Ownership structure and firm behavior
A case study on German automobile manufacturers
Harald T. Pals S1587382
August, 2008
ABSTRACT
This research adds to the literature on the relation between ownership structure and firm performance by investigating how interests and investment motives of distinct ownership structures influence the firm behavior that ultimately determines the performance of firms. For this, a multiple-case study on crisis situations of three German automobile manufacturers with different ownership structures is performed. The findings indicate that next to similar interests and motives, different owners indeed have distinct interests and investment motives, although these interests and investment motives may change over time, whereas in literature they are generally considered to be static.
Keywords: ownership structure, organizational behavior, firm performance, widely held,
CONTENTS
1. CONTENTS ...3
2. INTRODUCTION ...5
3. LITERATURE OVERVIEW ...7
3.1. The Ownership – Performance Relation...7
3.2. Widely Held Firms ...9
3.3. Family Owned Firms ...11
3.4. State Owned Firms ...13
3.5. Other Ownership Types ...15
4. BACKGROUND INFORMATION ...16
4.1. German Automobile Industry...16
4.2. Co-Determination Act...16
5. DAIMLERCHRYSLER ...17
5.1. Introduction ...17
5.2. Crisis Situations...18
5.2.1. Daimler-Benz – Chrysler merger. ...18
5.2.2. Role of shareholders. ...18
5.2.3. Smart...19
5.2.4. The Chrysler division. ...20
5.2.5. Mercedes quality trouble. ...21
6.2.2. Takeover rumors. ...26
6.2.3. Leadership changes. ...27
6.2.4. Quandt role during World War II...28
6.2.5. Profitability issues. ...28
6.3. Case Discussion...29
7. VOLKSWAGEN ...31
7.1. Introduction ...31
7.2. Crisis Situations...32
7.2.1. Latin American Crisis...32
7.2.2. Low profitability. ...32
7.2.3. Power struggle and corruption scandal...34
7.2.4. Volkswagen law and Porsche influence. ...36
7.3. Case Discussion...38
8. GENERAL DISCUSSION...40
8.1. Cross-Case Differences...40
8.2. Cross-Case Similarities...42
9. CONCLUSION ...43
9.1. Summary and Findings ...43
9.2. Limitations ...44
9.3. Future Research Suggestions ...45
10. REFERENCES ...45
INTRODUCTION
In small firms the entrepreneur is often the owner, which means that he is in charge of the firm and thus makes the decisions that make or break the firm. As the firm grows to become a big national or even international firm, the entrepreneur often loses (part of) his grip on the firm as external managers are appointed and/or a part of his ownership stake is being sold to facilitate the growth. Inherently, his influence on the performance of the firm is likely to diminish as well. The same goes for example for state owned firms that are being
privatized, as this process lowers the influence of the state on decision making. A number of studies have been addressed at understanding how (partial) ownership actually influences firm performance. Initially the debate was on firms with concentrated ownership or dispersed ownership (i.e. Berle & Means, 1932; Demsetz & Lehn, 1985), but gradually attention has shifted towards the relation between different ownership types and firm performance (i.e. Faccio, Lang & Young, 2001; Anderson & Reeb, 2003; Wei & Varela, 2003; Karathanassis & Drakos, 2005).
Despite the large quantity of literature concerning this topic there is no consensus on the exact relationship between ownership and firm performance. It was already recognized at an early stage that this relationship is influenced by the behavior of the firm (Berle & Means, 1932). Although Thomsen and Pedersen (2000) have argued that owners have certain unique investment motives and interests that ultimately lead to differences in performance, there seems to be little work that deals with how ownership structures actually influence firm behavior. The aim of this paper therefore is to add to the literature by giving a better understanding of the relation between ownership structures and firm performance. More precisely, it examines how interests and investment motives of different ownership types affect the behavior of the firm that ultimately determines the firm’s performance.
decisions and the motives behind these decisions, as well as on the interests of the shareholders of the firms.
The cases that were selected for this research are DaimlerChrysler AG, which is widely held, BMW AG, which has the Quandt family as the dominant shareholder and Volkswagen AG, in which the State of Lower Saxony is an important shareholder. As some authors have acknowledged (Faccio et al., 2001 and Maury, 2006), the relation between ownership structures and firm performance depends on the institutional setting in which the firm is operating, since for example some countries have higher levels of shareholder protection than others. Furthermore, the industry in which a firm is operating might also influence the relation between ownership structures and firm performance, as investors might favor certain industries over others, for example because they play a more important role in the economy (Chhibber & Majumdar, 1998; Wei & Varela, 2003). Therefore the cases in this study come from the same country and are all three active in the German automobile
manufacturing industry. Together with the fact that they each faced some sort of crisis in the past ten years and that they each have a distinct ownership structure, this makes them suitable for comparison. We want to note that some crisis situations originate before this period and for some of the cases we take the beginning of these crises as a starting point for the analysis. This will enable us to get a better understanding of the processes at work during these crises situations.
Widely held firms, family owned firms and state owned firms each behave differently, depending on the interests and investment motives of their owners and on the ability of owners to influence the behavior of the firm. Our research shows that shareholders in widely held firms have a more short-term orientation than family owned or state owned firms, although there is some general convergence towards a short-term orientation in all the cases. Family owners seem to keep higher levels of control on management, investment decisions and the appointment of managers than dispersed shareholders or state owners. This more active role of families gives them greater ability to influence the behavior of their firm
The crisis situations of the cases show that there are differences in the investments that the firms have made and in the extent to which the owners have relationships with other stakeholders. These two dimensions give a good indication of how ownership structures can influence firm behavior. The managers at DaimlerChrysler had good relations with the representatives of its biggest shareholders. With their backing, the managers tried to comply with the pressure to increase shareholder value by doing a number of investments that contained more risk. Many of these investments proved to be unsuccessful and were ultimately reversed. The close network at the top level of Volkswagen also enabled the management to do quite some investments, of which some were also quite risky. They however seem not to be driven by value maximizing motives, but rather by prestige. At BMW, the relations between the owners and management were much weaker. The firm did fewer investments, although the biggest investment that they did (in Rover) was quite risky and not very successful.
The remainder of this research is organized as follows. The next section gives an overview of the literature regarding the relation between ownership structures and firm performance. It also elaborates on the interests and investment motives that different ownership types may have. The third section briefly describes the importance of the automobile manufacturing industry for Germany and a specific feature of the German institutional setting. The subsequent three sections each introduce a case, elaborate on the crisis situations of the cases, and mention who were involved in the crises and how these players and the firms behaved with respect to these crises. The sections are closed with a discussion in which the empirical evidence form the cases is compared to the relevant literature. The seventh section gives a general discussion with a cross-case comparison for differences and similarities between the cases. The study is finalized with a section that contains a short summary, draws conclusions on the findings, indicates some research limitations and gives possible directions for future research.
