Is there a Watergate Scandal Emerging at Volkswagen?

Watergate is shorthand for a gradual but remorseless process through which a powerful leader becomes destroyed. Are there parallels in the current scandals at Volkswagen which have resulted in imprisonment for several middle-ranking executives? Will the very top leadership in Germany eventually be brought down?

Earlier this week [February 2008] Klaus Volkert, the former head of Volkswagen’s employee council, was jailed for his role in a corruption scandal.

According to The BBC, Volkert

was found guilty of incitement to breach of trust in the case, which involved employee representatives getting illegal privileges.

We have commented over the last year of the leadership troubles that have been hitting the corporate reputation of Europe’s premier car manufacturer.

I picked up the scent of something of interest, because of a little surge of numbers of visitors to this site searching for news about the VW company. That’s when I came across a Reuters report

Volkswagen supervisory board member Guenter Lenz has resigned his seat, becoming the latest casualty of a scandal involving the use of corporate funds to bribe the carmaker’s senior labour leaders. According to a statement from the Hanover works council, Lenz told employees on Tuesday at a plant staff meeting that he would now resign his board seat and his post as the site’s works council boss after previously ceasing to actively execute his duties. The public prosecutor’s office in Brunswick accuses him of aiding and abetting fraud and partaking in parties with prostitutes paid for out of a VW slush fund. Lenz, who has also resigned from the Lower Saxony state parliament, would accept a court sentence for his wrongdoing, the Hanover works council said.

The scandal has already cost the jobs of VW management board member Peter Hartz, group works council chief Klaus Volkert, as well as a member of the German federal parliament.

An earlier post [updated in October 2007] looked at the history of leadership problems at VW, concluding that
… the financial markets have absorbed the uncertainties regarding VW’s less secure future when and if the Volkswagen protection laws are removed. They are also unshaken by the leadership scandals, and by the risk that VW is falling behind Toyota in the development of its hybrid car range. (Strictly speaking, that is a wider concern for the future success of the German premium automobile marques, VW’s Audi, but even more so, BMW and Mercedes). At least Martin Winterkorn seems to be enjoying a leadership honeymoon.

Martin Winterkorn appears to have been parachuted in as someone untained with earlier scandals.

Back to Watergate

President Nixon’s downfall is now a classic of modern cultural mythology. The great leader is brought low, despite all efforts he made to protect himself.

At first, only the minor players in the drama are attacked. But as each each in turn is weakened, it becomes easier for a more important figure to come under attack. The drama is sustained with the prospect of defeat for the most powerful figure of all.

Forward to Volkswagen

Are we witnessing at Volkswagen a story that is gradually working its way towards the very highest of executives associated with the scandal?

I can only observe that denials are being made. The denials may be a necessary strategy to protect individuals from the hints that are emerging in the press.

Until something more substantial emerges, I shall not be naming names.

Acknowledgement:

Image of Watergate was downloaded from Professor Olsen’s fascinating history site

VW Law. All in the family as Porsch/VW consider wedding plans

Update [Aug 2009]

[This post offers background to the eventual merger between Porsche and Volkswagen. The original post follows ]

No-one was surprised when the so-called VW law was declared illegal. The ruling had been anticipated for a long time by Porsche through skillfully increasing its stake in VW. The stage was set for an official announcement of a merger between two German industrial dynasties which already had close family ties

European commentators had been discussing the merger for some while, as the so-called VW Law was tested in the courts. The general view was that the law contravened EU principles on competition grounds. The possibility of non-German control would encourage a ‘friendly’ takeover, with Porsche a front-running candidate.

There are strong links between the companies

Dr Ferdinand Porsche designed the original Beetle in 1936, and his grandson, Ferdinand Piech, is chairman of VW and the controlling shareholder in Porsche. Wendelin Wiedeking, chief executive of Porsche, is a member of the supervisory board of Volkswagen.

