All German car manufacturers are navigating towards crisis, but nowhere does it look as bleak as at VW in Wolfsburg. Three plants in Germany and tens of thousands of jobs are up for grabs, and profits fell by two thirds in the third quarter. The extent of the crisis is not the only thing that sets Volkswagen apart from other companies. Nowhere else is the state’s influence so great. The SPD-led state of Lower Saxony holds almost 20 percent of VW shares and therefore two seats on the supervisory board. Leading economists believe that the coincidence of influential politics and a serious crisis is no coincidence. On the contrary: they criticize conflicts of interest, slowness in corporate management and a particular susceptibility to scandals. Clemens Fuest, President of the Munich Ifo Institute, is calling for drastic consequences. “Politicians should withdraw from the company,” he told the F.A.Z. The connections between politics and the company have always been close. They include people, special rules for VW and structural entanglements that make independent supervision difficult. The Peter Hartz case A prominent example is Peter Hartz. When Gerhard Schröder was Prime Minister of Lower Saxony in the 1990s, VW implemented the four-day week under the then HR Director Hartz. 30,000 jobs were saved, and the SPD chancellor later appointed him to head the government commission that developed the “Hartz reforms”. Christian Wulff (CDU), one of Schröder’s successors in the Hanover State Chancellery and on the company’s supervisory board, campaigned in 2009 for VW to take over the insolvent contract manufacturer Karmann from Wulff’s hometown of Osnabrück. The capacity was not used. Today, the plant with 2,300 employees is threatened with closure. Another special feature: the works council’s say is enormous, supported by the VW law, which ensures considerable influence for both the state and the employee representatives. Excesses became known from 2005 onwards, when new details about bribes and pleasure trips came to light. The then works council chairman Klaus Volkert resigned and the scandal kept the company in suspense for years. The European Commission had called for changes to the VW law several times, but essential special rights were retained even after a ruling by the ECJ. Since then, Germany has had confirmation from the EU’s highest judicial body that a minority of 20 percent of shareholders in the VW Group – which roughly corresponds to the country’s share – can prevent important decisions. The Stock Corporation Act, which sets a hurdle of 25 percent, applies to all other stock corporations. No production facility can be built or relocated against the will of the employee representatives. It is difficult to prevent distortions of competition. Bernd Irlenbusch, an economics professor in Cologne with a focus on good corporate governance, believes that none of this is a good idea: “There is a lot of evidence that the state is doing a good thing “To generally limit ourselves to defining the economic framework within which companies can act.” Irlenbusch can judge this particularly well in the case of VW. When the group began to independently examine the diesel scandal (monitoring), the Wolfsburg-based company hired the Cologne researcher as a consultant for compliance issues and to train the supervisory board. Several years later, Irlenbusch doesn’t believe the company has done its homework. Furthermore, he sees a whole series of problems caused by state participation. Firstly, distortions of competition against competitors can hardly be prevented with state participation. In other words: If, for example, the state decides on purchase bonuses for electric cars, as is now being demanded by SPD Prime Minister Stephan Weil, VW could benefit more than the competition. And all this at the expense of taxpayers, who are still held liable through direct participation. Achim Wambach, the President of the Leibniz Center for European Economic Research (ZEW), puts it this way: “The state influences the rules in many markets, so it is both a rule setter and a player, which distorts competition.” State-owned companies are often slower And closely related to this, the researchers fear, companies that are partly state-owned are no longer sufficiently competitive. It can be observed that “companies owned by the public sector tend to find it more difficult to carry out disruptive restructuring,” says Wambach. This can cause damage, especially in very dynamic times. Fittingly, economist Irlenbusch reminds us that he and other experts appealed to VW ten years ago to bring affordable electric cars onto the market for the average consumer. Today, the lack of such a model is its biggest disadvantage compared to the competition. The group doesn’t want to close the gap until 2026 with an electric Volkswagen for less than 30,000 euros. Danger of conflicts of interest The third, and possibly biggest, problem is conflicts of interest. On the one hand, the experts see the danger that the state will not fulfill its regulatory obligations in the company at all or only in a weaker form because of its involvement. Business ethicist Irlenbusch cites the emissions scandal that came to light in 2015 by US authorities as an example. “It seems implausible that the US authorities were further ahead than the corresponding German authorities,” says the researcher. There were many who knew or suspected something. This omission is part of a whole series of scandals and affairs. Irlenbusch lists: “1990 the foreign exchange scandal involving the head of the foreign exchange trading department Burkhard Junger and others, 1996 the Opera Ball affair involving the then Prime Minister of Lower Saxony Gerhard Schröder and his wife, 1997 the ABB bribery affair involving the CEO of the VW subsidiary Skoda, Volkhard Köhler, In 2004, the VW salary affair, in which several members of the SPD Bundestag received salaries from VW in addition to their parliamentary salaries without any apparent adequate performance; in 2005, the corruption affair, in which members of the works council were bribed with financial benefits, luxury trips and services from prostitutes and corrupted in their decisions “It does not seem unreasonable to Irlenbusch that misconduct is encouraged by conflicts of interest, for example because the company has the – possibly sometimes misleading – impression that the state is not looking so closely or is not condemning these things more clearly “But there is also more fundamental information on the subject of conflicts of interest. As co-owners, the public sector is committed to the well-being of the company, explains ZEW economist Wambach. This is stipulated in Principle 10 of the German Corporate Governance Code. “Nevertheless, the interests of the owner can be decisive in some decisions, for example when it comes to the question of production locations.” So what if it would be beneficial for the company to close factories, but that costs politicians the decisive votes in the next election campaign. “I wonder how incumbent politicians can manage to fulfill such an obligation as a member of the supervisory board in cases where political interests and company interests are not in harmony,” says Irlenbusch. Rules of good corporate governance apparently do not apply to VW. The capital market sees Volkswagen’s special rights Part of a larger problem that is also weighing on the share price. From the point of view of many investors, VW does not comply with the usual rules of good corporate governance. There is a lack of independent supervisory boards; instead, the shareholder families Porsche and Piech, the major shareholder Qatar, the state of Lower Saxony and IG Metall dominate. Dual functions run through the group’s committees, important subsidiaries such as Audi and Porsche and the family holding company Porsche SE. Better control mechanisms, many believe, would have protected the group from old and new crises. To date, the legal investigation into the emissions manipulation has not been completed. The responsible court in Braunschweig has just suspended the trial against Martin Winterkorn due to the 77-year-old defendant’s new health problems. SPD politicians from the federal states with VW factories are now calling for new state aid, and even a scrappage bonus 2.0 is no longer taboo for them. Ifo President Fuest sums up: “Building cars is not a political task.” It is clear that VW has put necessary adjustments on the back burner. “That’s why they have to be even more drastic now.”
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