Holistic integrity and compliance management system

Integrity and compliance are major priorities in the Volkswagen Group. We firmly believe that, for long-term commercial success, it is important that each and every individual complies with laws, regulations and commitments. Compliant behavior must be a matter of course for all Group employees. This is why integrity and compliance remain key elements of our new Group strategy NEW AUTO and a focus topic in matters of sustainability.

Our objective is to be a role model and deepen the trust of our employees, customers, shareholders and partners in our Company. Our regulations, processes and corporate culture focus on all employees acting with integrity and complying with the rules at all times.

At the same time, we have embedded integrity in our decision-making processes. For example, every resolution proposal submitted to the Board of Management must explain that the intended decision is in line with integrity and compliance, what risks may be associated with 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.

Integrity and compliance must have an equally important strategic and operational priority as performance indicators in our Company as, for example, sales revenue, profit, product quality or employer attractiveness.

We have been building a holistic integrity and compliance management system (ICMS) since 2018. This system is in line with the five internationally recognized ECI (Ethics and Compliance Initiative) principles: strategy, risk management, a culture of integrity, a speak-up environment and resolute accountability.

We are implementing our Together4Integrity (T4I) program to anchor integrity and compliance throughout the Group. This program brings together the vast majority of the Group’s integrity and compliance activities under one roof, applying uniform, robust process and implementation standards.

Thus, we are not only establishing a worldwide ICMS for all Group and brand companies, we are also advancing one of the most extensive change and cultural programs in the history of the Volkswagen Group.

TOGETHER4INTEGRITY

T4I – eleven key initiatives

T4I is to be rolled out in the Volkswagen Group in 2022 and implemented by 2025. The Group’s headquarters is overseeing the program planning and rollout of T4I. The managing directors of the individual companies are responsible for implementing the program at a local level. The packages of measures may differ depending on local circumstances. The implementation time will also vary.

The packages of measures are divided into eleven key initiatives:

1. HR (Human Resources) Compliance Policies and Procedures

The aim of this key initiative is the integration of integrity and compliance into the standard HR processes such as recruitment, training, promotion and remuneration (bonus payments). Integrity and compliance are also a compulsory topic in annual employee appraisals and form part of training measures for employees across all levels of the Company.

2. Code of Conduct

The Code of Conduct (CoC) is the key instrument for reinforcing employees’ awareness of responsible action and decision making, creating the basis for complying with the rules within the Company. The CoC provides support to employees and managers, helping them to find the right contact persons in cases of doubt. Included in the employment contracts, the CoC commits all Group employees to comply with it. Our employees undergo regular mandatory training in the key contents of the CoC.

3. Integrity Program

The integrity program is designed to reinforce the culture of integrity. Its objective is to communicate to employees the importance of integrity and motivate employees to behave with integrity in their everyday work. We regard integrity as an attitude; it provides an inner compass for correct action and becomes particularly decisive in gray areas, when explicit rules are missing or conflicting goals exist. We place particular emphasis on making decisions with integrity. Appropriate training modules on this topic provide support to all management levels, from foremen up to executives.

4. Risk Management and Internal Controls

All business activities entail risks. Binding structures and processes are designed to help create transparency and manage risk. These include the quarterly risk process, which is focused on acute risks, the standard internal control system (ICS), which is designed to protect key processes, and root cause analysis.

5. Internal Compliance Risk Assessment

The internal compliance risk assessment (ICRA) identifies and addresses compliance risks in the Group, in particular those risks involving corruption, money laundering, embezzlement and risks relating to business and human rights. Compliance measures are defined for each company based on its risk profile. The ICRA also defines implementation standards for the Code of Conduct, whistleblower system and compliance training.

6. Whistleblower System

The whistleblower system is the central point of contact for reporting cases of rule-breaking by Group employees such as white collar crimes, acts of corruption, tax offenses, environmental offenses, human rights violations, infringements of antitrust and competition legislation, money laundering and terrorism financing, breaches of product safety and licensing regulations, and serious breaches of privacy. Employees and third parties can report misconduct at any time and in many languages. A wide range of channels is available for this purpose, including completely anonymously, if preferred. The aim is to avert damage to the Company and its employees through the use of binding principles and a clearly governed process.