Anticipating the ruling will go against the VW Law after the advisory opinion, fellow German automaker Porsche AG increased its holding in Volkswagen to 31 percent while Lower Saxony raised its number of shares to 20.36 percent. That means the bloc of Porsche and Lower Saxony can now stop any takeover themselves with more than 51 percent combined

Frits Bolkestein was the EC commissioner for the internal market, and had no doubts about the ruling. Writing in The Financial Times, he points to Article 56 of the Treaty on the Economic Community, which states that

“All restrictions on the movement of capital between member states and between member states and third countries shall be prohibited.” This is one of the four fundamental freedoms of the European Union the freedom of movement of capital, movement of goods, services and persons.

Rumors of wars

There is a case for stating that Germany demonstrates an alternative mode of capitalism. The much-lauded strength of its industrial sector is backed by a complex governance system. Funds tend to be provided by banks rather than the financial institutions of the city. News seems to trickle through to the financial press, increasing the proportion of speculative comment over hard facts.

In November 2007, rumors suggest that Porsche intends to acquire VW, and incorporate the models under the Porsche brand through a holding company. VW declines to respond to such rumors. The powerful unions at Volkswagen sent a signal of discontent, with work stoppages, including 40,000 workers at the main Wolfsburg plant on Wednesday October 30th.

What’s going on?

Shares in VW have moved steadily upward this month. News coverage in the rest of Europe has been low. My suspicion is that plans towards securing that dynastic merger are in place. Whether the happy day is near remains to be seen.

Volkswagen Porsche rumours continue

Wenderlin Wiedeking

Speculation is again raging about the fate of German vehicle manufacturer Volkswagen following reports that luxury carmaker Porsche plans to boost its holding in the company beyond 50pc. English-language reports do not capture the entire flavour of the German ones

According to the Telegraph

The speculation comes after Porsche, controlled by Ferdinand Piech, also chairman of VW’s supervisory board, said in July that it was not “as yet” considering increasing its Volkswagen holding. But it has been steadily increasing its ownership of the group in recent years, raising its holding from 27.3pc last March in its most recently publicised share acquisition. That move meant Porsche, topping the 30pc threshold, was forced under German law to make a takeover bid for Volkswagen.

But the company intentionally priced its offer at the lowest allowable level – the same €100.92 (£68.36) price it paid by exercising options to by the 3.7pc stake – and predictably received a take up “considerably less than 1pc of VW’s shares”.

Porsche is only required to again publicise the extent of its stake in Volkswagen if it crosses the 50pc mark.

The Rumors all cited an article from Der Spiegel that had not yet been published – I believe this is what the postmodernists liked to call a simulacrum, a replica of an original that did not exist.

The reports replicated themselves and anticipated an article that did not (yet) exist.

The unclear situation

The article when it appeared reads slightly differently to the English versions (and the computer ‘translation’ into English is far from clear).

The comprehensive accounts of the VW company by Der Spiegel are brilliant, but unfortunately only appear in English translation some time later.

At present, the publication’s German-language reports hint only at a potential battle between Wenderlin Wiedeking at Porsche and the powerful Union and its leader, Bernd Osterloh,
the Work Council boss, if Porsche attempts to change existing agreements at VW.

Wiedeking, as head of Porsche, is given far more prominence than than he is in the English Language reports.

AS long ago as february, The State of Lower Saxony (strongly directed by Christian Wulff) had abandoned the so-called Volkswagen law preventing loss of state control, and permitting Porsche to acquire shares to just-below the triggering 30% stake.

The future role of Ferdinand Piech remains also unclear. the charismatic and powerful Piech had headed VW until 2002, and remains in an advisory role. Piech

owns a significant share of Porsche, roughly 13%. In order to prevent discussions among the many family members, a policy was established in early 1972 that no Porsche family member is allowed to be involved in the management of the company.

A waiting game

Porsche seems to be playing a waiting game. VW is relatively powerless. Like Caesar of old, Wiedeking can wait until precisely the moment to strike.

