Illustration 5.3 Volkswagen's governance crisis Spring 2015 saw a boardroom battle at one of the world's leading car companies; Autumn brought scandal. The Volkswagen Group was founded in 1937 to manufacture the famous VW Beetle, designed by the engineering genius Ferdinand Porsche. The Porsche family's own car company held an ownership stake that eventually rose to 50.7 per cent by 2009. That year, Volkswagen cemented the relationship by agreeing to take over the Porsche company, creating a single group that became the second largest car company in the world. The German state of Lower Saxony, the location of Volkswagen's huge Wolfsberg factory complex, owns 20 per cent of Volkswagen as well. External investors only hold 12 per cent of the company's voting shares. The Spring 2015 boardroom battle concerned a member of the Porsche family, Ferdinand Piëch. Piëch had served as Volk- swagen CEO from 1993 to 2002, and then become chairman of the company's supervisory board ('Aufsichtsrat') (see Endnote 22). Piëch was a cousin of Wolfgang Porsche, who also sat on the supervisory board. Piëch's wife, a former kindergarten teacher, was another member of the supervisory board, as in recent times were two of his nieces. Half the 20 members of the supervisory board are worker representatives; two are representatives of the Lower Saxony government; 17 were either German or Austrian; one represented a Swedish bank, and two more represented investments by the Qatari state. Ferdinand Piëch was in dispute over Volkswagen's strategy and performance with the company's CEO since 2007, Martin Winterkorn. On appointment, Winterkorn had announced his 'Strategie 2018', aiming to become the world's largest carmaker by the year 2018. Winterkorn had increased sales by more than 50 per cent, and Volkswagen Group cars had won World Car of the Year awards five times under his leadership. However, Piëch was allegedly disap- pointed about profit margins, falling sales in the USA and the failure to develop a budget car for China. The dispute was carried out behind closed doors, but finally Winterkorn triumphed and Piëch resigned at the end of April. The triumphant Martin Winterkorn signalled he wanted to move on from the internal politicking: 'Much has been written about alleged problems and improvements that need to be made... [but] don't be fooled. We know what we have to do... and we started doing it some time ago. The supervisory board has been a crucial supporter in every step of this journey. However, in September 2015, the United States Environmental Protection Agency (EPA) issued Volkswagen a notice of violation of the Clean Air Act. The company had been found to have fitted its diesel engines with a so-called 'defeat device' that allowed vehicles' nitrogen oxide (NOx) output to meet US standards during regulatory testing, while emitting up to 40 times more NOx in real-world driving. NOx is a major pollutant, associated with poten- tially fatal diseases such as emphysema and bronchitis. Volkswagen installed its defeat device in about 11 million cars worldwide between 2009 and 2015. According to some estimates, the cost of legal claims, fixes to cars and regula- tory fines could exceed €30bn. A few days after the EPA notice, Martin Winterkorn resigned as CEO. He denied knowing about the defeat devices, but he was the executive ultimately responsible and he was blamed for an expansion strategy that encouraged risk-taking and a corporate culture that was too inward- looking. Volkswagen announced that Hans Dieter Pötsch would become the company's chairman (filling the slot left empty by Piëch in April): Pötsch had been Volkswagen's Chief Financial Officer since 2003. Matthias Müller, who had spent a life-long career in Volkswagen, was appointed CEO. Sources: Financial Times, 26 April 2015 and 4 October 2015. Questions 1 To what extent does Volkswagen reflect the strengths and weaknesses of the stakeholder model of governance (Section 5.3.2)? 2 What should Volkswagen have done with regard to governance and management after the resignation of Martin Winterkorn?