Holistic integrity and compliance management system

Integrity and compliance are major priorities in the Volkswagen Group. Marking the end of the Monitorship, the Chairman of the Volkswagen AG Board of Management Herbert Diess said: “The end of the Monitorship is not the end of our journey. I am committed to the continuous improvement of our organization and its culture, and so are all my Board of Management colleagues. This mindset is essential to our ambition of making safer and more intelligent zero-emission vehicles for today’s customers and for generations to come.”

We firmly believe that acting with integrity and in compliance with the rules is vitally important for our Company’s future success. It is for this reason that we have embedded integrity and compliance in our Group strategy TOGETHER 2025⁺. Our objective is to act as a role model for integrity and compliance and thus deepen the trust of our employees, customers, shareholders and partners – both existing and future – in our Company.

To achieve this aim, we have been building a comprehensive and holistic integrity and compliance management system (ICMS) since 2018. This is being rolled out as part of the Together4Integrity (T4I) program and is based on the five principles of the internationally recognized ECI, which relate to strategy, risk management, a culture of integrity, a speak-up environment and resolute accountability. In this context we are also implementing the measures that we defined based on the recommendations made by the Independent Compliance Monitor Larry D. Thompson.

T4I aims to establish robust, consistent process standards that are anchored in the Group’s corporate policies or organizational guidelines. The purpose is to give integrity and compliance an equally important strategic and operational priority in our Company as, for example, sales revenue, profit, product quality or employer attractiveness. T4I is thus one of the most extensive change programs in the history of the Group. In 2020, the Group Board of Management resolved to form the Group Board of Management Integrity and Compliance Committee (K-VAC), which, among other things, takes over the tasks of the Group Compliance Committee established during the Monitorship. The main tasks of the K-VAC include continuing to develop the ICMS and the corporate culture as well as managing the uniform implementation of the initiatives combined in T4I across all divisions and brands.

Through T4I we aim to implement the ICMS by 2025 in around 850 Group companies in which we hold a majority stake. By the end of 2020, 639 companies had already begun the implementation. This will strengthen Group-wide corporate governance and reduce the corresponding risks. The ICMS is therefore also a substantial contribution to the sustainability of the Volkswagen Group. We also want to live up to our responsibilities in terms of our influence on companies not controlled by Volkswagen.

TOGETHER4INTEGRITY

Integrity encourages ethical decision-making

An essential role of the ICMS is to introduce integrity as a strategic key to success in all the Group’s brands and companies. This includes integrating integrity into decision-making processes. For example, every resolution proposal submitted to the Board of Management must highlight the extent to which the intended decision is in line with the Group’s integrity and compliance, what risks arise from it and how the risks can be reduced. Similar requirements apply to Group brands and companies and to Group bodies to which the Board of Management has delegated decision-making powers.

Compliance means adherence to rules

We firmly believe that long-term commercial success can only be achieved if each and every individual complies with laws, regulations and commitments. Compliant behavior must be a matter of course for all Group employees. The compliance organization provides worldwide support in the form of programs, guidelines, processes and practical advice. The compliance Infopoint is a core element of this. This is available to all employees.

Our compliance organization focuses on preventing corruption, fraudulent breaches of trust and money laundering. Compliance in mergers & acquisitions, noncontrolled shareholdings and safeguarding business and human rights are other key areas. In addition, we expedited the integration of the topic of business and human rights into the ICMS and accorded the topic vital strategic importance. Here, we follow the UN’s requirements and principles on business and human rights due diligence. An investigation of all companies in the Group within the scope of compliance was conducted in 2020 with the aim of identifying risks in respect of human rights. Based on the findings, these companies were given a set of binding measures that they must implement by December 31, 2021.

T4I brings together activities from eleven key initiatives

The ICMS defines standards for integrity and compliance. T4I is rolling out and implementing these standards uniformly throughout the Group in the form of more than 100 packages of measures. The packages of measures are divided into eleven key initiatives:

1. HR Compliance Policies and Procedures

The focus is on standard HR processes such as recruitment, training, promotion and remuneration (bonus payments). For example, integrity and compliance matters have been included as criteria for the recruitment process and staff development measures for managers since 2019. Employment contracts contain integrity and compliance clauses. Integrity and compliance have also been covered by annual employee appraisals since 2020. Performance-related remuneration from senior executive positions is now also partly determined by integrity and compliance standards.

2. Code of Conduct

The Volkswagen Group’s Code of Conduct is the key instrument for strengthening employees’ awareness of responsible action and decisions, giving employees support and guidance, and finding the right contact persons in cases of doubt. The framework is available online to employees and also to external third parties.

Every employment contract refers to the Code of Conduct and commits the employee to comply with it. Regular training is intended to increase its efficacy. The Code of Conduct is also taken into account when calculating their variable, performance-related remuneration, which is set as part of the employee appraisals. Members of the higher levels of management are annually certified on the Code of Conduct. They confirm that they will comply with the Code of Conduct and undertake to report any serious regulatory violations.

