The revelations about Volkswagen’s emissions fraud, added to recent scandals at Siemens and Deutsche Bank, show a German corporate establishment that is out of step with a society that is actively trying to atone for 20th-century sins, writes Leonid Bershidsy
AS IT accepted the resignation of chief executive Martin Winterkorn, the executive committee of Volkswagen’s supervisory board praised his “towering contributions” to the company that stands to lose much of its $37bn (€32.8bn) cash stash making amends for major fraud committed on Winterkorn’s watch.
Such graciousness is a German tradition, and it raises the question whether there’s something fundamentally wrong with the country’s corporate establishment.
In its statement, the committee declares as fact that Winterkorn “had no knowledge of the manipulation of emissions data”. There was no way to establish that in the short time since VW’s use of special software to cheat emissions tests came to light.
The board, which in April backed Winterkorn in a battle with company patriarch Ferdinand Piech, must have taken the chief executive’s word for it. That is amazing leniency on the part of a group of people charged with looking out for shareholders’ interests, given that VW’s stock is down 28% since September 18.
There’s nothing unusual about it, though. When Anshu Jain stepped down as co-chief executive of Deutsche Bank in June, the bank’s stock price was down 17% from this year’s high in April, dogged by continuing heavy fines for all sorts of past misdeeds — many committed on Jain’s watch — and a helpless restructuring plan he had proposed.
Yet Paul Achleitner, the chairman of Deutsche’s supervisory board, expressed his appreciation for the contribution of Jain and the other co-chief executive, Juergen Fitschen, who is leaving at the end of this year, in almost the same words the VW board used for Winterkorn.
In 2013, the supervisory board of Siemens, Germany’s fifth biggest company by revenue, announced the resignation of Peter Loescher, whose time as chief executive was marked by costly delays in important projects and woeful strategic errors, noting that “under his leadership, the company achieved a substantially higher level of performance and profitability”.
Loescher was credited with cleaning up Siemens after the company was caught bribing officials in a number of countries to land contracts. That scandal was the undoing of his predecessor Klaus Kleinfeld, who was seen off with the message that thanks to his leadership, “Siemens is in better condition than ever before”.
This is not a question of decorum. It may be that malfeasance of the kind seen at VW, Deutsche Bank, and Siemens over the years, as well as a lack of executive responsibility for it — beyond the nuisance of having to resign and be sorely missed — is built into the German corporate governance system.
This system is distinctive in that it recognises the interests of more than just the shareholders. Other stakeholders, such as workers, local governments, and often creditors are represented on supervisory boards.
In accordance with German law, half of Volkswagen’s board consists of employee representatives elected by the workforce. Besides, two of the board’s 20 members are delegated by the state of Lower Saxony.
Votes by the workers and the local bureaucrats secured Winterkorn’s boardroom triumph in April. Workers’ representatives, including labour union leaders, take up half the seats on the boards of Siemens and Deutsche Bank, too.
This is called “co-determination”. The term has more to it, though, than joint decision-making. As a result, the interests of employees and other stakeholders become closely aligned with those of management. There’s a strong esprit de corps, which isn’t necessarily conducive to a clean, value-based culture.
In a recent paper, the University of Michigan’s David Hess recalled the Siemens bribery scandal: “Although the German laws had changed to make it clear that bribing foreign government officials was illegal, the company continued to pay bribes because, as one manager stated, employees believed they had to pay them or else ‘we’d ruin the company’.”
It is a feature of every scandal that it is followed by promises of a clean-up. VW has promised “full consequences” for employees found guilty of wrongdoing. Deutsche Bank and Siemens created elaborate anti-corruption programs. Whether they are effective is another matter.
Deutsche Bank is now scaling back its Russian business following investigations into benchmark fixing and money laundering on behalf of Russian clients. Siemens still faces repercussions from the old bribery scandal in countries from Brazil to Israel to Greece.
No wonder it often takes intervention from foreign authorities to uncover wrongdoing by German corporations. In the cases of VW and Siemens, US probes led to the damaging revelations. At Deutsche Bank, shady practices might have continued but for the attention of financial regulators in the US and the UK.
German corporations are inclusive but, in part because of that, closed systems: They keep stakeholders happy, but when outsiders ruin the cosy atmosphere, shareholder returns tend to plummet and the consequences are spread over many years.
Chancellor Angela Merkel, who has run Germany for the last decade, has done a lot to turn it into a values-based society. It’s easy to attack German corporations from that point of view.
“Valuable cars can only be built if values matter in a company,” Heribert Prantl wrote in a newspaper column criticizing Volkswagen for letting Winterkorn get off so lightly.
“The big question now is when VW will be valuable again. A resignation is not enough here.”
The German corporate establishment is out of step with a society that is actively atoning for its 20th-century sins. If it cannot cleanse itself, perhaps changes are needed to the corporate governance system to give investors a bigger role and give other stakeholders a stronger voice.
The Volkswagen emissions scandal has rocked Germany’s business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe’s largest economy.
Volkswagen is the biggest of Germany’s car makers and one of the country’s largest employers, with over 270,000 jobs in its home country and even more working for suppliers.
On Wednesday, Volkswagen CEO Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned, and economists are now assessing its impact on a previously healthy economy.
“All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis,” ING chief economist Carsten Brzeski told Reuters.
“If Volkswagen’s sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole.”
Volkswagen sold nearly 600,000 cars in the US last year, about 6% of its 9.5m global sales. The US Environmental Protection Agency said the company could face penalties of up to $18bn (€16bn), more than its entire operating profit for last year.
Although such a fine would be more than covered by the €21bn the company holds in cash, the scandal has raised fears of major job cuts.
The broader concern for the German government is that other car makers such as Mercedes and BMW could suffer fallout. There is no indication of wrongdoing on the part of either firm and some analysts said the wider impact would be limited.
The German government said the car industry would remain an “important pillar” for the economy, despite the deepening Volkswagen crisissurrounding Volkswagen. Bbut analysts warn it is exactly this dependency on the motoring sector that could become a threat to an economy forecast to grow at 1.8% this year. Germany is already having to face up to the slowdown in the Chinese economy.
In 2014, roughly 775,000 people worked in the German car sector — nearly 2% of the whole workforce.
In addition, automobiles and car parts are Germany’s most successful export — the sector sold goods worth over €200bn to customers abroad in 2014, accounting for nearly a fifth of total German exports. “That’s why this scandal is not a trifle. The German economy has been hit at its core,” said Michael Huether, head of Germany’s IW economic institute.
There are also voices, however, that say the impact on the economy as a whole should not be exaggerated.
“I don’t think that the German automobile industry will be lumped altogether,” Commerzbank chief economist Joerg Kraemer told Reuters. “There won’t be a recession just because of a single company,” Kraemer added.
The German BGA trade association also tried to calm the public by saying there were no signs that customers abroad were starting to doubt quality and reliability of German companies.
“There isn’t a general suspicion against goods labeled ‘Made in Germany’,” BGA managing director Andre Schwarz told Reuters.But he acknowledges there is a degree of concern among German companies that the scandal over cheating on U.S. diesel emission could have a domino effect on their businesses, eroding the cherished ‘Made in Germany’ label.
Some observers also see some irony in the scandal. While the German economy defied the eurozone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.
“The irony of all of this is that the threat could now come from the inside, rather than from the outside,” Brzeski said.
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