Volkswagen Faces Governance Review Due to Factory Closures

Volkswagen AG is currently under scrutiny following its announcement to close several factories in Germany and terminate long-standing labor agreements with unions. This move has drawn attention to the car manufacturer's unique governance and ownership structure, which has long been a topic of discussion among investors.

The company's complex ownership arrangement comprises two types of shares: preferred shares listed on the DAX index and common shares with voting rights. The majority of these shares are held by the Porsche and Piech families' investment arm, Porsche Automobil Holding SE, which owns a 31.9% stake in the leading European car manufacturer. The state of Lower Saxony holds an 11.8% stake, while Qatar owns 10%. However, in terms of voting rights, Porsche Automobil Holding SE has a dominant 53.3% voting power, while Lower Saxony and Qatar hold 20% and 17% of the votes, respectively.

This ownership structure is governed by regulations stemming from the year 1960 when Volkswagen transformed into a public company, known as the "Volkswagen Law." The law was designed to protect the company from external influence by granting significant power to Lower Saxony and the workforce. Key provisions of the law include that decisions requiring a three-quarters majority at the annual general meeting must be passed by a minimum of 75% of Volkswagen shareholders, giving Lower Saxony a blocking minority. Additionally, any decision related to the establishment or relocation of a production facility must gain a two-thirds majority approval in a supervisory board consisting of 20 members, of which 10 are German worker representatives. This provision grants worker representatives the power to veto plans that significantly impact factories.

Volkswagen's governance has come under criticism because it allows Porsche Automobil Holding SE to maintain effective control despite not owning a majority of the total shares. Furthermore, CEO Oliver Blume, who also leads Porsche AG (ETR: P911_p), is criticized by some investors who argue that one individual should not manage two major automotive manufacturers. This governance situation, combined with uncertainty regarding succession within the Porsche and Piech families, has led to Volkswagen's shares underperforming in the industry over the past five years.

The labor disputes arising from the planned factory closures highlight the complexities and challenges of Volkswagen's unique governance system.