left them with specific kinds of capacities for non-market
coordination in the sphere of corporate finance but more liberal arrangements
in the sphere of labor relations” (Hall & Soskice, 2001, p.21). The Mediterranean
model is clearly not doing well economically and politically, and all the
Mediterranean countries are in crisis to varying degrees.
Thus
overall, we can conclude that the German model is far from being a failure
vis-à-vis other models and I do not consider the VW scandal as a failure of the
German model of capitalism.
With
regards to the appointment of Matthias Müller as the new CEO after the scandal,
I believe that he revived the company even though many people had some doubts
about him due to his well-known close relations to the Porsche and Piech
families and the possible involvement of a Porsche model in the scandal
(Porsche was Müller’s former employer). In the 3 years that have passed after
Müller’s appointment, we can say that he has managed the crisis surrounding the
scandal well as well as starting an aggressive expansion into the electrical
vehicle industry. VW’s profit margins from sales increased from 6% to 7.4% in
2016, the year following the crisis. Under Müller, VW also remained as the
largest automaker in the world and did not concede its position Toyota Motor
Corporation.
Of course,
all these positive changes did not happen by themselves. As mentioned in the
first part of the essay, Müller tried to change the rigid, malfunctioning
top-down governance structure by delegating more authority to the brand and
regional managers, and furthermore Porsche Automobil Holding (largest
shareholder of VW) stated in a release that any change in the VW governance
structure would be reflected in its own.
To
conclude, I would say that the VW’s corporate governance structure was flawed
and was already alarming before the emissions scandal. It was bad
implementation of the German co-determination model and showed its potential
weaknesses. However, the scandal cannot be said to imply a failure in the
German model, as the German model is doing better than the other models (the
Anglo-Saxon one which lost its almost unquestioned perceived superiority after
the 2008 crisis and the Mediterranean model) in many areas and the scandals
that involved German firms tended to happen in Anglophone countries which
further provide an argument against the failure of the German model. Moreover,
Matthias Müller’s appointment as the new CEO after the crisis proved to be a
good decision with regards to the firm’s reputation, profit margins of sales
and reforms in the governance structure.
Sources
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