Investor VW Attack Stops Short Of Seeking End To Dilute Union.
“Clearly the company has a major corporate governance problem”
“management team knew they would be paid a lot of money simply for protecting jobs and increasing wages”
Activist investor TCI Fund Management launched a stinging attack on Volkswagen for failing shareholders and called for curbs on management pay, but fell short of urging reform of the company’s most crippling problem; the power of labour unions and local politicians to veto decisions which might finally reform its ability to make money.
TCI Fund Management accused VW management of collusion by accepting large bonuses from the Labour-dominated board in return for making sure jobs in Germany were protected and wages increased at the expense of profitability and the shareholders.
What it called “aggressive management behaviour” contributed to the dieselgate scandal.
The engineering workers union controls half the votes on the ruling 20-seat supervisory board and has a veto over plant closures. The German state of Lower Saxony has two seats on the board too.
TCI Fund Management called for clear goals to be set for the future and a compensation scheme for management which is transparent and doesn’t underwrite failure, but didn’t suggest the underlying system of governance needed to change. It also questioned the motives of the Porsche and Piech family shareholders who were happy to see this system continue.
TCI Fund Management, a London‐based hedge fund founded by Sir Chris Hohn, has built up a 1.2 billion euro ($1.4 billion) stake in VW. Hohn, in a letter to VW management and supervisory boards, said its investment over four years had been a constant disappointment. There was a potential for massive profit and cash-flow expansion at VW, but it had been held back by “underperforming and overpaid management”.
Wage bill jumps
Hohn said VW made an operating profit of $11.3 billion ($12.9 billion) in 2011. Six years later the profit was the same, despite buying Porsche which contributed over 3 billion euros ($3.4 billion). This meant profits, excluding Porsche, had fallen to 8 billion euros ($9.1 billion). Meanwhile, VW’s wage bill had jumped 50% to 36 billion euros ($41 billion), while high-cost workers in Germany increased 40%.
“Clearly employee and management compensation are constantly prioritized over shareholder profits to an extreme degree,” Hohn said.
“Clearly the company has a major corporate governance problem,” Hohn said, but made no suggestions as to how it might change.
“The fact that huge management bonuses have been approved by the labor-dominated Supervisory Board suggest the old executive management team knew they would be paid a lot of money simply for protecting jobs and increasing wages. We are concerned this improper arrangement is continuing today. That is no way to run one of the biggest companies in the world and it is no longer acceptable to minority shareholders. It also brings into serious question the judgement of the controlling Porsche and Piech families as to why they are happy to see management enrich themselves whilst the value of their shareholder collapses,” Hohn said
Hohn said labour productivity at VW was half of that at Toyota, and around 40% lower than at Renault and Peugeot.
Negative scale benefits
“VW has realised no positive scale benefits. In fact, it has managed to generate negative scale benefits, a woeful achievement in an industry where there should be huge economies of scale in purchasing and R&D. Immediate change is necessary,” Hohn said.
Nobody was available at VW in Wolfsburg to comment on the letter.
Given that many shareholders believe the underlying problems at VW concern the system of governance dominated by unions and politicians, why didn’t Hohn suggest this was changed? He declined to answer questions in an email which included one asking if the VW’s system of governance was politically highly sensitive and therefore impossible to change.