Volkswagen, a German automaker with a rich history, evolved through strategic expansions, encompassing brands from mass-market SEATs to luxury Lamborghinis. The influential ‘Volkswagen Law’ was established to protect the company from outside impact, securing significant rights for workers and the state of Lower Saxony. Its complex shareholding structure features Porsche SE as the largest stakeholder. Governance issues arise due to Porsche SE’s control and CEO Oliver Blume’s dual leadership of Volkswagen and Porsche AG, affecting investor confidence and share performance.
Similar to many German corporations, this iconic automaker’s journey spans 87 years of strategic growth and transformation, resulting in a diverse portfolio that includes mainstream vehicles such as SEAT, high-end brands like Lamborghini, and stakes in Porsche AG and Traton, a truck manufacturer.
UNDERSTANDING THE VOLKSWAGEN LAW
The strong role of labor organizations at Volkswagen dates back to its establishment before World War II, when the Nazis financed the main factory in Wolfsburg using funds partly sourced from union assets. This financing, along with the exploitation of forced labor, laid the groundwork for the company’s finances. After the war, British authorities, who supervised the factory, decided to transition the company into public ownership.
As of now, the state of Lower Saxony, where Volkswagen operates five of its six assembly facilities in West Germany, retains a 20% voting stake in the company.
In 1960, lawmakers enacted the so-called “Volkswagen Law,” which was designed to empower both Lower Saxony and the workforce, safeguarding the automaker from external pressures when it became a public limited company.
KEY PROVISIONS OF THE LAW
Two primary provisions stand out.
Firstly, decisions typically requiring a three-quarters majority in the annual general meeting must receive support from over four-fifths of shareholders, effectively granting Lower Saxony blocking rights.
Secondly, the establishment or relocation of manufacturing plants mandates approval from two-thirds of the 20-member supervisory board, as stipulated by the law, while closures are not explicitly addressed.
This scenario allows the ten board members who represent German workers to veto any significant development projects.
COMPLEX SHAREHOLDING STRUCTURE
The shareholding framework is intricate, primarily because Volkswagen has two classes of shares: preference shares, which are part of the German DAX index, and ordinary shares that come with voting privileges.
The majority of the group’s capital, spanning both share classes, is controlled by Porsche SE, the investment arm of the Porsche and Piech families, holding a 31.9% stake in the leading European car manufacturer.
Additionally, the German state of Lower Saxony possesses an 11.8% share, while Qatar holds 10%.
In terms of voting rights, the picture differs: Porsche SE commands 53.3% of voting power, thereby exercising effective control over Volkswagen. Lower Saxony maintains a 20% voting share, with Qatar at 17%.
GOVERNANCE CHALLENGES
Volkswagen has faced scrutiny from investors regarding its governance, which is partly attributed to its unique shareholder structure that allows Porsche SE to dominate the company without owning a majority of shares. Furthermore, Oliver Blume, who serves as the CEO of both Volkswagen and Porsche AG—a publicly traded entity in which Volkswagen holds a 75.4% stake—faces regular criticism. Many investors question whether one individual should oversee two major automotive manufacturers simultaneously.
This governance ambiguity has resulted in Volkswagen shares lagging behind industry performance over the past five years, with concerns about the succession of the Porsche and Piech families—led by 81-year-old Wolfgang Porsche and 82-year-old Hans Michel Piech—adding to investors’ unease.