With 295,000 employees in Germany and 24 factories across its home country, it is hard to overstate the importance of Volkswagen to Europe’s largest economy. The conglomerate, located in Wolfsburg, is one of Germany’s largest industrial employers and a magnet for a network of suppliers.
From a short to medium term perspective, the Volkswagen empire has just become more stable. The inclusion of a minority stake in sports car maker Porsche last month has led to the emergence of high-value money should it need to raise money. Volkswagen still owns 75% of Porsche’s shares, which have the right to vote and which are not. Billions of money might easily be raised if the group needed it in exchange for something like paying to switch to electric cars.
However, Porsche’s initial public offering might be a major problem in the long run, as it makes already cumbersome corporate governance even more complex. Is this good for Germany?
Following the listing of Porsche AG, investors seeking exposure to the Volkswagen empire can now choose between buying shares in four different listed facilities: the comprehensive group Volkswagen AG, the sports car brand Porsche AG, and its truck maker Traton. SE and a holding company that owns the voting shares of the Porsche Beach Group in Volkswagen AG and Porsche AG (“Porsche SE”).
These companies are linked together in a network of common shares that the Porsche-Beach family effectively controls through its hold on the voting shares. Listed companies are theoretically independent and run by separate executive boards that are overseen by their supervisory boards. But there is no doubt that decisions are made by the Porsche Beach family.
An overlap of personnel across the group’s eight different councils accentuates and reinforces this grip. Eleven individuals – nine of them men – hold positions on the boards of directors of at least two different companies.
At least five of them are on three different boards of directors. The main man is Hans-Dieter Buch, who chairs the supervisory boards of Volkswagen and Tratton, is CEO of Porsche SA and is a member of the supervisory board of Porsche AG. Oliver Blume holds two jobs as CEO of Volkswagen and Porsche AG. Manfred Doss, Head of Legal at Volkswagen is also responsible for compliance at Porsche SE while serving as a member of Traton’s supervisory board.
This complex web of cross holdings, stock lists, and individual responsibilities does more than just create additional overhead costs. It can even raise questions regarding a conflict of interest.
Just take a look at the roles of Lutz Mischk, Chief Financial Officer of Porsche AG. It may be in the interest of Porsche AG to keep the dividends low to preserve cash. But as Head of Investment Management at Porsche SE, he may want to receive as much payment as possible from Porsche AG.
The group’s advisors state that the relationship between Volkswagen, Porsche and other entities is legally and clearly defined. Prior to the initial public offering of Porsche AG, a legal agreement giving Volkswagen full control of cash flows and day-to-day decisions at Porsche AG was cancelled. Without such an agreement, management is required under German law to pursue the best interest of the entire company.
Nevertheless, the Porsche-Beach family and Volkswagen might draw up a new agreement with the stroke of a pen given their voting rights. This may be a purely theoretical option, as such a move is likely to hurt investor confidence. But if family preferences change, outside shareholders may be able to do nothing once morest it.
Essentially, outside investors have a limited voice. In Porsche SE and Porsche AG, voting shares are not traded on the financial markets at all. In the case of Volkswagen, Lower Saxony and Qatar’s sovereign wealth fund also have large holdings of voting shares. The government of Lower Saxony has special veto rights in cases such as takeover offers. The feisty metalworkers’ union IG Metall has a huge influence on Volkswagen.
Owning shares in Porsche AG requires belief in the managerial capabilities of a suspect company in areas such as compliance with emissions regulations, as well as communication in the financial markets. Seduced by Porsche’s growth and profitability, investors have chosen to ignore potential risks for the time being. If this bet fails, it will not only be painful for them. Given Volkswagen’s sheer size and scale, this would be a blow to the broader German economy.
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