Corporate governance is a hot topic at the moment. There have been numerous recent examples of businesses that have failed to demonstrate high levels of internal compliance and, as highlighted in our previous blog, Corporate governance: All change?, this has led to large scale changes being proposed to the UK’s governance regime.

One household name in the spotlight for its failures is Volkswagen. Following the emissions scandal, the company is facing more criticism, investigation and investor discontent.

Three advisory groups, Institutional Shareholder Services (ISS), Deminor and Hermes Equity Ownership Services, agree that senior officers at Volkswagen have not been held to account for the emissions scandal and any attempts to overhaul corporate culture have been non-existent.

The state of corporate governance within Volkswagen

Although Volkswagen previously admitted that the emissions scandal was caused by a ‘collection of failures within the company’ and that there was a mind-set that tolerated rule breaking, the advisory groups are unimpressed with its actions to tackle this.

ISS has given Volkswagen its lowest possible rating on corporate governance; Deminor is ‘highly critical’ of the company’s culture and Hermes has said that the company’s progress since the emissions scandal has ‘underwhelmed’. The culture within the company has apparently worsened with seniors at Volkswagen still continuing to ‘collect bonuses as if nothing has happened’. Levels of transparency have also decreased in the aftermath of the emissions scandal with the investment groups complaining that a report into the internal investigation was not made public.

According to Deminor, the first rule of corporate governance is to hold people accountable for their actions but Volkswagen have not shown the slightest inclination to make ‘the top guys accountable’.

In contrast, Hermes previously praised Barclays for their swift and appropriate changes to internal corporate governance. After the Libor rate rigging scandal, the bank impressed investors with ‘a systematic review into the role of corporate culture in the scandal’.

Further woes

At its AGM last month, Volkswagen reported that it is creating a more ethical company culture, but that hasn’t prevented further accusations being made. It has now been reported that the remuneration of Bernd Osterloh is being investigated under German laws which provide that a company has a fiduciary duty and cannot waste money by paying fees that are too high. Osterloh was a labour representative and sat on the supervisory board which holds the company’s management to account. As leader of the company’s works council, he had broad powers to influence company policy. Volkswagen says that the salary is consistent with law and internal policy, and was reviewed by an independent expert.

All publicly listed companies in Germany have a works council and, in addition, labour representatives hold half the seats on a company’s supervisory board. It’s been argued that this system gives top executives an incentive to keep the leader of the works council happy. At Volkswagen, investors have repeatedly raised concerns about their structures, saying that it ‘protected top management from outside scrutiny and helped create a climate where the emissions scandal could breed’.

And there’s more…

Another negative story has also emerged as it appears that Volkswagen’s CEO is to be investigated over possible market manipulation. Matthias Mueller took over after the scandal emerged, but he was previously a board member of Volkswagen’s Porsche holding company. This latest investigation focuses on how the board of the holding company responded to the scandal.

There are concerns that investors were informed too late about risks to the Porsche holding company from the emissions scandal, as well as the financial consequences. As in the UK, a German listed company has a duty to inform investors as soon as potentially price-sensitive information comes to light.

In favour of good corporate governance

Given all the allegations and continuing revelations, it is not surprising that investors in Volkswagen are unhappy. The tale provides a useful case study in favour of strong corporate governance and investor involvement. Good corporate governance can be reduced to the key principles of accountability, transparency, moral correctness and a focus on the sustainable success of an entity over the longer term. It seems clear that investors believe Volkswagen fell woefully short in all these areas.

This blog post was written by Elliot Gibson. For further information, please contact:

Sophie Brookes, partner, Corporate

T: 0161 836 7823


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.