REPORTING CHANNELS OF THE WHISTLEBLOWER SYSTEM

7. M&A and NCS compliance

In the event of planned mergers and acquisitions (M&A transactions), the relevant companies are audited for commercial risks such as corruption, breaches of trust or fraud. The analyses provide recommendations to mitigate the risks identified. This also applies to joint ventures as well as industrialization and cooperation projects with external partners. Furthermore, the Group Compliance organization works to achieve appropriate compliance management at non-controlled shareholdings (NCSs), i.e. companies that are not controlled by a Volkswagen Group company as a majority shareholder.

8. Business Partner Due Diligence

The business partner due diligence (BPDD) process entails reviewing the integrity, and especially corruption risks, of suppliers, service providers and sales partners. The aim is to identify risks of legal infringements, such as corruption or the violation of ethical standards, at an early stage, to avoid risky business partners and to define measures to minimize risks and implement these with the business partner. If this is not possible, options for terminating the business relationship are explored, or the business relationship is not established in the first place. As such, we have already established the fundamental prerequisites for the implementation of parts of the Lieferkettensorgfaltspflichtengesetz (German Supply Chain Due Diligence Act).

9. Product Compliance

The product compliance management system (PCMS) is designed to ensure that our products comply with the legal and regulatory requirements of the exporting and importing country, internal and external standards, contractually agreed customer requirements and externally communicated voluntary commitments over 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 relevant requirements and responsibilities for all strategy, planning and decision-making processes in the Group brands and companies. This includes a system of key indicators to determine progress in meeting environmental targets in the fields of renewable energy, CO₂ emissions and resource efficiency. We make allowances for the actual and potential environmental risks and opportunities across our products’ entire life cycle.

11. Anti-Corruption

The Volkswagen Group has a zero-tolerance policy on active or passive corruption. This is anchored in both our internal Code of Conduct and our Code of Conduct for Business Partners. Our investigation offices look into and process any reported violations of our principles, and sanctions are imposed on the employees concerned. This initiative also includes the development and implementation of mandatory training for employees in divisions or companies with a high risk exposure.

Hence, T4I aims not only to strengthen uniform corporate governance throughout the Group in relation to integrity and compliance, the program is also designed to advance the culture of integrity by inspiring and motivating employees and strengthening their own drive to act with integrity in all situations. This includes steadfastness in adhering to principles of integrity – regardless of economic or social pressures. Thus, T4I and the ICMS contribute significantly to increasing sustainability in the Volkswagen Group.

Sustainably measuring success

Methods for monitoring effectiveness and measuring progress are an integral part of the compliance management system. The central planning and reporting system of the T4I program provides continuous transparency on the implementation status of the key initiatives. It is used for internal reporting to the Group Board of Management and the Brand Board of Management, makes project advances known and serves to provide assistance when countermeasures are being introduced in response to project delays.

The annual opinion survey also provides information about the development stage of our culture of integrity. The Group-wide employee survey examines whether each individual is able to act with integrity. Where a fixed threshold value is not achieved, the relevant manager must identify and remove the possible obstacles together with the team.

To measure the level of target achievement in relation to Integrity and Legal Affairs, we have 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 that address compliance with regulations and processes, dealing with risks and errors and the opportunity to act with integrity. In the event of negative deviations, the affected departments develop and implement measures. From an already good basis – the level of agreement among employees has always been in the highest category of the underlying five-level range – the indicator has continuously improved up to and including 2021. The index was up by 4.1 points compared with the baseline value and 0.2 points year-on-year.

In addition, Volkswagen uses the integrity index. It measures a company’s integrity holistically and functions as a structural early warning system. Determination of the index began in 2019 as a pilot project for the Volkswagen Passenger Cars and Audi brands. Independent business ethicists collect more than 100 measuring points in the categories of compliance & infrastructure, working atmosphere & integrity culture, products & customers, society, and partners & markets. The assessment conducted in the reporting period showed encouraging progress in the index value. Gains in, among other things, the categories of compliance & infrastructure, working atmosphere & integrity culture, products & customers, and society contributed.

The Group also conducted its first-ever integrity and compliance survey in the reporting period, with 47,000 employees taking part anonymously.