LITERATURE OVERVIEW
The Ownership – Performance Relation
corporations with many small shareholders, but with corporate control concentrated to managers. Their argument is that due to the accompanying agency-problem these managers rather allocate resources according to their own benefit than to enhance firm performance. However, the validity of this research is diminishing as more recent studies have shown that not only in the USA many (large) companies with ownership concentration exist (Demsetz & Lehn, 1985; Shleifer & Vishny, 1986; Holderness & Sheehan, 1988; Morck, Shleifer & Vishny, 1988), but in other parts of the world ownership concentration is far more common (La Porta, Lopez-de-Silanes & Shleifer, 1999; Claessens, Djankov & Lang, 2000; Faccio & Lang, 2002). Also, several researchers have addressed the ownership-performance relation proposed by Berle and Means (1932) but the exact influence remains unclear as researchers find opposing results (i.e. Demsetz & Lehn, 1985; Morck, Shleifer & Vishny, 1988; Mudambi & Nicosia, 1998; Demsetz & Villalonga, 2001; Welch, 2003; Chirinko, Garretsen, Van Ees & Sterken, 2004; Earl, Kucsera & Telegdy, 2005; Sánchez-Ballesta & García-Meca, 2007; Tam & Tan, 2007). Whereas the focus of these authors is on ownership as being concentrated or not, there is also a considerable amount of research that uses the type of ownership as an independent variable (i.e. Karathanassis & Drakos, 2004; Gedajlovic, Yoshikawa & Hashimoto, 2005; Bernotas, 2005; Hallward-Driemeier, Wallsten & Xu, 2006).
As was shown by Faccio & Lang (2002), in continental Europe family controlled firms are more important than widely held firms and this is reflected in a number of studies that have focused on family owned or controlled firms and their relation to firm performance (McConaughy, Matthews & Fialko, 2001; Anderson & Reeb, 2003; Lee; 2004; Maury, 2006). While the majority of this research finds positive relations between family ownership and firm performance, there are some others that have found no such relationship (i.e. Faccio et al., 2001; Chen, Cheun, Stouraitis & Wong, 2005). Care should be taken however when
So the evidence from the literature shows that different ownership structures have different effects on firm performance, but that the exact relations remain unclear. As Berle and Means (1932) already indicated, the relationship between firm performance and
ownership is moderated by the behavior of the management of the firm and this behavior is in turn influenced by the extent to which shareholders are able to monitor the firm’s
management. Several authors (i.e. Demsetz & Lehn, 1985; Mudambi & Nicosia, 1998; Demsetz & Villalonga, 2001; Chirinko et al., 2004; Kapopoulos & Lazaretou, 2007) followed the Berle and Means proposition that this monitoring behavior depends on the level of
ownership concentration.
On the whole, there is considerable literature that deals with ownership types and firm performance, but studies that make a direct comparison of different ownership types and their relation to firm performance seem to be rare. Among the few that did is the work by Thomsen and Pedersen (2000), who indicated on the basis of regression analysis that firms owned by institutional investors perform better than firms owned by families, states or other companies. According to them, the performance of these ownership types deviates from each other because apart from common motives, each ownership type has unique motives to invest in a firm.
Widely Held Firms
Following the definition of La Porta et al. (1999), we consider a firm to be widely held if there is no shareholder that owns more than 20% of the shares of a firm. We want to note that La Porta et al. (1999) used the percentage of voting rights to determine a shareholders stake in a firm, but since the companies in this research are German and Germany has a one share – one vote rule (although as we will show later on Volkswagen is an exception to this, (Deminor Report, 2005)), we consider it legitimate to use the percentage of shares owned as a threshold to determine the ownership type.
Berle and Means (1932) already acknowledged the existence of firms in which
they can use to invest, make an acquisition or to improve their debt structure (Helwege, Pirinsky & Stulz, 2007). Another reason might be that the initial owners want to diversify their risk by spreading their invested capital across multiple firms (Fama & Jensen, 1983; Shleifer & Vishny, 1997). Finally, the initial shareholders may sell their shares when the firm has a good stock market value so he can increase his personal wealth (Helwege, Pirinsky and Stulz, 2007).
The investors that buy shares from the initial owners also have distinct reasons for investing in the firm. In general, investors buy themselves into a firm with the objective to eventually increase their personal wealth (Lewis, 2001). One way of achieving this is through dividends that are paid to shareholders as a reward for providing their capital to the firm. Another possible way in which they can increase their wealth is by trading their shares against a higher price compared to the price they paid for the shares. This implies that they put
pressure on the management of a firm to realize short-term increases in firm value (Fama & Jensen, 1985). Investing in a firm does come at the risk that a firm may not (be able to) pay dividends or that the value of the firm has dropped. Instead of investing a large amount and thus all his risk in only one firm, an investor is therefore likely to spread his investment portfolio into smaller shareholdings across multiple firms, thereby diversifying his own risk (Lee & O’Neill, 2003; Manjón, 2004). Furthermore the shareholdings of investors in widely held firms are relatively small, which means that they can be more easily sold than larger (or majority) shareholdings (Lee & O’Neill, 2003). Investors also might favor investing in a widely held firm opposed to a in a majority owned firm because in a dispersed ownership structure there is no majority owner that can expropriate corporate wealth by transferring profits to other companies that it owns or by influencing the composition of the board (Holderness & Sheehan, 1988; Tribo, Berrone & Surroca, 2007).
(Lee & O’Neill, 2003). Since dispersed shareholders have relatively low shareholdings the firm is more vulnerable to a hostile takeover (Holderness & Sheehan, 1988). Another issue is that the dispersion of ownership lessens control over a firm’s management (Berle & Means, 1932), although smaller shareholders may offset this problem by forming a coalition (Zwiebel, 1995).
Family Owned Firms
Family owned firms are firms that are partially or entirely owned by an individual or a family. Again following La Porta et al. (1999), we consider a firm in which an individual or a family is the biggest shareholder and owns a 20% or higher stake in a firm (directly or via a holding structure) to be a family owned firm. Family owned firms have often been researched (i.e. La Porta et al., 1999; McConaughy et al., 2001; Anderson & Reeb, 2003; Burkart, Panunzi & Shleifer, 2003; Maury, 2006) and therefore there is considerable information regarding their motives to invest in a firm.