[Someone correctly pointed out to me how confusing this last point is. I meant to say like Caesar the Military leader, not Caesar the Shakespearean victim.]

VW leadership troubles continue

Some stories attract international interest, while others remain almost unnoticed. Serious Volkswagen watchers will be aware of one leadership story that has not gained much international attention.

I picked up the scent of something of interest, because of a little surge of numbers of visitors to this site searching for news about the VW company. That’s when I came across a Reuters report

Volkswagen supervisory board member Guenter Lenz has resigned his seat, becoming the latest casualty of a scandal involving the use of corporate funds to bribe the carmaker’s senior labour leaders. According to a statement from the Hanover works council, Lenz told employees on Tuesday at a plant staff meeting that he would now resign his board seat and his post as the site’s works council boss after previously ceasing to actively execute his duties. The public prosecutor’s office in Brunswick accuses him of aiding and abetting fraud and partaking in parties with prostitutes paid for out of a VW slush fund. Lenz, who has also resigned from the Lower Saxony state parliament, would accept a court sentence for his wrongdoing, the Hanover works council said.

The scandal has already cost the jobs of VW management board member Peter Hartz, group works council chief Klaus Volkert, as well as a member of the German federal parliament.

The Financial Times also commented on the story. As did

Eurotribune a self-declared ‘left-leaning’ publication with communitarian goals. It writes about what it sees as unhealthy industrial arrangements in Germany’s internationals, and is particularly suspicious of the relationships between State, workers councils, and boards of organizations. It sees more trouble ahead for Volkswagen over its leadership and governance.

VW is plagued by a series of corruption scandals involving top union and work council members. Those already netted include the author and name-giver of the infamous Hartz-IV law, VW human resource manager Peter Hartz, as well as an SPD member of parliament. Now the scandal forced the resignation of Günter Lenz, who was at the same time the work council head for VW’s utility vehicle branch, a member of VW’s oversight board, and a member of the regional parliament for SPD. He is under investigation for visits to brothels on company money… Lenz denies the accusation. However, prostitutes have confirmed his story in the case of the top work council man, Klaus Volkert — who now sits in prison. The payments for the prostitutes were approved by Hartz himself.

Leadership lessons

It seems strange that this story was not been followed more closely by the international financial press. Maybe Angela Merkel and Nicholas Sarcozy have found time, in their new-found friendship, to muse over the matter as they explore the equally taxing issues of EADS governance.

War and Piëch at Volkswagen

Porsche makes a bid for VW. But it’s an offer they want shareholders to refuse. It may be a bid to secure VW for the Porche family through VW’s ex-CEO Ferdinand Piëch. Confused? It so, you may thinking competitive not collaborative strategy.

This week, the financial press reported that Porsche had made a bid for Volkswagen. But the bid was accompanied by a statement that the company intended to exercise its options to acquire a slightly larger stake in the company which would push its shares to the level where it was legally obliged to offer to make an offer for all VW shares. Porsche went so far as to indicate that their bid price under-valued the shares. Even if, for some reason, there were to be an offloading, the shares would be put back on the market.

Background

Volkswagen has been protected from a hostile takeover by a little piece of German legislation that has become known as the Volkswagen law. But recently, rulings in Germany indicate that the Law violates EU principles, and is likely to be rescinded.

This has opened the way to moves from overseas bidders. German auto manufacturers dusted-down Plan B.

This is where a little background on the complicated inter-relationship of German firms and government interests helps. Porsche has enjoyed a long and collaborative relationship with Volswagen. Its first models drew extensively from the engineering technology developed down the years at VW. Today it is considered to be VW’s closest busness partner.

VW chairman is Ferdinand Piëch, one of the legendary figures of modern German industry. Piëch is the grandson of Ferdinand Porsche. He was formerly chairman and CEO, noted for his aggressive (‘proactive’) leadership style. He was to be credited with developing the brands of Audi and VW, and reversed the fortunes of VW in America, although his moves for Bentley and Rolls Royce were less successful.

