Independent investors have raised questions about the future of Volkswagen's chief executive Herbert Diess after he evoked a Nazi phrase in a management meeting last week.
Mr Diess, who took the reins of the world's largest carmaker less than a year ago, told managers last Tuesday that the high margins of VW Group's Porsche brand gave it more freedom than its other marques such as Audi.
But his choice of words – “Ebit macht frei”, or “Profits will set you free” – seemed to be a play on the phrase “Arbeit Macht Frei”, or “Work will set you free”, which was forged into the gates of the Auschwitz concentration camp.
“I think he is going to be fired,” said one long-term US institutional investor. “I’m torn about it. On the one hand, he’s one of the few managers that could probably move the company in the right direction. On the other hand, it’s so offensive I don’t think it’s really excusable.”
Ulrich Hocker, a director at DSW, a group representing small shareholders in Germany, called Mr Diess's statement "ridiculous", adding: "It's not a sentence you can say in Germany." Mr Hocker said he planned to demand another apology at Volkswagen's upcoming shareholders' meeting, but was not sure it warranted Mr Diess's removal.
Another investor, whose firm holds shares worth tens of millions of euros, said he and his fellow shareholders were “very upset and shocked” by the comments. “We had high hopes for him – for his ambitious strategy and focus on costs. But what changed last week is now there are big question marks over his judgment.”
Max Warburton, an analyst at Bernstein, wrote to clients on Friday that he believes "management change at VW is now a significant risk".
When Mr Diess’s comment was first reported in Manager Magazin, the supervisory board called the phrase “inappropriate and difficult to comprehend”. Several people present at the meeting said Mr Diess used it multiple times.
Apologised
Mr Diess apologised, saying it was “in no way my intention” to allude to the Nazis or to Hitler, who established Volkswagen in the 1930s. The phrase pre-dates the Nazis and Mr Diess had been quoting a former professor to make the point that underperforming brands needed to step up their game.
However, the association of the phrase with Auschwitz is common and it would be surprising if that had escaped Mr Diess, who visited the site of the camp in November and met a 95-year-old Holocaust survivor. "My conversation with Zofia Posmysz, a survivor of Auschwitz, will leave a deep and lasting impression," Mr Diess said at the time.
Mr Diess's blunder is seen as a gift to those already opposed to his leadership, including labour unions upset with his drive to slash costs and lift margins, and Bernd Osterloh, the powerful works council head.
“Historically it’s a disaster, but also from a survival aspect it’s problematic,” the former Volkswagen official said. “He gave Osterloh a home run, proving that all Diess cares about is profit, not jobs. For an Anglo-Saxon company – so what? But for VW, securing jobs is a religion. It’s the most important thing.”
The works council does not want to be seen piling on the criticism, however. It sent an internal note to workers on Wednesday welcoming Mr Diess’s “immediate clarification and unequivocal apology”.
Plenty of minority shareholders continue to support Mr Diess and dismissed the gaffe as an unfortunate error.
Another Volkswagen investor in the US said: “Any shareholder would know that whatever his utterances, Diess is the best thing to happen to the company in the last 50 years.”
Christian Strenger, founding member of Germany's corporate governance commission, said removing Mr Diess after his full apology "would be quite a mistake" given the progress he has made getting the Porsche-Piëch families on board with reforms. "He's been pretty successful in getting them moving."
Compliance issue
Hiltrud Werner, a VW board member and head of integrity, said she did not see the remark as a compliance issue. "I feel very sorry for Dr Diess to have hurt the feelings of many so truly unintentionally," she said. "I hope that his apology is accepted by those who understandably felt his choice of language to be inappropriate."
Others pointed out that minority investors have no power, given how VW’s ownership structure gives more than half the voting rights to the Porsche-Piëch family.
Porsche SE, the family-owned holding company of Volkswagen, said on Tuesday it had increased its stake in the carmaker to 53.1 per cent from 52.2 per cent. On Monday, a regulatory filing also showed Mr Diess had purchased €2.1 million worth of shares.
Fuelling shareholder anger at Volkswagen’s current leadership is that earlier momentum from the group’s turnaround efforts appears to have stalled.
TCI, the British hedge fund run by Sir Chris Hohn that had built up a €1.2 billion stake in VW in 2016, completely divested from VW in the middle of last year, according to two people familiar with the matter. The divestment, which has not been made public before now, reflected TCI's belief that there was little chance of shareholders enjoying improved returns.
TCI came to believe that Volkswagen’s chief shareholders – the Porsche-Piech families, the federal state of Lower Saxony and Qatar, who together make up nearly 90 per cent of the ownership structure – were not receptive to arguments for increasing cash flow because of the need to spend tens of billions of euros on electrification and self-driving technology, two people said. – Copyright The Financial Times Limited 2019
