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VW motors on, but for its critics concerns over governance remain

Machiavelli warned to “never waste the opportunity offered by a good crisis”, but the father of political science seems to have been ignored by Volkswagen.
The German car giant went into meltdown in 2015 when it emerged 11m of its diesel cars had been fitted with “defeat devices” to cheat pollution checks. Shares in the company crashed, sales plunged and the chief executive quit: just the sort of crisis to drive fundamental changes in the governance standards that allowed the dieselgate scandal to occur at VW.
However, it was an opportunity that VW – which also owns Audi, Bentley, Bugatti, Lamborghini, SEAT and Skoda car marques, along with Ducati motorbikes and Scania and MAN trucks – missed, according to Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management.
VW motors on, but for its critics concerns over governance remain

Herbert Diess, the new boss of VW Group, with Matthias Mueller, who he replaced in the job, at the company's annual press conference

Credit:
AFP
“Corporate governance has always been an issue for VW,” she says. “After the scandal there was a chance to reform but they chose not to change.”
Instead of root and branch reform, VW appointed Matthias Mueller – a company veteran and then head of Porsche – to become chief executive, while finance director Hans Dieter Poetsch was made chairman.
Mueller – who was replaced in the job by Herbert Diess, head of the VW cars division, on Thursday – oversaw $25bn (?17.5bn) of payouts in penalties, compensation, vehicle buybacks and modifications, and a huge external investigation – the results of which were never made public. He also instigated cost cuts, investment in electrification and a change of workplace culture, such as a whistle-blowing programme.
However, hopes that dieselgate would shake up the governance system, which many think enabled the scandal to occur, turned out to be unfounded.
Part of the problem is the ownership of VW and how it is controlled. Of the 500m VW Group shares, 40pc have no voting rights. Of those that do, almost 90pc are controlled by just three powerful groups. Some 52pc are held by Porsche Automobil Holding, which represents the interests of the families of VW founders Ferdinand Porsche, the car designer, and his son-in-law Anton Piech; 20pc are controlled by the State of Lower Saxony, where VW is based, and 17pc are owned by Qatar’s sovereign wealth fund. 
Volkswagen ownership
Further complicating the issue is that VW’s supervisory board made up of 20 members – the equivalent of non-executives in the UK – is split, with 10 representatives for shareholders and 10 for workers and unions. On the shareholder side, four seats are taken by representatives of the Porsche and Piech families, two by  Qatar and two by nominees for Saxony.
“It’s a coalition for unhealthy governance,” says Arndt Ellinghorst, automotive analyst at Evercore. “There’s an almost unspoken agreement that employment overrides everything, allowing for radical ideas [to protect or create jobs] and it holds back the company.”
With almost half of the company’s 640,000 staff employed in Germany, the labour voice is a powerful one. “It’s like the whole company is designed for growth because it creates jobs,” adds Ellinghorst.
VW motors on, but for its critics concerns over governance remain

VW has been the subject of protests over the dieselgate scandal

Credit:
Reuters
Hamilton Claxton says the number of insiders on the supervisory board is a worry. “There’s no independents to ask difficult questions and dig up the dirt.” Further concerns of hers include how the chairman of the supervisory board was incentivised, with performance bonuses. 
Hermes, another powerful asset manager, has long raised concerns about how VW is managed. At last year’s AGM, it called for a no-confidence vote in the board, saying VW had “questionable corporate culture”, and had “failed to systematically address its problems”.
Dieselgate was not the first time VW was hit by scandal. In the early Nineties it paid $100m to settle an industrial espionage claim and a decade later a German court heard allegations that prostitutes, sex parties and expense account shopping trips were used to win union chiefs’ support.
Still when it comes to making money, scandals that might crash other companies seem little more than speed bumps for VW. Despite the initial hits to sales in the wake of dieselgate and the fines and compensation payout, VW sales are now back at record levels, with operating profit also at new highs. Along the way, the company has also regained the crown as the world’s biggest car maker.
VW motors on, but for its critics concerns over governance remain

Volkswagen and Audi cars bought back from customers and put into storage in the US after the emissions scandal

Credit:
Reuters
However, Diess’s elevation to the top job is unlikely to bring the structural reform that many long for. His reputation as a strong manager with a good understanding of technology means he is likely to improve the company’s financial performance even further.
Hermes welcomed Diess’s appointment, but Michael Viehs, associate director of responsibility at the fund manager, called on VW’s board to “explain the timing of the management changes” and provide an update on ongoing investigations against current and former executives relating to the emissions scandal. He added: “We need to see tangible evidence of a changing culture and governance.  “Diess should make this a top priority. We also expect Volkswagen to appoint more independent members to its supervisory board.”
“The succession was designed this way,” says Ellinghorst. “Mueller’s done a good job but he took the bullet during the clean-up of VW, while protecting Diess, who’s coming in fresh and without baggage.”
But Hamilton Claxton is not certain that VW has a clear road ahead of it without making changes.  “Good governance will always out-perform,” she says.  “Timing’s an issue – VW did well for a long time – but might it have done better if the board had asked some tougher questions?”  
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