Shortly after close of trading on Friday evening, news started to spread that German auto maker Volkswagen had been accused by the U.S. Environmental Protection Agency of deliberately cheating the outcome of mandatory emissions tests on around half a million of its vehicles.
On Sunday, Volkswagen’s CEO, Martin Winterkorn, personally apologised for breaking the trust of customers and the public and on Tuesday, the company disclosed that this issue is likely to affect around 11 million vehicles worldwide, which exceeds the total vehicle production of the entire VW Group in the past fiscal year. Shares in the auto company, which closed at €162.40 on Friday evening, fell in trading over the start of the week to a four-year low of under €100 per share on Wednesday morning, knocking around €25bn, or over one third, off its market cap.
Following an ad hoc meeting of VW’s supervisory board on Wednesday, Mr. Winterkorn tenured his resignation but insisted on his lack of knowledge of the manipulation of emissions data.
Back in April, Winterkorn appeared to have narrowly avoided the chop after the chairman of Volkswagen’s supervisory board and member of the controlling family, Ferdinand Piëch, publicly stated that he was “at distance” to the VW CEO, prompting speculation of imminent changes at the top. However, the Piëch-Porsche family ultimately backed Winterkorn resulting in Ferdinand and his wife stepping down from all of their mandates in the Volkswagen Group. Disappointingly, the company did not use this opportunity to increase independent oversight on the supervisory board, quickly filling the empty seats with two of Piëch’s nieces. The board’s former vice chairman, Berthold Huber, serves as chairman on an interim basis until a long-term successor has been decided upon.
In our Proxy Papers on Volkswagen’s previous annual meetings, we have questioned whether the composition of the company’s supervisory board would allow objective oversight of management, given that only one of its board members could be deemed to be truly independent of management and major shareholders. With a free float of only 12.3%, VW’s major shareholders have been able to limit the presence of independent directors on the supervisory board and key board committees, even failing to comply with independence targets that the board had set itself.
Since the Porsche takeover was completed in 2012, minority shareholders in VW have failed to voice any effective dissent over the Company’s poor governance practices. Now, it seems that despite VW’s seemingly steady upward trajectory in recent years, the gears propelling its growth were secretly corroding. With the widespread failure to acknowledge corrupt behaviour in VW becoming increasingly evident, attention will turn to the tone set at the top levels of management and the supervisory board, which appear to have failed to create a culture of good governance within the Company.
Many shareholders believe that a board with a higher level of independence would serve as a more effective defence mechanism against future incidents with such potential wide-reaching financial, legal, and reputational consequences as this one. Unfortunately, it is often difficult to assess the potential dangers of a poor governance model until it is too late. The German governance model has traditionally de-emphasized the question of independence at the board level. Is it time for a remodel?
Contributors: Chris Rushton and Andrew Gebelin