If the top managers at Volkswagen thought they could lay low and ride out the storm swirling around Europe's largest automaker amid its Dieselgate global emissions scandal, they may be in for a surprise.
Increasingly, the automaker's perceived defensiveness and tone-deaf crisis management appears to making problems even bigger for Germany's largest listed company.
Not only are key shareholders beginning to call for the company's supervisory board chairman, Hans Dieter Pötsch, to step down or remove himself from internal investigations into the fraud. There is increasing evidence that VW's stonewalling mentality with the public and shareholders may be adding to its labor problems and legal bills ahead of a key month of decision-making.
A flashpoint for discontent is the automaker's apparent decision to award its top managers -- most of whom were in positions of responsibility during the years when VW falsified emissions on up to 11 million diesel autos -- with multi-million-euro bonuses. Reportedly, top managers are prepared to accept only a 30 percent cut in their bonuses to be awarded later this month.
Several shareholders expressed dismay and criticized the payouts, which would be doled out even though VW faces billions of euros in fines, legal fees and recall costs, and is asking rank-and-file workers to suffer big cuts in their modest year-end performance payments.
Management's unyielding position on the executive bonuses appears to be helping the United Auto Workers, the U.S.'s biggest industry labor group, make headway in organizing its first chapter representing VW workers at its factory in Chattanooga, Tennessee.
Last December, a group of 160 workers at the plant voted to be represented by the U.A.W., which would be the first time the union would organize workers of a foreign automaker in the United States. Volkswagen challenged the vote, but on Wednesday, U.S. federal labor officials rejected its appeal, paving the way for the union to get a foothold at the VW plant.
Gary Casteel, a U.A.W. representative, called on Volkswagen to begin discussions with the union in Chattanooga to create the first union chapter "without delay.'' Volkswagen, through a spokesperson who declined to be named, said the automaker was examining its options. The governor of Tennessee, Bill Haslam, has recently backed VW in the labor fight, criticizing the union for exploiting the crisis.
Southern states in the United States are generally anti-union, and use their lower cost of living and wages to attract industry and jobs from the north. VW plans to add 2,000 jobs at the Tennessee plant to build a new line of sports utility vehicles.
In Europe, VW's handling of the crisis is coming under fire from shareholders and shareholder activists, who are increasingly frustrated at VW's apparent decision to delay or minimize the repairs and recalls of vehicles in markets such as Germany, where the automaker has argued that its rigging software is technically legal under E.U. law.
As the scandal plays out, Volkswagen continues to lose ground in Europe, where more consumers are beginning to avoid the automaker and its 11 brands. The VW group's combined share of the European auto market fell to 23.4 percent in the three months through March, down from 24.4 percent a year earlier, the European Automobile Manufacturers' Association reported on Friday.
In Europe, VW's handling of the crisis is coming under fire from shareholders and shareholder activists, who are increasingly frustrated at VW's apparent decision to delay or attempt to minimize the repairs and recalls of vehicles in markets such as Germany, where the automaker has argued that its rigging software is technically legal under E.U. law.
Hans-Christoph Hirt, who represents British investment consultancy Hermes Equity Ownership Services, which represents thousands of Volkswagen shareholders, said the bonus discussion shows that members of VW's supervisory board, particularly its chairman, Hans Dieter Pötsch, are not independent in the matter and should recuse themselves.
“The way the bonus payments topic was addressed confirms shareholders' reservations about the composition of the supervisory board, which from many perspectives is far from optimal. Not least because the supervisory board chief Mr. Pötsch is prejudiced on many topics,” Mr. Hirt told Handelsblatt. “Common decency would have been to stall bonus payments until this one-off and extraordinary loss in value becomes clear and the diesel affair is fully explained.”
Mr. Pötsch was VW's chief financial officer during the period when the automaker falsified emissions on millions of diesel autos. In the weeks after the scandal broke last September, he was unexpectedly appointed chairman of VW's non-executive supervisory board, which sets major policy and hires and fires the chief executive. As the leader of the supervisory board, Mr. Pötsch is now overseeing an internal investigation that is supposed to determine what major executives, including presumably himself as CFO, knew of the scandal.
VW has consistently denied that its top managers, including former chief executive Martin Winterkorn, knew of or ordered the software deception that enabled VW to trick emissions regulators around the world. When he was promoted to head of the supervisory board, Volkswagen agreed to pay Mr. Pötsch a €10 million signing bonus, ostensibly to cover the obligations outstanding in his contract as CFO, which was to run through 2017. That payment has become a lightening rod for criticism, as have those to be paid to other board members.
Mr. Hirt, the Hermes manager, is among the more influential investors in Volkswagen and represents numerous large shareholders and the interests of his company's parent company, the British pension fund Hermes, which holds stakes in many DAX companies.