Family firms emerge when a founder (or a founding family) starts a business, presumably with the motive of increasing his wealth, which is closely linked to the performance of the firm (Lee, 2004). Apart from this pecuniary interest, the founders may also have some non-pecuniary interests in the firm. As Burkart et al. (2003) have shown, in Western Europe family firms are usually passed on to descendants of the founding family. The motive for doing so may be that the firm is being considered a family asset that has to be preserved by passing it on to the heirs (Anderson & Reeb, 2003). Next to that, the family might want to preserve certain firm-specific investments concerning human capital (Maug, 1996) that allow the family to make better strategic decisions than non-family owners (Ciferri, De Saint-Seine, Meiners & Snyder, 2005). A third motive for passing the firm on to
descendants may be that the family wants to preserve family specific political connections that may possibly benefit the firm (Faccio, 2003). Founders also may have other
non-pecuniary goals that do not necessarily maximize profits, like for example winning a title with a sports organization or becoming the worlds biggest firm in its industry, and so on (Demsetz and Lehn, 1985).
be concerned with the reputation that their firm has, as the firm’s reputation may affect their own reputation and vice versa (Anderson & Reeb, 2003; Galve Górriz & Salas Fumás, 2005). Their reputation in turn may influence the trust and confidence that third parties like providers of capital or suppliers have in them (Galve Górriz & Salas Fumás, 2005). In addition to that, founding families may want to create trust among their (non-family) employees and share their beliefs, characteristics and values in order to increase their employee’s commitment to the firm (Lee, 2004).
One of the biggest differences compared to widely held firms is that the founding family is likely to have a long term investment orientation towards the firm. In combination with the high risk of their relatively undiversified investment portfolio (Shleifer & Vishny, 1986; Thomsen & Pedersen, 2000; Anderson & Reeb, 2003) they may be more conservative and thus behave less opportunistic. Investors in widely held firms on the other hand are likely to be interested in short term results and thus management may behave more opportunistic (James, 1999). According to Fama & Jensen (1985) and Lee (2004), families are likely to put more emphasis on the expansion of the firm, achieving technological innovation or
preservation of the firm. Achieving firm growth might be a problem for a family, since it generally requires more capital resources than the family can provide (Galve Górriz & Salas Fumás, 2005; Ciferri, De Saint-Seine, Meiners & Snyder, 2005). Therefore they might choose to sell part of the shares of the firm, although they may be reluctant to give up a large part of their shares to smaller shareholders, as it may foster the free-rider problems described earlier (Lee, 2004). So instead, they may decide to retain a majority stake or sell a larger part and maintain their power through coalitions of shareholders, extra voting rights or holding companies (Ciferri, De Saint-Seine, Meiners & Snyder, 2005).
may also choose a kind of hybrid version, where they appoint outside directors to
management positions, but do not sacrifice too much power by placing family members on the nominating committee1. The trade-off of appointing family members to management positions is that the choice of qualified and capable people is limited, as the entrepreneurial ability of the founder(s) (Morck, Shleifer & Vishny, 1986) does not necessarily have to be present in the descendants.
Expropriation by families is likely to go at the expense of other shareholders, which may cause conflicts between the family and the other shareholders (Thomsen & Pedersen, 2000), although this relation is likely to depend on the political regulatory environment and corporate governance that differ per country (Faccio et al., 2001). Also, as the above shows, families may have different motives for investing in a firm compared to other (minority) shareholders, which in turn may be a cause of conflict between them (Lee, 2004). Kets de Vries (1993) mentions that conflicts like sibling rivalry, nepotism or autocratic behavior may also arise between family members. This may result in behavior that does not serve the interests of other shareholders.
State Owned Firms
Firms in which the state is the sole owner or in which it has a considerable ownership stake are seen as state owned firms. Following La Porta et al. (1999), a firm can be considered a state owned firm when the state is the biggest shareholder and owns a minimum stake of 20% of the shares. As La Porta et al. (1999) and Faccio and Lang (2002) have shown, state ownership (in particular in bigger firms) can be found in several countries.
A government is likely to have different motives to invest in a firm than investors in a widely held firm or in a family firm. One of the main differences is that opposite to families or small investors, governments do not pursue value maximizing goals (Chhibber &
Majumdar, 1998; Wei & Varela, 2003). Instead, they are likely to have relative advantages in capital, technology and management compared to non-state owned firms (Liu & Zhao, 2006). To illustrate, a state has the disposal of much higher capital resources (for example, in China the state controls the banking sector that allocates loans to firms (Hallward-Driemeier et al., 2006)) than non-state owned firms (Chhibber & Majumdar, 1998). This may give state owned
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firms advantages regarding liquidity, credit or cost of capital that a government then may use to correct for the market failures that a non-state owned firm would encounter (Thomsen & Pedersen, 2000).
So instead of maximizing profits, governments have other incentives to invest in a firm. First of all, these incentives may be classified political, social and economical (Wei & Varela, 2003). The political and social objectives may be to achieve full employment, low output prices or free social services (Thomsen & Pedersen, 2000; Chiou & Lin, 2005; Park, Li & Tse, 2006). Another reason to invest in a firm might be that the government wants to transfer profits from successful state owned firms into state owned firms that have been less successful, thereby writing off the debts of the unsuccessful firm (Park, Li & Tse, 2006). Governments might also invest in a firm because of ideological views. For example, in countries with a strong communist influence like in China, many firms were state owned. Over the years China has liberalized, but in many big firms the state remains to have a relatively high stake. This may be the result of a compromise between conservatives who do not want liberalization and market economy reformers (Wei & Varela, 2003). Also, the government might want to retain control over firms in strategic industries to protect them, might the privatization process fail (Wei & Varela, 2003).
because they want to control the hiring and laying-off of employees, particularly in the case off mass lay-offs (Wei & Varela, 2003).
There may yet be another motive for governments to invest in a firm though. As we have argued, widely held firms may be the target of a hostile takeover. If the party that bids for the firm is a foreign firm, there may be a risk that it will transfer employment to its domestic country or to another country. A government therefore might decide to invest in the firm to prevent the firm from being a takeover victim, since government shares are not freely traded (Chhibber & Majumdar, 1998; Jürgens et al, 2002; Varela & Wei, 2003; Chiou & Lin, 2005).
Furthermore governments may also have the power to nominate directors when they have a controlling stake in a firm (Chiou & Lin, 2005), which enables them to make sure that the firm acts in according to their interests, although they might be different to those of other shareholders (Wei & Varela, 2003). Management in turn might be encouraged to act
accountable to the public and to be legitimate, thereby maximizing political support (Li, 1994). The downside is that management and employees of state owned firms may have the tendency to expropriate value from the firm in numerous ways (i.e. bribes, predatory tax and worker shirking). Since the government does not have a value maximizing interest in the firm, there is no control for behavior that might undermine this goal and thus employees can make improper use of the firm (Jefferson, 1998).
