Friday 20 April 2018

Rebuilding Volkswagen's reputation means challenges ahead for its board

The car manufacturer must bypass its entrenched culture to get on the road to recovery, writes Ben Marlow

Company town: Scrap metal lies in a boat in front of the Volkswagen power plant in Wolfsburg
Company town: Scrap metal lies in a boat in front of the Volkswagen power plant in Wolfsburg
An activist of environmental group Greenpeace holds a protest poster outside the Wolfsburg Volkswagen plant

Ben Marlow

There can't be many places remaining in the Western world where the social fabric is so inextricably entwined with a single corporation as Wolfsburg in Germany. Company towns were much more prevalent at the end of the 19th and beginning of the 20th Century.

In Britain, Titus Salt built Saltaire, the Cadburys constructed Bournville, and William Lever personally oversaw the creation of Port Sunlight in Cheshire for thousands of soap factory workers.

In the US, such towns ran into their thousands, particularly in the south and western states where heavy industries such as mining and steel production required large numbers of workers. But the invention of the motor car, the rise of big multi-national companies, and huge increases in home ownership led to the majority disappearing.

Yet, in Germany, the city of Wolfsburg has grown to become a thriving, modern city thanks to the existence of one company - Volkswagen. A planned town centred on the village of Fallersleben, it was built in 1939 to house workers of the VW factories which had been erected to assemble the Beetle on the orders of Hitler, who wanted Germany to mass-produce a car that could compete with the Model T Ford.

Almost 80 years later and the city owes its continued existence and wealth to the success of VW. More than half its 120,000 inhabitants are employed by the carmaker and its factory, which stretches across an area of six square kilometres - equal to the size of Gibraltar - is the biggest in the world, churning out 840,000 cars a year.

Next door, on a former industrial site, Volkswagen has spent £250m building a giant automotive theme park where tourists can look around its factory, visit a state-of-the-art car museum, indulge in driving courses, robot-guided ascents of VW's 20-storey car towers, and stay in a luxury hotel. Since opening in 2000, it has attracted more than 10 million people.

Even Wolfsburg's football team grew out of a multi-sports club for VW workers, and plays its home games at... you guessed it: the VW Arena.

Wolfsburg then is the town that VW built and the carmaker is its very heart.

As VW itself boldly proclaims: "We value our cars so highly we've built a whole city devoted to them."

That one company is capable of creating such a large city, and a prosperous one, gives you a sense of how powerful VW is in Germany, and also how highly regarded.

The scandal that has engulfed Germany's most venerable company has sent shockwaves through the establishment.

For decades, Volkswagen has been a byword for state-of-the-art German engineering, its distinctive badge seen around the world as a cast-iron guarantee of the latest, safest and most carefully crafted technology.

Having admitted to deceiving regulators over emissions from its diesel cars, that reputation now lies in ruins and the company sits alongside Enron, Worldcom, HBOS, and BP, among the corporate giants that became synonymous with shoddy practices.

Yet in VW there is added pain and embarrassment for the German establishment, since many of the country's most influential figures, together with some powerful allies, sat on the carmaker's supervisory board for years and were therefore in a position to help prevent the scandal. For many, it is here where the root cause of VW's troubles lie, in an entrenched corporate governance and culture that was either so ineffective that it failed to spot any of the issues that led to the crisis, or simply too weak to challenge management.

VW's 20-member council of directors, which is equally divided between shareholder and worker representatives, is responsible for hiring and firing executives, providing advice to management and monitoring their actions.

Yet, for a company of this size with thousands of external shareholders, diverse opinions and engineering expertise were almost totally non-existent.

The board was made up almost entirely of Germans and Austrian who were representatives of the largest shareholders - the Porsche and Piech families, the State of Lower Saxony and Qatar. Out of 20 directors, the board only had one independent voice - Annika Falkengren, chief executive of Swedish bank SEB.

And, if ever there was any doubt that VW's culture was deeply entrenched, it responded to Germany's biggest ever corporate meltdown by elevating Hans Dieter Potsch, its chief financial officer since 2003, to the position of chairman, an act of madness.

Even if Potsch thinks the blame should be pinned on some of the executives, how likely is he to do that?

Siemens, another German corporate titan, appointed a raft of outsiders when it was rocked by a huge bribery scandal in 2006. It eventually emerged in far better shape.

If VW is to stand a decent chance of recovering, it should do the same.

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