Compliance: clear rules in the Group

Compliance with the rules must be a matter of course for all employees of the Volkswagen Group. The Group compliance organization provides support worldwide in the form of programs, guidelines, processes and practical advice. It helps the Group and brand companies to comply with the rules when carrying out their business activities and to comply with the relevant laws and internal regulations. The compliance work focuses on the prevention of corruption and fraudulent breaches of trust, money laundering and the topic of business and human rights.

The Compliance Infopoint has established itself as the central help center for compliance questions at the Volkswagen Group. The team either directly issues a recommendation on the matter in question or forwards the query to a competent body. Case studies derived from these consultations are regularly incorporated into communications about compliance. The accessibility of the Infopoint was expanded further in the reporting period; using the Volkswagen 360° app, employees can now contact the Compliance Infopoint directly. This makes it much easier particularly for employees without a computer workstation of their own.

In addition, the Group Compliance organization offers training and communication formats tailored to specific target groups – management discussions and training courses for multipliers being two of these. Moreover, compliance content is part and parcel of all career development paths from the induction program for trainees to programs for leadership and management development to the senior management program. The measures are supplemented by information and communication activities such as awareness campaigns, film and dialogue formats, newsletters and interactive games for learning about laws and rules.

In the reporting period, the Group Compliance organization dedicated itself to important future areas with a set of actions, including projects for cross-Group collaboration in the markets, further development of IT-based compliance tools and exchange formats with internal and external compliance experts.

Responsibility in supply chains and in business

Requirements and aim

The Volkswagen Group aims to make mobility sustainable for generations to come. It is therefore only natural that we comply with our legal, social and environmental responsibility not just within the Group but also in our supply chains.

This is the reason Volkswagen defined “responsibility in supply chains and in business” as a focus topic and integrated it into the initiatives of the new Group strategy NEW AUTO. We recognize our corporate responsibility for human rights in our business units, at our sites and in our business relationships. We condemn forced and child labor, respect the freedom of assembly, put tolerance and diversity into practice, protect the disadvantaged and do not engage in unlawful activities. This is also anchored in our Code of Conduct.

Our goal is to strengthen the compliance management system for human rights, which is in force throughout the Group. This system has been designed to comply with the UN’s Human Rights Due Diligence requirements. We aim to effectively reduce ESG (environmental, social, governance) risks including human rights risks by no later than 2025. All Group companies within the scope of Group Compliance are to have implemented the topic of business and human rights in their compliance management system by 2023. We will support the achievement of targets with suitable measures and manage this by means of corresponding KPIs.

Focal points: business and human rights

We compared the pertinent human rights frameworks with our business-specific activities and defined the aspects that are relevant for us as focal points. These salient business & human rights issues refer to:

• Labor rights
• Safety
• Tolerance

In 2019, the Volkswagen Group Board of Management established a coordination function for the topic of business and human rights within the Volkswagen Group, which also coordinates the collaboration with the brands and regions. We use an appropriate committee structure to manage this topic from the Group Board of Management down to the regional level in the Group brands.

Dialogue and cooperation

We communicate with our workforce on the topic of business and human rights via various channels. We communicate our positioning to the public and external stakeholders in interviews and media reports.

We are the only automobile manufacturer involved in the international, cross-sectoral Global Business Initiative for Business and Human Rights (GBI). In addition, we are active in Econsense, the sustainability association for German industry. Furthermore, we are in dialogue within the German automotive industry as part of the National Action Plan for Business and Human Rights and seek close exchange with other companies as well as institutional investors and investment banks, for example at our annual ESG conference for investors.

Transparency through risk assessments

The topic of business and human rights is closely integrated into our internal compliance risk assessments. Group Compliance has now assessed the human rights risks at 782 controlled Group companies in a total of 83 countries. The results were reviewed and confirmed by the companies, which were then notified of risk-specific measures that they were required to implement by the end of the reporting period. The implementation will be monitored starting in 2022.

Preparations for the Lieferkettensorgfaltspflichtengesetz (LkSG – German Supply Chain Due Diligence Act)

We are currently intensively preparing for the German Supply Chain Due Diligence Act. The Volkswagen Group supports the newly created binding legal framework under which companies and their suppliers commit to respecting human rights. We welcome the fact that the law creates longer-term legal certainty for companies. Yet the LkSG will also impose requirements that can only be fulfilled with great effort on the part of companies.

For more information on integrity and compliance as well as the topic of business and human rights, please see our 2021 Group Sustainability Report.