Finally we want to address the free rider problem. Since the state has a controlling ownership share, it can be expected that its ownership structure is more concentrated compared to widely held firms and thus the free rider problem can be expected to be less (Demsetz & Lehn, 1985). On the other hand, state ownership may be an indication for other investors to mitigate the monitoring of managers as governments might put more emphasis on stability in the firm (Wei & Varela, 2003) which in turn can increase the free rider problem (Li, 1994; Chhibber & Majumdar, 1998; Suto, 2003).
Other Ownership Types
Porta et al. (1999) describe firms that are owned by a financial institution like a bank, who have their own motives for investing in a firm (Thomsen & Pedersen, 2000). Firms may also be part of an inter-corporate network with many cross-shareholdings like the Japanese Keiretsu’s (Lee & O’Neill, 2003; Gedajlovic et al, 2005). Finally, a rather new form of ownership is provided by private equity funds. These funds are known for their preference for very short-term returns (Ajamian, 2003).
BACKGROUND INFORMATION
German Automobile Industry
In this research it was chosen to investigate three firms from the German automobile manufacturing industry. Automobile manufacturers have had a long time presence in
Germany, as the automobile made by Carl Benz in 1885 is generally acknowledged to be the first car in the world. Today, Germany is the fourth biggest producer of automobiles in the world behind Japan, the USA and China with just over 6 million units produced in 2007. The biggest producers are Volkswagen, Daimler(Chrysler) and BMW, who are together
accountable for about two thirds of the entire German automobile production2. Figure 4 in the appendix shows that their joint production is well over 10 million units per year. Inherent to such high production levels is a large automotive supplier industry. The overall result is that in Germany nearly one in every seven jobs is related to the German automobile industry (BBC News, 9 September 2004; NRC Handelsblad, 27 September 2005), so the German automobile industry plays an important role with respect to employment in Germany. As can be seen in figures 5, 6 and 7 in the appendix, DaimlerChrysler and Volkswagen each employ about 50% and BMW even 75% of their workforce in Germany. In total, these three
manufacturers alone employ about 400.000 people in Germany.
Co-Determination Act
Before continuing to the cases, it’s worth to mention a specific feature of the German governance system. In Germany, having a two-tiered structure with a management board and a supervisory board is a legal requirement for firms (Li, 1994). The 1976 Co-Determination Act (Mitbestimmungsgesetz) stipulates that for firms with more than 2,000 employees the
2
supervisory board should consist of 12, 16 or 20 members, depending on the size of the firm. Also, the seats in the supervisory board should be divided equally between employee
representatives and other stakeholder representatives. However, the other stakeholder representatives have some privileges in electing the chairman of the supervisory board, to give them a slight advantage in case a voting ends up in a draw3. So employees in German firms are likely to have more influence on decision making compared to employees in firms in other countries.
DAIMLERCHRYSLER
Introduction
The first case is DaimlerChrysler AG. This firm arose in 1998 by a merger between Daimler-Benz and Chrysler, but as we will also show below, it is often considered as a takeover by Daimler-Benz4. Its annual revenue was approximately €150 billion and its 2006 net profit was just over €3 billion (see figures 1, 2 and 3 in the appendix). The Deutsche Bank was the main shareholder in Daimler-Benz with 22% of the shares, which made it a bank owned firm, but after the merger it only had 12% of the shares of the combined firm before lowering its share to below 5% as from 2004 onwards5. The 2006 (the final complete year of the merger) annual report shows that this firm has a large number of shareholders, with the largest shareholder being the Kuwait Investment Authority with a 7,1% stake (see figure 8 in the appendix). The board of management consists of representatives of both the Chrysler and Mercedes car groups. No representatives of substantial shareholdings are found in the supervisory board. Given the shareholder structure and the composition of the board of management and the supervisory board, we consider DaimlerChrysler AG as a widely held firm. We acknowledge that DaimlerChrysler AG has been split up again into two separate entities in 2007, but that is not deemed a problem for this research as its main focus is on the period before the separation.
3
European Foundation for the Improvement of Living and Working Conditions. http://www.eurofound.europa.eu/emire/GERMANY/CODETERMINATION-DE.htm
4
The merger between Chrysler and Daimler-Benz: what it means for workers. World Socialist Web Site, 08/05/1998. http://www.wsws.org/news/1998/may1998/merg-m8.shtml.
5
Crisis Situations
Daimler-Benz – Chrysler merger. In May 1998 Daimler-Benz CEO Jürgen Schrempp and Chrysler CEO Robert Eaton announced the biggest merger in automotive history by combining their firms into the DaimlerChrysler AG and thereby creating the fifth largest automobile manufacturer in the world (Het Financieele Dagblad, 8 May 1998). The firms indeed seemed to complement each other as Chrysler sold most of its cars in the USA,
whereas Daimler-Benz’ biggest market was Europe (NRC Handelsblad, 13 October 1998). At that time both firms recorded record profits and belonged to the most profitable automobile manufacturers, with profitability for Chrysler at around 20% and for Daimler at 12% (Het Financieele Dagblad, 31 July 1998; NRC Handelsblad, 13 October 1998). The merger was motivated by possible cost advantages regarding joint purchasing, production, research and development, sales and marketing, although both Brands would remain independent (Het Financieele Dagblad, 8 May 1998). The new firm was based on German law, meaning that because of the Co-Determination Act it was required to have a strong worker representation on its supervisory board (De Financieel-Economische Tijd, 8 May 1998). Both CEOs were to lead the firm for at least the first three years and it got two headquarters, one in Detroit and one in Stuttgart (De Financieel-Economische Tijd, 17 November 1998). The shares of both firms were transformed into DaimlerChrysler AG shares, which made the Deutsche Bank (± 12%), the Emirate of Kuwait (± 7%) and private investor Kirk Kerkorian (± 4%) the biggest shareholders (De Financieel-Economische Tijd, 8 May 1998).