One source of his wealth is the 13% share of Porsche. Under that corporation’s rules, he is barred from a directorship as a member of the family. Although no longer CEO, he has enormous influence at VW, and is still chairman of its supervisory board.

AS we noted in an earlier posts, VW has suffered a number of bloody battles over its leadership recently. After several departures following corporate misbehaviors, chief executive, Bernd Pischetsrieder, brought Mr. Bernhard, a former executive at DaimlerChrysler, into Volkswagen in October 2004 as part of his plan to cut costs at the automaker. Mr. Bernhard pushed through plans, cut 20,000 jobs and extended working hours during the course of 2006. This upset the powerful Volkswagen union, IG Metall, which is also closely allied with Volkswagen’s chairman, Ferdinand Piëch. In Novemember 2006, Mr. Piëch, together with Porsche, a major Volkswagen shareholder, pushed out Mr. Pischetsrieder in favor of Mr. Winterkorn.

So what’s going on?

If we take Der Spiegel’s line, we have just witnessed one more chess move in the game billionaire Piëch is playing to secure the future of VW with himself in change.

Pischetsrieder hadn’t posed any significant obstacle in Piech’s path towards taking power at VW. But he was an inconvenience … Shortly after Porsche’s entry as a shareholder, the VW boss commissioned J.P. Morgan to provide an expert opinion as to whether it could lead to a conflict of interests if Piech, as a co-owner at Porsche, would look to promote the interests of the sports car company as a member of the VW board. The investment bankers recommended that Piëch resign. Pischetsrieder submitted this advice to the board. And with that, his fate was more or less sealed.

So there we have it. The septuagenarian Piëch still has an undiminished appetite for a ‘friendly’ fight. Remember the cuckoo in the nest principle noted at Alliance Boots?

There are also the unheard melodies. Chess moves considered and eventually rejected. These include the possibility of VW bidding for the increasingly vulnerable Chrysler business from Mercedes.

Meanwhile, globally the next generation of global giants in the auto-industry are emerging. Will they eventually replace the increasingly vulnerable American and European dynasties?

VW shrugs off leadership shifts but fails to convince its environmental critics

Update October 24th, 2007

With the demise of the so-called VW law, The future of VW seems increasingly connected with that of Porsche. Porsche has strengthened its share-ownership of VW and appears to be following a strategy of creating wriggle-room for a takeover bid at a time that is most advantageous to itself.

[Original report follows]

The VW motor giant has shrugged off its leadership shifts of the last year. New chief executive Martin Winterkorn seems to have re-assured financial analysts of the company’s future and of the successful implementation of its restructuring plans. An environmental perspective, however, indicates further challenges ahead.

In an earlier post, I pointed to the organizational instability that accompanies leadership shifts such as those that had befallen auto-giant Volkswagen. The background was the scandal concluding with a criminal conviction for Peter Hartz, formerly head of personnel at the VW corporation, and an influential figure in labour policy changes introduced by the former German chancellor, Gerhard Schröder.

Volkswagen chief executive Bernd Pischetsrieder had stepped down under unclear circumstances, followed by the departure of Wolfgang Bernhard. Mr. Bernhard pushed through plans to cut 20,000 jobs and extend the workweek during the course of 2006. But in the process, he alienated the powerful Volkswagen union, IG Metall, which is also closely allied with Volkswagen’s chairman, Ferdinand Piëch.

The VW preservation society

Meanwhile a long-rumbling legal progress was grinding its way through the German courts. Last month, The advocate general ruled that the so-called “Volkswagen Law” wrongly prevented the free flow of capital. If this is ratified, the company becomes more vulnerable to takeover.

Two stories are emerging

These were the circumstances under which Martin Winterkorn took over in the New Year. Two stories are emerging. The first points to the improved prospects future profits for the company announced this week. The second concerns the wider environmental picture.