3. Integrity Program

The integrity program is designed to reinforce the culture of integrity. The most important instruments in this program include dialogue-oriented communication measures and event formats. These communicate to employees the importance of integrity and motivate employees to behave with integrity even in the face of external pressure. Associated actions include encouraging a culture of handling mistakes constructively, more transparency in taking decisions and a greater willingness to discuss mistakes and risks openly.

4. Risk Management and Internal Controls

This initiative involves operating an effective risk management system. Uniform, defined structures should ensure transparent handling of risks from our business activities and enable them to be managed. This refers to the annual regular governance, risk and compliance (GRC) process focused on systemic risks, the quarterly risk process (QRP) focused on acute risks, the standard ICS (internal control system) aimed at safeguarding processes, and root cause analysis. The initiative to support the QRP also includes the introduction of the “Riskradar” IT system and training of risk managers.

5. ICRA and Compliance Organization

This key initiative describes the organization and processes of the Compliance department at Group level and in the individual Group companies. It shapes the Company’s compliance strategy, sets Group-wide standards for the internal compliance risk assessment (ICRA) and contains measures for managing and mitigating the compliance risks. The ICRA has been carried out since 2018, with the Group companies being assigned to different risk categories on the basis of a comprehensive questionnaire. To reduce potential risks, we rolled out standardized compliance measures in the relevant business units, the scope of which varies depending on the business units’ individual risk exposure. The degree to which measures have been implemented is reported on a regular basis, but at least once per year. Business units with a high risk are regularly monitored by the Divisional Compliance Officer or Regional Compliance Officer and starting in 2021, audited by an external auditor.

6. Whistleblower system and incident response

This initiative brings together all measures for the establishment and operation of the whistleblower system. The whistleblower system is the central point of contact for reporting cases of serious rule-breaking in the Volkswagen Group. The aim is to avert damage to the Company and its employees through the use of binding principles and a clearly governed process. An investigation is only initiated after the information received has undergone a thorough examination and the latter has identified concrete indications of rule-breaking. The affected parties are treated fairly: the presumption of innocence applies as long as rule-breaking has not been proven. They are listened to at an early stage and vindicated if wrongly suspected. Strict confidentiality and secrecy apply throughout the investigation. Appropriate sanctions are applied where misconduct is proven. Whistleblowers are protected and their statements are treated confidentially. A wide range of channels is available for reporting information on misconduct, including anonymously if preferred.

7. M & A and NCS Compliance

In the event of planned mergers and acquisitions, the relevant companies are audited according to integrity and compliance standards. This prevents a Group company from being confronted with unidentified integrity or compliance risks when acquiring another company. This key initiative also promotes compliance in non-controlled shareholdings (NCS), i.e. companies that are not controlled by a Volkswagen Group company as a majority shareholder (excluding Chinese joint ventures). During mergers and acquisitions (M&A) and the supervision of NCSs, strategic, economic and ethical considerations are key to the sustainability of investment decisions.

REPORTING CHANNELS OF THE WHISTLEBLOWER SYSTEM

8. Business partner due diligence

Business partner due diligence entails reviewing the integrity and compliance systems of suppliers, service providers and sales partners. This review of existing and potentially new business partners is carried out as part of a risk-based, transparent, documented process that is implemented worldwide using an IT-based tool. This initiative also includes the offer to assist business partners in meeting the required standards. Companies that do not meet the standards defined in the Volkswagen Code of Conduct for Business Partners should not receive new business.

9. Product compliance

The product compliance management system (PCMS) shall ensure that our products comply with the legal and regulatory requirements of the exporting and importing country, external standards and contractually agreed customer requirements, as well as internal standards and externally communicated voluntary commitments throughout their life cycle. We have defined clear roles and responsibilities for our PCMS with regard to design, implementation and monitoring.

10. Environmental compliance

Statutory environmental regulations and voluntary commitments are binding at all locations and in all business fields. The Group’s environmental policy and the environmental compliance management system stipulate the corresponding requirements and responsibilities for all strategy, planning and decision-making processes in the Group brands and companies. This also includes a system of metrics to determine progress in meeting environmental targets: in the fields of renewable energy, CO₂ emissions and resource efficiency. We make allowance for the actual and potential environmental risks and opportunities in our products’ entire life cycle.

11. Anti-corruption

We advocate fairness in business dealings and have a clear zero-tolerance policy on active or passive corruption. We have therefore produced Group policies on dealing with gifts and invitations, donations and sponsorship. This initiative also includes the development and implementation of trainings for employees in divisions or companies with a high risk exposure.