Role of shareholders. Shareholders played an important role at DaimlerChrysler. This is for example shown by Eaton announcing that DaimlerChrysler shares would be traded on at least 21 different stock exchanges across the world and that the firm aimed for a two-digit return on investment and an elaborate dividend policy (NRC Handelsblad, 19 September 1998; De Telegraaf, 1 April 1999). The merger initially triggered mainly positive reactions among shareholders, who in particular favored the role of Schrempp who had the reputation of paying special attention to shareholder interests and had a strong focus on profitability (De Financieel-Economische Tijd, 8 May 1998; NRC Handelsblad, 25 June 1998). There were however also some minority shareholders that were concerned with the high speed at which their firm was developing itself (Het Financieele Dagblad, 28 May 1998). Also, after the legally now German firm was removed from the important Standard & Poor 500-index, a lot of American institutional investors had disposed of their shares, despite relatively high
the fact that the shares lost half their value in the next couple of years and that the dividend pay was drastically reduced (De Financieel-Economische Tijd, 21 February 2002; NRC Handelsblad, 21 February 2002). This led to more and more dissatisfaction amongst shareholders, with probably the best example being set by Kerkorian who sued
DaimlerChrysler for losses occurred due to the devaluation of the share value and he also demanded a takeover premium and reversal of the merger. His motivation was that he felt deceived by Schrempp who had admitted in an interview with The Financial Times in 2000 that instead of a merger of equals, his plan had always been to make Chrysler a division of Daimler-Benz and that the equal division of the management board into Americans and Germans was for “psychological” reasons only (De Volkskrant, 29 November 2000). His claim was however rejected by a lower court in 2005 and a U.S. federal court in 2007 (Automotive News Europe, 19 September 2007).
Minority shareholders more than once urged Schrempp to resign (De Financieel-Economische Tijd, 12 April 2001; FEM Business, 17 April 2004; NRC Handelsblad, 7 April 2005). Schrempp however stayed on board by utilizing his very good relations with the CEO of Deutsche Bank, with the former CEO of Deutsche Bank Hilmar Kopper, who was
chairman of the supervisory board at DaimlerChrysler and with the Kuwait Investment Authority. These parties had put him into the position of CEO years ago and they supported his policies despite opposition from minority shareholders (NRC Handelsblad, 11 January 2001; Trouw, 27 February 2001; FEM Business, 17 April 2004). Due to all sorts of trouble that will be described below, year after year pressure had been building up on Schrempp and ultimately the majority shareholders could not support him anymore, leading to his retirement at the end of 2005. To illustrate his troublesome relation with the shareholders: when his retirement was announced, DaimlerChrysler share prices immediately increased 9% (Leeuwarder Courant, 28 July 2005).
Smart. Together with Swiss watch manufacturer Swatch, Daimler-Benz had
developed the Smart, which is a compact city car. The car was to be introduced early 1998, but stability problems similar to those that Mercedes had had with its A-class model meant that its introduction was postponed by more than half a year (Eindhovens Dagblad, 12 February 1998). Right from the beginning Smart sales were below expectations and only half a year after its introduction Schrempp told the shareholders he was considering to stop
to peak at just over 150.000 units sold in 2004, before sales started to decline again6. Despite the increase in sales, Smart had not been able to make profits and therefore a €1.2 billion reorganization was announced in 2005 (NRC Handelsblad, 1 April 2005). The continuing trouble with Smart even brought DaimlerChrysler to a point where it considered selling its Smart division or setting up a cooperation with another manufacturer, as laying off one-third of the Smart personnel and reducing the number of models did not sort the expected effect (NRC Handelsblad, 9 January 2006). Until today, Smart is still owned by Daimler, although it produces only one model7.
The Chrysler division. In the first two years of the merger Chrysler and Daimler were both performing well. However, in the course of 2000 it became clear that Japanese
manufacturers had increased their grip on the stagnating US market. GM and Ford responded by giving high discounts which Chrysler had to follow, causing difficulties in selling vehicles against reasonable margins and resulting in high stock levels. In reaction, Daimler directors Dieter Zetsche and Wolfgang Bernhard were put in charge of Chrysler and it was decided to close three plants in the USA, thereby laying off 13.000 employees (Het Financieele Dagblad, 18 November 2000; NRC Handelsblad, 23 November 2000). Several stakeholders insisted on Schrempp to reverse the merger and to resign, but he did not respond to these calls (De Volkskrant, 5 December 2000; Het Financieele Dagblad, 5 January 2001). In January 2001 DaimlerChrysler announced plans to lay off another 26,000 employees and to close six plants at Chrysler in the next three years (ANP, 29 January 2001). These measures could not prevent Chrysler to drag the entire DaimlerChrysler firm into a loss in 2001, but for 2002 the Chrysler division managed to make a modest profit (De Financieel-Economische Tijd, 21 February 2002; NRC Handelsblad, 5 February 2003). The situation then worsened again in 2003 and yet another reorganization round was announced, this time with the focus on purchasing and on its model range (De Volkskrant, 5 June 2003).
Chrysler then managed to make some profits in 2004 and 20058, but in 2006 sales dropped again, caused by an undervalued Yen which made Japanese imports cheaper and a higher demand for fuel efficient vehicles (Het Financieele Dagblad, 1 May 2006). The lower sales resulted in new losses for Chrysler and in February 2007 Zetsche (who had succeeded
6
DaimlerAG annual reports 1998-2007
7
Smart website, www.smart.com
8
Schrempp at the start of 2006) announced the decision to cut another 13,000 jobs and the closure of another plant in the USA. Remarkably, in contrast to his predecessor Schrempp, Zetsche didn’t rule out the possibility of selling the Chrysler division (De Tijd, 15 February 2007) and in May it was confirmed that the Chrysler division was sold to the private equity fund Cerberus Capital Management. Cerberus paid €5.5 billion for an 80,1% stake in the division, whereas Daimler had paid more than €30 billion for Chrysler back in 1998
(Algemeen Dagblad, 15 May 2007). Daimler seemed liberated from the trouble that Chrysler had caused it, although it retained the remaining 19,9% of the shares and gave Chrysler a €2 billion loan (De Tijd, 7 August 2007). In the first quarter of 2008 Daimler noted record sales, whereas Chrysler sales further declined (De Volkskrant, 30 April 2008).
Mercedes quality trouble. In 2002 Mercedes launched its new E-class model. In the years after its introduction it became clear that the model (as well as some other Mercedes models) was suffering from reliability trouble, mainly related to electronics. The trouble damaged the premium image that Mercedes had and that in turn had a negative effect on sales and profits. In reaction, the new Mercedes division director Eckhard Cordes launched a new quality improvement program and decided on a worldwide recall for 1.3 million vehicles (NRC Handelsblad, 10 February 2005; NRC Handelsblad, 1 April 2005). The trouble with Mercedes on top of the trouble with the Chrysler and Smart division are believed to have finally caused Schrempp to quit the job (Eindhovens Dagblad, 29 July 2005). Zetsche then announced to cut about 8,500 jobs in production at Mercedes to rebuild the profitability of the division (The Sunday Business Post, 2 October 2005). This announcement was soon followed by a new round of redundancies, this time in administration and organization (Het Financieele Dagblad, 25 January 2006). All these measures seem to have been effective as Daimlers 2007 annual report shows that Mercedes sales have increased since.
management board (NRC Handelsblad, 8 September 2000). Mitsubishi sales and profits however also declined and in 2001 it was decided to lay off 9,500 employees and lower production by closing a plant (ANP, 26 February 2001; Het Financieele Dagblad, 27 February 2001). Mitsubishi also had relatively high debts. It needed €2 billion to survive, but when Schrempp in 2004 proposed to give this to Mitsubishi the other managers on the board, the minority and majority shareholders and the supervisory board members blocked his plan, meaning that Mitsubishi got no more financial support from DaimlerChrysler (NRC Handelsblad, 8 April 2004; Het Financieele Dagblad, 14 April 2004; NRC Handelsblad, 30 April 2004).
