Brendan Greeley‘s article in the latest issue of Bloomberg Businessweek highlights the unusual — and counterproductive — role government has played in Volkswagen’s operations over the years.
In Italy, the privilege is called potere speciale; in France, action spécifique; in the U.K., it’s a “golden share.” Those are all different names for an ownership stake that gives a government—be it national or local—special powers above any other shareholder. That makes a crucial difference in running a business. Governments, for example, have good reason to prevent jobs from moving to more competitive labor markets. A golden share can help with that.
In Europe, most golden shares are held in utilities and telecoms, companies that were state monopolies before being privatized. For more than a decade, the European Union, as it expanded and liberalized its common open market, has been trying to undo the persistence of state control. But there is one golden share that has endured, a German law so breathtakingly exceptional it can only be called what it is in fact called—“das VW-Gesetz,” the Volkswagen Law. It is explicitly designed for a single company. Germany has managed to defend its golden share against the EU because VW had built a reputation as a force for good: responsible corporate citizen, pioneer in environmental progess. That reputation has just run out of Fahrvergnügen. …
… Publicly held German companies have two boards. Executives sit on the management board. They are in turn controlled by the supervisory board, which includes shareholders and labor leaders. Broadly, Germany’s dual-board structure preserves executive independence. Yet at Volkswagen, labor has an extra friend on the top board: the state. “You have the voice of the government present in the shareholder meetings,” says Carsten Gerner-Beuerle, an expert on corporate governance at the London School of Economics. “That is not something you’d see in any other board.”
In Lower Saxony, labor leaders deliver votes to endemically left-center state governments, which in turn use their veto to keep Volkswagen’s 72,000 German jobs in place. Working together, labor and government have extraordinary power at Volkswagen. There is no evidence to link this power to the company’s diesel deception, though the setup does help shield the company from the capital markets. Porsche learned this lesson when it borrowed heavily to try to buy Volkswagen in 2008. Lower Saxony’s golden-share veto protected Volkswagen, and overleveraged Porsche found itself acquired instead. “It’s a strange, and a bit weird, construction,” says Florian Möslein, a professor of corporate law at the Philipps University of Marburg. “There’s a long history that we need to take into account.” …
… “It’s very hard to justify the existence of this specific law,” says Werner Eichhorst, who runs European labor policy for the Institute for the Study of Labor in Bonn. The close relationship between two of the company’s power blocs—Lower Saxony and the labor unions—has kept wages high and put upward pressure on pay at the country’s other car manufacturers. But this is a roundabout way of managing a country’s labor policies. Germany’s other carmakers and its medium-size family businesses—the Mittelstand—don’t get laws tailored and retailored for them. Yet they have remained comparatively resilient during the last decade of boom, crisis, and recovery. The Volkswagen Law, says Eichhorst, has really only managed to do one thing: keep jobs in Lower Saxony.
It was unpopular to argue that the law had to go when Wolfsburg know-how was making clean, fast, fuel-efficient cars. Now, it’s clear Volkswagen wasn’t making any such thing. When corporate structures are opaque, says Möslein of Philipps University, they produce bad outcomes. The core problem at VW, he says, is the law that bears its name. It’s made the company inflexible and badly managed. And it was hard to see that until the deception came to light.