A finance success story was more widely reported. In the UK, The BBC, for example, emphasized the good news, in a piece entitled Upbeat forecast lifts VW shares. The piece might have been more credible if it had managed to get the good Dr Winterkorn’s name right.

Meanwhile, Der Spiegel in an extended interview with Dr Winterkorn was addressing a concern that VW was lagging in its efforts to produce its hybrid cars.

A somewhat defensive Dr W denied that the German auto-industry was lagging in applying technology in the interests of the environment, saying it was ‘nothing but clever marketing on the part of our competitors. It has nothing to do with the facts’ .

What sense can we make of the two stories?

First, that the financial markets have absorbed the uncertainties regarding VW’s less secure future when and if the Volkswagen protection laws are removed. They are also unshaken by the leadership scandals, and by the risk that VW is falling behind Toyota in the development of its hybrid car range. (Strictly speaking, that is a wider concern for the future success of the German premium automobile marques, VW’s Audi, but even more so, BMW and Mercedes). At least Martin Winterkorn seems to be enjoying a leadership honeymoon.

VW Leadership travails: A Shakespearean drama

The Volkswagen organisation has faced downsizing challenges in common with the majority of auto-manufacturers in recent years. As these changes unfolded, the company became embroiled in leadership battles familiar to students of the dramas of William Shakespeare. The German business governance system also has to be studied to understand some of the key contextual factors involved.

Update January 27th 2007

The original filing was updated with the news that Peter Hartz, the official at the centre of the bribery scandal has been given a two year-suspended prison sentence.

Peter Hartz goes to court today to face charges of illegal payments to Union officials. Hartz was formerly head of personnel at the VW corporation. He had also been an influential figure in labour policy changes introduced by the former German chancellor, Gerhard Schröder. The story was a high profile one in Germany when he resigned from Volkswagen in July 2005, accompanied by lurid accounts of sexual shinnanigans.

The case has taken two years to reach court. Since then, the
corporation has encountered a range of further leadership problems.

A few months ago, Volkswagen chief executive Bernd Pischetsrieder stepped down under unclear circumstances.

Then an announcement was made that Wolfgang Bernhard is to leave his post as chairman of the Volkswagen brand group by the end of January 2007.

The Context

The New York Times analyses the situation as a leadership battle:

The former chief executive, Bernd Pischetsrieder, brought Mr. Bernhard, a former executive at DaimlerChrysler, into Volkswagen in October 2004 as part of his plan to cut costs at the automaker. Mr. Bernhard pushed through plans to cut 20,000 jobs and extend the workweek during the course of 2006. But in the process, he alienated the powerful Volkswagen union, IG Metall, which is also closely allied with Volkswagen’s chairman, Ferdinand Piëch. When Mr. Piëch, together with Porsche, a major Volkswagen shareholder, pushed out Mr. Pischetsrieder in favor of Mr. Winterkorn in November, Mr. Bernhard was left vulnerable to the same fate.

Leadership battles

The organizational leadership literature has gone some way from the original trait models, in which the great leader was presented as having special qualities through which he (almost always he) achieved great transformational change. Among other weaknesses, these models considered that the leader was the causative force for change.

Later models considered that there were situational factors which would influence leadership practices. However, the models still had a linear character, with the leader triggering change.

Professor Yukl has been one of the minority of leadership authorities warning against the simplicity of such models.

What seems to be happening at VW is a leadership drama in which the vested interests play out their parts in a way familiar to students of Shakespearean tragedies. No wonder that Leadership courses have turned to Shakespeare to throw light on contemporary business issues.

Footnote

This week (Thursday 2th January) it was reported by the BBC that Peter Hartz has been given a two year-suspended prison sentence.

Hartz, a guiding hand behind former German Chancellor Gerhard Schroeder’s labour reforms, was fined 560,000 euros ($726,000; £369,000). The former head of personnel at Europe’s biggest carmaker escaped jail after cutting a deal with prosecutors.