A few weeks later DaimlerChrysler sold its shares in Hyundai, officially because of “changed global market circumstances”. It is however generally believed that it had to do with a dispute on DaimlerChrysler signing a manufacturing agreement with a Chinese
manufacturer that already had an exclusive manufacturing contract with Hyundai (NRC Handelsblad, 12 May 2004). One and a half year later DaimlerChrysler also sold its share in Mitsubishi which on top of still declining sales had to deal with the coming out of another scam with respect to concealed quality problems, only this time at its truck division Fuso (De Tijd, 10 March 2005; De Volkskrant, 12 November 2005).
Toll collect. The German government had given the assignment to the Toll Collect consortium to develop a toll system for trucks. Due to mechanical failures the consortium could not manage to deliver the system before its deadline and therefore the government cancelled the contract. DaimlerChrysler had a 45% stake in Toll Collect and the cancellation of the contract led DaimlerChrysler to entirely write off the investment in 2003 and to reserve €100 million for possible claims. Despite this, Schrempp indicated that DaimlerChrysler was still willing to participate in the project and in February 2004 the government reversed their decision to break with Toll Collect (De Tijd, 20 February 2004; ANP, 29 February 2004).
2004; NRC Handelsblad, 24 July 2004). The agreement though was only signed after the management board had promised to let go of 10% of its wages and bonuses (De Telegraaf, 19 July 2004).
Case Discussion
When considering the crises of DaimlerChrysler, one can clearly see the
characteristics of a widely held firm. First of all, when announcing the merger the CEOs constantly emphasized the importance of profitability and their attention to dividends. Despite deteriorating results, dividends were only altered in 2002, although the decrease from €2.35 to €1.- per share was quite severe (De Financieel-Economische Tijd, 21 February 2002).
However, only one year later dividends were brought back to €1.50 per share before being raised to €2.- per share in 20079. On top of that, the many problems that DaimlerChrysler faced (Chrysler, Smart, Mercedes quality, Mitsubishi) had a strong negative impact on share prices. Year after year shareholder value declined, and like Fama & Jensen (1985) proposed, dissatisfied shareholders urged the management many times to take measures to increase shareholder value on short notice. The best example of an unhappy shareholder was set by Kerkorian, who sued DaimlerChrysler amongst others for a declined shareholder value. Despite promises by the management (in particular by Schrempp on the annual meetings, i.e. NRC Handelsblad, 8 April 2004), results failed to come. The management’s short term orientation may have also led to the risky investments (James, 1999) in Chrysler (that was very profitable at the time of the merger), Mitsubishi, Smart and Toll Collect, although management said they were long-term investments. Remarkably, right after the merger only relatively few shareholders acknowledged the opportunistic investments of Schrempp. When it became clear that the firm would have a strong German influence, many US shareholders bailed out and made use of the quick transferability of their shares (Lee & O’Neill, 2003).
The fact that Schrempp managed to stay on board despite his failed investments is partly an example of the lack of control and power that dispersed shareholders have (Berle & Means, 1932). Many smaller shareholders tried to improve their power by combining their forces in so called “Schutzvereine” (De Financieel-Economische Tijd, 12 April 2001) similar to the coalitions mentioned by Zwiebel (1995), but they were not strong enough to exert significant power. Contrary to Holderness & Sheehan (1998), minority shareholders did have
9
influence on the appointment of board members. The Deutsche Bank and the Kuwait
Investment Authority had played a big role in the appointment of Schrempp, although at that time their stakes in Daimler-Benz were higher than their stakes in DaimlerChrysler.
Schrempps position was to a large extent secured by the support he got from these major shareholders with whom he had very good relationships and therefore he managed to withstand the opposition from the smaller shareholders. When he resigned, the supervisory board (under chairmanship of the former Deutsche Bank CEO) appointed Zetsche who had a good track record in reorganizations (NRC Handelsblad, 29 July 2005), which is generally favorable to shareholder value.
BMW
Introduction
The next case is BMW AG. Figures 1, 2 and 3 in the appendix show that BMWs annual revenue has steadily increased to about €50 billion in 2006 and net profit to more than €2.5 billion. The corporate website of BMW indicates that 46,6%10 of the shares are held by Johanna Quandt and her two children Stefan Quandt and Susanne Klatten and that 43,2% of the shares are held by several smaller institutional investors (see figure 8 in the appendix). Johanna Quandt is the widow of Herbert Quandt, who inherited a 30% stake in BMW when his father died in 1954 before increasing it to approximately 50% in 1959. The board of management does not contain members of the Quandt family, but Stefan Quandt and Susanne Klatten are represented in the supervisory board. Therefore BMW is seen as an example of a family-owned firm.
Crisis Situations
Rover crises. Much to the dislike of its minority shareholders, BMW took over the British automobile manufacturer Rover from British Aerospace in 1994 in exchange for £800 million. (De Financieel-Economische Tijd, 17 May 2000). Apparently it did so to increase its market and product base, which enabled it to better withstand pressures from the
consolidating automotive industry (AROnline.co.uk, 7 March 2005). It is also believed that
10
BMW AG Shareholder structure,
BMW was interested in the technology of the Land Rover (part of the Rover Group) all terrain vehicles, as it was planning to launch a similar car under their own brand name (NRC Handelsblad, 18 September 1999). At that time Rover was performing reasonably well, but shortly thereafter Rover sales began to decline due to outdated models and technology (Automotive News Europe, 13 September 1999). Next to that, the rising of the value of the Pound Sterling had a negative effect on sales inside and outside the United Kingdom (De Volkskrant, 23 October 1998;World Socialist Website, 27 October 1998).
