VW Group Scandal Analysis

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Q1

Introduction

Traditionally the main goal of companies has been to a profit from their operations in order to please their shareholders. This report examines the recent case of VW Group and the scandal surrounding their attempt to cheat the emissions testing carried out by the US Environmental Protection Agency (EPA) in pursuit of profit, and the subsequent media attention that followed. I look at whether the group has lost legitimacy in the eyes of the public and of its shareholders and if there has been any effect on the automobile industry as a whole. I also examine the reaction of the market to the scandal and investigate the impact of the scandal on the share price of the company and other firms.

Breach of Social Contract and loss of legitimacy

Companies have an implied social contract to conduct their business operations in a way that is in line with the expectations of society as identified by Lacey et al. (2014, p. 833). By installing their vehicles with a device to beat environmental testing, it would appear that VW Group has broken the terms of their social contract. Pellegrino et al. (2012, p. 69) state that companies are now more than ever under increased scrutiny from the media to conduct their operations in accordance with the social contract in order to for their operations to be perceived as being legitimate. Legitimacy
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This loss of legitimacy through out a whole industry was seen after the collapse of Enron, when the involvement of its auditor Arthur Andersen was revealed, as identified by Audia et al (2009, p 195), when other audit firms that had no involvement also lost legitimacy because there was a negative public perception of audit firms in general. There may be a legitimacy gap between the practices of the automobile industry and society’s expectations of how the automobile industry should

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