Following the decisions on the bonuses for Mr. Pötsch and others, Mr. Hirt called for a shake-up at VW.
“We would welcome significant personnel changes in the supervisory board,'' he said. "The body needs more independence, relevant experience and competence, in areas like new technology and the U.S. and Chinese businesses. The right time for such changes all depends on the result of the diesel affair.”
Mr. Hirt is not alone in his criticism. German shareholder representatives are also enraged over the bonus discussions, the final outcome of which remained unclear as of Thursday evening as VW's supervisory board sought to break an impass between recalcitrant executives, who feel entitled to the big payments, and labor and state shareholders on the supervisory panel who are ostensibly lobbying for managers to forsake their bonuses completely.
We would welcome significant personnel changes in the supervisory board. Hans-Christoph Hirt, Hermes Equity Ownership Services, which represents VW shareholders
The divisive issue comes at the worst possible time for Volkswagen as the automaker faces potentially a multi-billion-euro fine in the United States, and perhaps even more in the costs to repair or recall millions of cars and settle hundreds of lawsuits around the world brought by angry shareholders, customers and even some of VW's own dealerships in the United States.
Some shareholders were stunned that VW would even consider awarding bonuses of any kind during a crisis that could bring long-term damage to the automaker's balance sheet and reputation. VW has set aside €6.7 billion ($7.6 billion) for the costs of the crisis, although most analysts expect this to be a down payment on costs that could approach €100 billion.
“We cannot begin to understand why they are even talking about bonuses,” said Marc Tüngler, who heads the Deutsche Schutzvereinigung für Wertpapierbesitz in Frankfurt, an association that represents individual investors in German listed companies. Mr. Tüngler not only opposes further bonuses. He wants VW's supervisory board to force board members to repay the ones they have already received.
Under German law, the company's supervisory board is required to examine the issue, if it determines that management's behavior materially damaged the company. But now, the head of the board is one of the men who ran VW into the crisis.
Even so, Mr. Tüngler said he is still advising his members against launching lawsuits against Volkswagen -- yet. “We have thousands of inquiries from VW shareholders and we are telling them: Don't do anything thing right now,” said Mr. Tüngler.
Hundreds of lawsuits have been launched in the United States against the German carmaker following the scandal. VW has hired Kenneth R. Feinberg, a prominent lawyer who specializes in compensation funds, to oversee compensation payouts.
But Mr. Tüngler does not rule out European lawsuits.
Time is of the essence, he said, and it will be decisive how German financial supervisory authority Bafin rules on whether VW informed shareholders of the scandal in a timely fashion. The automaker's shares have fallen by 24 percent since the scandal broke last September, and have plunged 45 percent over the last year. VW shares were down nearly 1 percent at €126.80 in Frankfurt at 10 a.m.
The DSW is prepared to sue Volkswagen on behalf of German investors if Bafin decides the company delayed making the scandal and its import public. Handelsblatt has seen documents that suggest Mr. Pötsch and Mr. Winterkorn, who resigned days after the scandal broke, had been informed of "problems'' with diesel emissions months before U.S. regulators forced the issue last September.
But so far, there has been no evidence tying either executive, or other members of the management board, directly to the fraud, which VW insists was the work of a few, mid-level rogue engineers.
There have been no signals in Germany so far on how Bafin will rule in the case. But there are already mounting signs that VW's annual shareholders meeting on June 22 in Hannover is going to be turbulent, even moreso than the one last year. Back then, shareholders were unsettled by an open power struggle between the former supervisory board chief, Ferdinand Piëch, and Mr. Winterkorn.
Regardless of the rising shareholder anger, VW remains essentially controlled by the families of Mr. Piëch and Wolfgang Porsche, his cousin and representatives of the families of founder Ferdinand Porsche. Together, the two families wield the absolute voting majority at VW. Their interests in the automaker span over decades and form the basis of their wealth.
And despite Volkswagen's increasingly precarious position, the broader VW group -- which includes lucrative specialty automakers such as Porsche and Audi, may help soften the blow and loss of market share at the company's mass-market brand.
Earlier this week, VW said it would delay publishing its financial results for the first quarter from April to May 31. It is possible that -- excluding exceptional expenses -- that financial picture may not look so bad.
After all, subsidiaries Porsche, Audi and Skoda, its Czech unit, all reported a strong first quarter over the past few days.
Kevin O'Brien is Editor-in-Chief of Handelsblatt Global Edition. Katharina Slodczyk, Astrid Dörner, Markus Fasse and Christian Schnell are editors at Handelsblatt who cover companies and markets, the German auto industry and Volkswagen. To reach the authors: [email protected], [email protected], [email protected], [email protected] and [email protected]