Is VW’s structure too complex for Germany’s good?

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With 295,000 employees in Germany and 24 factories in its home country, it’s hard to overstate Volkswagen’s importance to Europe’s biggest economy. The Wolfsburg-based conglomerate is one of Germany’s largest industrial employers and a center of gravity for a network of suppliers.

From a short to medium term perspective, the Volkswagen empire has just become much more stable. The listing last month of a minority stake in sports car maker Porsche has generated valuable currency in case it needs to raise cash. Volkswagen still owns 75% of the voting and non-voting shares of Porsche. It could easily raise billions of dollars if the group needed it for something like paying for the transition to electric vehicles.

However, Porsche’s IPO could prove a major headache in the long run, as it makes the conglomerate’s already cumbersome corporate governance even more complex. Is it good for Germany?

Following the IPO of Porsche AG, investors wishing to gain exposure to the Volkswagen empire can now choose between buying shares in four different listed entities: the entire group (Volkswagen AG), its sports cars (Porsche AG), its truck business (Traton SE) and a holding company that owns the voting shares of the Porsche-Piëch clan in Volkswagen AG and Porsche AG (Porsche SE).

These are linked in a network of cross-shareholdings effectively controlled by the Porsche-Piëch family through its hold on voting shares. Listed companies are theoretically independent and run by separate boards of directors supervised by their respective supervisory boards. But have no doubt, the shots are called by the Porsche-Piëch clans.

An overlap in the workforce between the group’s eight different boards of directors highlights and reinforces this influence. Eleven people, including nine men, sit on the boards of at least two different companies.

Five of them are even on at least three different boards. Key man Hans Dieter Pötsch chairs the supervisory boards of Volkswagen and Traton, is CEO of Porsche SE and sits on the supervisory board of Porsche AG. Oliver Blume doubles as CEO of Volkswagen and Porsche AG. Volkswagen’s chief legal officer, Manfred Döss, is also in charge of compliance at Porsche SE while serving as a member of Traton’s supervisory board.

This complex web of cross-shareholdings, stock listings, and individual responsibilities doesn’t just create additional overhead. This may raise questions about conflicts of interest.

Take a look at the roles of Lutz Meschke, CFO of Porsche AG. It could be in Porsche AG’s interest to keep dividends low to preserve cash. But as the head of investment management at Porsche SE, he may want to receive as many payments as possible from Porsche AG.

Group advisers say the relationship between Volkswagen, Porsche and the other entities is clearly defined legally. Prior to Porsche AG’s IPO, a legal agreement that gave Volkswagen full control of Porsche AG’s cash flow and day-to-day decisions was rescinded. Without such a pact, management is required by German law to seek the best interest of the whole company.

However, the Porsche-Piëch clan and VW could set up a new agreement with the stroke of a pen given its voting rights. This could be a purely theoretical option, as such a decision could shake investor confidence. But if the family’s preferences change, outside shareholders may not be able to do much against it.

External investors essentially have a limited voice. In Porsche SE and Porsche AG, shares with voting rights are not listed on the stock exchange at all. In VW’s case, the state of Lower Saxony and Qatar’s sovereign wealth fund also hold large holdings of voting shares. The government of Lower Saxony has special veto rights on matters such as takeover bids. And the fiery metalworkers’ union IG Metall has a big influence at VW.

Owning shares of Porsche AG requires trusting the management abilities of a company that has a spotty record in areas such as emissions compliance as well as capital market communication. For now, investors have chosen to ignore the potential pitfalls, lured by Porsche’s growth and profitability. If that bet went wrong, it wouldn’t just be painful for them. Given Volkswagen’s size and reach, that would be a blow to the wider German economy.

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