Volkswagen: Why Turnaround Hopes Are Building
Hints emerging German car maker may tackle governance obstacles under new strategy plans
The tunnel has been long and the fumes noxious, but light is dimly emerging in the investment case for Volkswagen.
For years investors have seen the potential for the company to increase shareholder returns by improving the profitability of the VW-branded business, its largest revenue-spinner and spiritual core. For years hopes have been dashed as the company has responded to modest growth by hiring armies of staff, particularly in Germany.
To give just one example, in 2014 VW spent more on research and development than any company in any sector globally, according to brokerage Evercore ISI. Yet it isn’t viewed as a leader in automotive innovation—quite the contrary following last year’s emissions scandal.
The root of the problem has been clear: a supervisory board dominated by labor interests. German supervisory boards are always split between union and shareholder representatives, but a fifth of VW’s shareholder seats are also filled by local government officials who usually side with the unions.
The big question for shareholders is whether this balance of interests could change. After months of gloom, the past few weeks have brought three glimmers of hope.
The most dramatic is an open letter from a London-based activist investor, TCI Fund Management, arguing for a more transparent management-pay deal that prioritizes profits and returns. Hedge-fund manager Chris Hohn, who has amassed a 2% stake over four years, argues that the “old executive management team knew they would be paid a lot of money simply for protecting jobs and increasing wages.” The shares have risen about 7% since the note was published Friday, suggesting some investors think a vocal independent shareholder can prod the new management team into changing approach.
The second development is a U-turn on dividends from Porsche SE, the family holding vehicle that owns 52% of Volkswagen’s voting shares (and little else). Four days after slashing its payout in line with VW’s, the company said it would pay a much higher dividend than initially planned.
The Porsche and Piëch families, which hold half the shareholder seats on VW’s supervisory board, haven’t publicly supported reform. But their apparent dependence on Porsche SE’s dividends could be a hint that some share investors’ frustrations.
Finally, the Qatari sovereign-wealth fund, which owns 17% of VW’s voting stock and has little interest in protecting German jobs, is reportedly seeking more power. It currently has two seats on the supervisory board, but none on the “presidium”—the steering committee that convenes before board meetings to discuss key issues.
Nothing is guaranteed. And it is hard to see why the local government that owns 20% of VW’s voting stock would readily change its stance.
But long-suffering investors don’t have to wait long to find out. Volkswagen’s new “strategy 2025”, due to be unveiled this summer, could offer promise both in terms of cost-cutting and, possibly, governance reforms. That would finally give fuel to the company’s stalling recovery engine.