Rover however had another serious problem, in that its production costs were too high. BMW tried to tackle this by agreeing lower wages, flexible working hours and temporary short-term contracts with Rover employees when it took over (World Socialist Website, 27 October 1998; Algemeen Dagblad, 6 February 1999). It also managed to increase the productivity of the British plants, which was relatively low compared to other European automobile manufacturing plants (World Socialist Website, 27 October 1998). Unfortunately these measures could not prevent Rover from making losses, so BMW introduced new retrenchments in 1998 including the laying off of over 4,000 workers and a reduction of the working week from five to four days. Then BMW CEO Bernd Pischetsrieder even threatened with closure of the Rover plants if productivity would not be increased (De Volkskrant, 23 October 1998;World Socialist Website, 27 October 1998). Despite these measures, BMW decided early 1999 to lower Rover production by 10% (ANP, 9 January 1999).
The losses at Rover caused BMW profits and turnover for 1998 to decline, which happened for the first time in 30 years, and BMW was the least profitable of the bigger German automobile manufacturers (Algemeen Dagblad, 6 February 1999; NRC Handelsblad, 18 September 1999). The debacle with Rover finally had cost Pischetsrieder his job at BMW and he was replaced by Joachim Milberg in February 1999 (Het Parool, 8 February 1999). Milberg closed a deal with the British government that secured government investment in the Rover plants and he planned further redundancies (De Volkskrant, 24 June 1999).
March 2000). It sold Land Rover to Ford and it retained the Mini brand and production facility11. However, one and a half months later Rover ended up being sold to the Phoenix consortium because Alchemy wanted to cut almost all jobs and focus only on sports cars, which led to resistance among the worker representatives on the BMW supervisory board (NRC Handelsblad, 9 May 2000). The deal with Phoenix included an interest-free loan of 420 million pounds to Phoenix, which in the end was a cheaper solution than to reinvest in Rover (Socialistworld.net, 15 April 2005). The sale of Land Rover was also troublesome, as BMW had not given Ford accurate information on the firm and therefore the transaction price was reduced (Het Financieele Dagblad, 22 May 2000).
Later that year the Sunday Express (8 October 2000) released an article in which it is said that BMW wanted to close down the Rover group if talks with possible takeover candidates would end up nowhere. The Quandt family members were believed to be the driving forces behind a rather secretive supervisory board meeting (as the British Government and British trade unions were not notified of the meeting) in which the supervisory board had to vote over the liquidation of Rover. This meeting however was cancelled at the very last moment, as BMW had come to an agreement with Phoenix.
Takeover rumors. In the years of the Rover crisis the international automobile industry was in a consolidation phase that was marked by some big mergers like those between Daimler and Chrysler in 1998 and between Renault and Nissan in 1999. Being a relatively small manufacturer, BMW was also often associated with a takeover by another automobile manufacturer. Among the proposed firms to take over BMW were Volkswagen, Ford and General Motors (The Independent, 21 March 2000). Often confronted with these rumors, BMW representatives as well as the Quandt family have continuously denied that they wanted to sell their shares in BMW (Eindhovens Dagblad, 5 August 1998; Het Parool, 8 February 1999; NRC Handelsblad, 12 February 1999; The Guardian, 20 March 2000; De Financieel-Economische Tijd, 17 May 2000). The reason why BMW was brought into connection with a possible takeover was that apart from the Rover subsidiary, the BMW division itself was performing pretty well. This might exactly be the reason why the Quandt family would not want to sell their shares, although it is also suggested that they were
11
reluctant to give up the enormous prestige that is coherent to BMW ownership (The Independent, 21 March 2000). Next to that, there may be some other indicators of the dedication of the Quandt family to BMW. First of all, in 1995 the Quandts made their shares more difficult to trade by transferring them to a holding company. Second, a family
spokesman indicated that their main goal was long run value creation, although profitability was also high on their list (BBC News, 16 March 2000; Tijd Nieuwslijn, 21 March 2000). Finally, it is believed that they wanted to get rid of Rover because they were concerned with possible damage to the reputation of the BMW brand (NRC Handelsblad, 12 February 1999).
Leadership changes. First, to better understand the relations between the leaders of BMW and the Quandt family, we go back to the predecessor of Pischetsrieder, Eberhard von Kuenheim. Von Kuenheim had worked for the Quandt Gruppe and was appointed by Herbert Quandt as CEO of BMW in 1970 and in the period under his leadership, that lasted until 1993, BMW became one of the worlds leading luxury automobile manufacturers. After his tenure as CEO he became chairman of the supervisory board of BMW (until his resignation in 1999), but he is believed to have retained a high degree of control over BMW because he had appointed Pischetsrieder on who he had great influence. He also was the first supervisory board chairman with an office at the firms headquarters which allowed him to interact more with the firm’s management and he enjoyed a high level of trust from the Quandt family through his long term relationship with them (Automotive News Europe, 13 September 1999). Johanna Quandt and her advisor Hans von der Goltz were the representatives of the Quandt family in the supervisory board until 1997, when both seats were transferred to Johanna’s children. They were believed to take a more active role in the firm (The Guardian, 19 April 1999), whereas Johanna and Von der Goltz relied more on Von Kuenheim (Automotive News Europe, 13 September 1999). When Von Kuenheim stepped down as CEO in 1993, many expected him to appoint Wolfgang Reitzle as his successor. It is reported that he thought Reitzle was not capable for the job and that Reitzle demanded sole power, whereas Von Kuenheim wanted close cooperation with the new CEO to retain some degree of power. So instead, with the backing of the Quandts, he chose Pischetsrieder (Automotive News Europe, 13 September 1999).
by the Quandt family to propose Pischetsrieder’s biggest internal opponent Reitzle as the new CEO (Birmingham Post, 6 February 1999; Het Parool, 8 February 1999). This is remarkable because Reitzle had plans to heavily reorganize Rover and the Quandt family was asked by the British Government to retain employment in Britain (Algemeen Dagblad, 6 February 1999). Surprisingly, Joachim Milberg was ultimately chosen as the new CEO, as Reitzle could not get the support of the worker representatives of the supervisory board who
disagreed with his reorganization plans (Algemeen Dagblad, 6 February 1999; Het Parool, 8 February 1999). Quite soon after his appointment rumors started that Milberg would be sacked, and despite several announcements of the Quandt family that they backed him (The Independent, 21 March 2000; De Financieel-Economische Tijd, 17 May 2000), he was replaced by Helmut Panke in 2002 (De Financieel-Economische Tijd, 29 December 2001).
