Opting for Three-Headed Management
Volkswagen’s governance structure may seem strange to those accustomed to Anglo-American corporate law. But, its sustainability/ESG-friendly structure has roots stretching back to the 17th-century Netherlands.
As a German stock corporation, or “AG” (Aktiengesellschaft), Volkswagen has a dual board structure: at the top sits a Supervisory Board, which oversees a Management Board. The Supervisory Board appoints the Members of the Management Board, which takes responsibility for day-to-day operations. The Chairman of the Management Board generally equates to an Anglo-American CEO.
The two boards have no overlapping membership. While the Supervisory Board appoints and removes members of the Management Board, the Supervisory Board has no authority to instruct the Management Board, nor to act on behalf of the company.
Co-Determination (Non-Shareholder Representation on Supervisory Boards)
From the mid-19th century onwards, laws in German states have mandated increasing labor representation in oversight of company affairs.
Currently, for companies with more than 2,000 employees, German law mandates that representatives from the company’s labor union and/or workforce make up half the Supervisory Board. Moreover, in Volkswagen’s case, representatives from the state of Lower Saxony, where Volkswagen is headquartered, hold a 20% voting stake, along with a veto over major decisions.
Clipping the CEO’s Wings
Recently, labor and political representatives on the Supervisory Board wanted to fire Volkswagen CEO Herbert Diess.
In addition to battling supply-chain problems, Diess has pushed transformation of Volkswagen’s product mix heavily towards electric vehicles. These issues threatened the workforce status quo, particularly in Lower Saxony. Fearing large-scale job losses from supply-chain troubles and Diess’s retooling the company, labor representatives sought his ouster.
Other Supervisory Board members worked out a compromise: Diess would stay as Chairman of the Management Board, but lose responsibility for managing the Volkswagen brand, as well as for operations in China. These portfolios went to other executives, one of whom was elevated to the Management Board.
Will This Three-Headed Dog Hunt?
The Supervisory Board’s moves tilt the company’s managerial decision-making and capital investment towards the existing workforce. Such bias is built into the large-employer-AG framework.
Lower Saxony’s voting and veto right re-enforce this bias in favor of Volkswagen’s headquarters state.
But, in protecting jobs in Lower Saxony, Volkswagen’s Supervisory Board has gone further. It has divided authority at the management level. This goes beyond the typical role of supervising, monitoring, and appointing/removing.
In Volkswagen’s case, the Supervisory Board has installed a triumvirate. The triumvirs will compete with each other. At the same time, Volkswagen must compete with established rival empires like, Toyota, Daimler, Ford, Honda, and General Motors, as well as disrupters like Tesla and, perhaps, Apple.
In fighting for short-term spoils of jobs and tax revenue, have labor-union/workforce and political representatives on the Supervisory Board made it harder for Volkswagen to win in the mid and long term?
If so, to whom will the spoils ultimately go?
Letting the Experiment Run Its Course
It’s not just companies that compete with each other; it’s company-law systems. Various systems around the world strike different balances among the interests of shareholders, stakeholders, and the environment.
Co-determination at Volkswagen has led to a managerial triumvirate.
Triumvirates in revolutionary France and late-Republican Rome fared poorly.
We’ll see how Volkswagen’s turns out, for the triumvirs and the company.