Emphatically developing a culture of integrity

The holistic integrity and compliance management system being established Group-wide through T4I provides the regulatory framework for acting with integrity and in compliance with the rules and results in uniform corporate governance throughout the Group in relation to integrity and compliance. It is also advancing the culture of integrity. The aim is to inspire and motivate employees and strengthen their own drive to act with integrity in all situations. Both, uniform corporate governance and a mature culture of integrity contribute to the effectiveness of the ICMS as a major factor in the sustainability of the Volkswagen Group.

Volkswagen’s corporate culture is founded on the seven Group Essentials. They define how we at Volkswagen want to work together and thus supplement the Code of Conduct. The Group Essentials also form the frame of reference for the Role Model Program, which encourages dialogue-oriented and distance-reducing collaboration.

T4I inspires and motivates employees, especially with launch events and perception workshops. Both events are held in each Group or brand company at the start of the implementation of T4I and involve both employees and managers across hierarchies as players in the change process. The perception workshops are primarily about the actual practice of integrity and compliance – measured by the perception of employees. Here, representatively selected employees and managers give their assessment of this practice and discuss opportunities for improvement. The perception workshops will be repeated annually until the key initiatives have been fully implemented. They measure the progress of the relevant company with regard to integrity and compliance and show where further action is needed.

Monitoring of implementation and effectiveness

Methods of impact monitoring and progress measurement are an integral part of our ICMS. The planning and reporting system of the T4I program provides information on the implementation status of all packages of measures at any time. It is used for reporting to the Board of Management and the boards of the Group and brand companies as well as for monitoring potential delays and initiating countermeasures.

In addition to the recurring perception workshops, our annual employee opinion survey shows the progress in our culture of integrity. This Group-wide survey asks whether it is possible for each individual to act with integrity. If the answer is no, the relevant manager must identify and clear the possible obstacles together with the team. The question was asked in the opinion survey for the first time in 2017 and since then, including in the reporting period, has been one of the three questions with the highest level of agreement, with a significant improvement in the value. The level of agreement among employees each achieved an average value in the highest category of the underlying five-level range.

Contributing to the Group’s strategic indicators

To measure the level of target achievement in the area of Integrity & Legal Affairs, we defined a strategic indicator for the major brands that manufacture passenger cars:

• Compliance, a culture of error management and behaving with integrity.
  This is based on an evaluation of the answers to three questions in the opinion survey relating to compliance with regulations and processes, dealing with risks and errors and the opportunity to act with integrity. In the case of negative deviations, the affected departments develop and implement measures. The indicator continuously improved on the previous good figure until 2020. On average, the level of agreement among employees was in the highest category of the underlying five-level range.

As an additional measuring tool, we use the Integrity Index developed by independent business ethicists from the Technical University of Munich. Based on more than 100 criteria in the categories of: the compliance & infrastructure, working atmosphere & integrity culture, products & customers, society, and partners & markets; it gives a comprehensive picture of an organization’s integrity. The integrity index was started in 2019 as a pilot project for Volkswagen Passenger Cars Germany and Audi (German sites). The scientists found that both of the brands examined exhibited a “good” integrity level overall.

The findings were used in the reporting year in a structured follow-up process to derive and implement improvement measures together with the respected departments.

Further information on the topics of integrity and compliance can be found in the Group Sustainability Report 2020.

Independent Compliance Monitorship successfully completed

In September 2020, the Independent Compliance Monitor, Larry D. Thompson, certified that Volkswagen has fulfilled its obligations under its Plea Agreement with the US Department of Justice (DOJ) to maintain a compliance program that will prevent, detect and punish violations of anti-fraud and environmental laws. Certification applies to Volkswagen AG and its subsidiaries and affiliates with the exception of Porsche AG and Porsche Cars North America, which were not part of the Monitorship. Over the course of the Monitorship, which began in 2017 and is now concluded, Volkswagen enhanced and improved its structures, processes and systems in many divisions of the company including technical development, governance, risk management, compliance and legal functions. Volkswagen expanded the whistleblower system, strengthened processes to prevent corruption and antitrust violations, and created a due diligence process for business partners. The Group also flattened hierarchies, decentralized decision-making and gave more responsibility to its brands and regional companies.

The completion of the Monitorship is not the end of the process; the Group remains committed to continuous further improvement of compliance and its corporate culture.

Thompson also served as Independent Compliance Auditor and issued his third and final audit report in June 2020. That report established that there had been no new violations of the relevant settlements with the Environment and Natural Resources Division of the DOJ, the California Attorney General, the US Environmental Protection Agency (EPA) and the California Air Resources Board.

On September 2, 2019, Volkswagen also announced that the Company had concluded a settlement agreement with the EPA, which had been the reason for commissioning a second auditor for the Volkswagen Group. This agreement was concluded to prevent it from being excluded from public contracts in the United States. This second auditorship is scheduled to last three years and will run until August 2022.