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Evolution, not Revolution, at Volkswagen Group

<img src=“Volkswagon-group-change.jpg” alt=“red volkswagon car” title=“Volkswagon Group”>

The changes to Volkswagen Group’s management structure, including the departure of its CEO, announced in April were in part designed to draw a line in the sand following the diesel emissions scandal of 2015. $31 billion dollars in fines later, the company is in rude financial health with operating profits and sales at record highs.

VW now finds itself in the early stages of a large transformation which clearly demonstrates the importance of stakeholder engagement when changing a business. This article will consider some of the steps it is taking to meet its long-term strategy, the focus of which rests in strengthening its ability to innovate whilst transforming the core business.

Chairman Hans Dieter Potsch spoke of the “most profound change that the automotive industry has ever experienced” when announcing the new management structure at a press conference in Wolfsburg on 13 April. In a bid to create a sense of urgency, he argued that VW had faced parallel challenges in recent years – the biggest crisis in its corporate history alongside “epoch-making upheaval” in the automotive industry – and that extensive revision to VW’s organisational design would help ensure that the company “vigorously accelerates its transformation.”

VW’s powerful trade unions voted in favour of the appointment of Herbert Diess as CEO, but not without getting something in return. As part of the changes the general secretary of the works council replaced the head of human resources, meaning that employee representatives will have more influence on company strategy than ever before. In addition to getting the unions on side, the new Chief Executive gave three colleagues (sales, IT and production respectively) significantly more responsibility, with a view to building a new guiding coalition of executives at the firm. Awkwardly, one of the executives has since been placed under investigation by Munich prosecutors in relation to the diesel emissions scandal.

“Emphatically address the special challenges that lie ahead of us, especially in electromobility, digitization and new mobility services.” -Herbert Diess at his first press conference as CEO

He made the case for making the VW Group a world-leading provider of sustainable mobility and articulated how changes to its organisational structure would help achieve this. This mantra was repeated when announcing VW’s Q1 results in late April, and again at its annual shareholders meeting in early May.

The big question is do the changes go far enough?

An excellent article by the FT’s Patrick Jenkins argued that the underlying ills at VW – the ills that facilitated the fitting of “defeat devices” on 11 million of its diesel cars – are not those of group structure but poor governance systems. Staff representatives hold half the seats on the 20-person supervisory Board with the Government of Lower Saxony, Qatar’s sovereign wealth fund and the Porsche/Piech founding family holding nearly all the rest. VW has only two independent directors.

The other glaring governance issue is that 40% of the 500 million VW Group shares have no voting rights, meaning that the views of ‘ordinary’ retail and institutional investors are ignored at the expense of those three powerful controlling shareholders.

What is the answer?

Fund managers such as Hermes and Royal London are calling for the appointment of more independent directors to ensure that people are asking difficult questions of the management team. Without this, it seems that change at VW Group can only really take place at a structural level – not a cultural one.

However, changes to the Supervisory Board are not in the hands of the new CEO, so what should he be concentrating efforts on now? To get to the point of instituting change he needs rally the support of many VW’s 640,000 staff, and it is therefore key that he has been able to recruit the support of the trade unions early on in his tenure. Mr Diess calls for creating a culture of “constructive dissent” which will strengthen accountability at the firm – right out of the playbook of John Kotter’s model for change, which argues that you enable action by removing barriers to change, such as inefficient processes and hierarchies. He will then need to be able to point towards the short-term wins that he is generating and, after the first successes, use the credibility he has gained to press harder still.

Only at this point will Herbert Diess be able to articulate the connections between the new behaviours and organisational success, making sure they continue until they become strong enough to replace old habits. It’ll be fascinating to see over the next few years whether evidence of a changing culture and governance does indeed appear.

 

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