Quandt role during World War II. At the end of November 2007 the German TV network ARD aired a documentary about the role of the Quandt family during World War II. In this documentary it was revealed that the AFA battery firm owned by Herbert Quandts’ father Günther used slave laborers in its plants. Quite often attention had been paid to the role of the Quandts during the war in other publications, like for example in the biography of the Quandt family. Also BMW had donated money to a national fund for former slave laborers (Het Parool, 15 December 1999). Nevertheless, the documentary came as a shock to the Quandt family and in reaction they announced to fund and support a research project that will examine their family’s role during the war, although this move may also serve to minimize possible damage inflicted on their image (Der Spiegel, 12 October 2007).
which ironically represent a large share of the Leipzig plant employees (Deutsche Welle, 21 December 2007). Furthermore BMW wants to cooperate with other automobile manufacturers to reduce development costs (Beleggers Belangen, 22 February 2008). Also part of the
problem is the relatively low value of the Dollar, which means that sales in the USA (which is a big market for BMW) are less profitable. Reithofer announced that BMW wanted to tackle this by extending its purchases in countries with the Dollarand by almost doubling its production in its USA plant (ANP, 6 February 2008; Het Financieele Dagblad, 8 February 2008). Finally, BMW is also facing problems in the USA due to the credit crisis, which causes extra depreciation on leased vehicles and installment payments that do not come (NRC
Handelsblad, 25 April 2008).
Case Discussion
BMW is a good example of a family owned firm in which over the years the shares have been transferred from generation to generation to keep the firm in the family (Anderson & Reeb, 2003). Quite often BMW was brought into connection with a takeover by another automobile manufacturer or institutional investors, but by maintaining 46,6% of the shares and transferring them into holding companies the family had enough control to withstand such hostile takeover pressures mentioned by Jürgens et al. (2002) and Ciferri et al. (2005). BMW board member Ernst Baumann was quoted saying that “the Quandt family were also interested in long lasting development, even if it took measures that were not directly profitable” (Het Financieele Dagblad, 30 May 2006). Next to these long term motives, a spokesman indicated that the Quandt family clearly has a profit motive related to their own wealth, which is in accordance with Lee (2004). Also, the meeting that they had arranged in which they proposed to close down Rover was a sign that they wanted to get rid of Rover to put a halt on the money wasting Rover was causing. As a final indicator of their profit motives, the lay-offs and shift of production to the USA that were announced by Reithofer at the end of 2007 were intended to stop the decline in profitability. It also shows that they favor profitability over employment in Germany. This is illustrated by the new plant in Leipzig that meant
The documentary on the role of the Quandt family during WWII was based on what happened in the factories owned or managed by the Quandts. At that time the Quandts were only partly in possession of BMW and most of the slavery took place in their other firms. Although the documentary did not focus on BMW, the Quandts were clearly concerned with possible damage to the prestigious reputation of BMW as their own reputation is closely linked to that of BMW. Their reaction was setting up and funding a research project to investigate their family’s role, thereby indirectly indicating that they acknowledged their dubious past. So, in line with Anderson & Reeb (2003) and Galve Górriz & Salas Fumás (2005), there is a close link between the image of the family and that of the firm. The decision to dispose of Rover is also linked to their reputation, as the failure to turn Rover into a
profitable firm negatively contributed to BMW’s image.
VOLKSWAGEN
Introduction
The third case is Volkswagen AG. The annual revenues of Volkswagen increased from about €70 billion in 1998 to more than €100 billion in 2006 and for that year net profit was about €2.5 billion (see figures 1, 2 and 3 in the appendix). So in terms of revenue it sits right in between DaimlerChrysler and BMW. This firm has two bigger shareholders, namely Porsche Automobil Holding SE with 22,5%15 of the shares outstanding and the State of Lower Saxony owning 14,8% (see figure 8 in the appendix). As mentioned before, Volkswagen is an exception to the one share-one vote rule, which is illustrated by the voting rights, with 30,6% and 20,1% for Porsche Automobil Holding SE and the State of Lower Saxony respectively. The management board has no members related to these owners but among the supervisory board members are three representatives of the Porsche Automobil Holding SE and two representatives of the State of Lower Saxony. When Volkswagen was privatized in 1960, the State of Lower Saxony and the Federal Republic of Germany each got a 20% stake in Volkswagen and the Volkswagen law was enacted. This law was meant to protect the firm from a foreign takeover and to secure that no decisions were made without the approval of the State of Lower Saxony. The law limits the voting rights of a shareholder to 20%, regardless of the actual percentage of the shares that it owns. It also requires an 80% majority in decision making, whereas 75% is normal under German company law. Finally, it gives the State of Lower Saxony and the Federal Republic of Germany the right to appoint two supervisory board members each, if they own at least one share in Volkswagen (Lovells, 23 October 2007). Currently, the State of Lower Saxony is the only state owner of Volkswagen, as the Federal Republic sold its shares in 1988 (Jürgens et al., 2002). These measures in effect give the State of Lower Saxony a veto on decision making.
So, although not the biggest shareholder, the State of Lower Saxony does have a substantial ownership and control stake in Volkswagen AG. Combined with the knowledge that Porsche Automobil Holding SE only started building their majority stake in Volkswagen AG in 2005 (Porsche press release, 28 September 2005) and the fact that the state of Lower Saxony has more than 20% voting rights, we consider it to be a (partially) state owned firm.
15
Volkswagen Group Fact Sheet, per 14 March 2008
Crisis Situations
Over the years, Volkswagen has faced a number of crises even before the period under investigation in this paper. For example, in the early 90’s it had difficulties maintaining profitability and it had to cut costs (De Tijd, 12 April 2006). Under the leadership of then CEO Ferdinand Piëch it reached an agreement with the trade union IG Metall to reduce working time by 20%, thereby preventing the lay off of 20.000 employees (Jürgens et al., 2002).
Latin American Crisis. Halfway the 90’s Volkswagen (and a number of other automobile manufacturers) heavily invested in the upcoming Latin American market as an answer to the increasing demand for new cars. Unfortunately, the international financial crisis that hit Asia and Russia had spread to Latin America by the end of the decennium. In the next few years inflation rates were high and as a consequence interest rates rose as well, thereby making it more expensive to lend money to buy a car. The result was declining car sales (NRC Handelsblad, 3 December 1998), but with production running at full speed and also lower sales in the USA, Volkswagen was saddled up with an enormous stock of unsold cars and thus had strong overcapacity (The New York Times, 20 March 1999; Trouw, 22 July 2003). Even attempts by the Brazilian government to boost sales by lowering taxes didn’t turn the crisis around (The New York Times, 20 March 1999).
In order to tackle this crisis Volkswagen undertook a number of different measures with the agreement of Latin American trade unions. These measures included voluntary retirements and a buy out plan for over 4,000 workers, flexible working hours and working days (Ramalho & Santana, 2002), obliged holidays in order to lower stock levels (The New York Times, 26 September 1998) and eventually some wages cuts (World Socialist Web Site, 23 November 2001). Volkswagen did however pressure trade unions to sign the agreement by threatening to lay off thousands of workers if they would not agree with the cost cutting measures (NRC Handelsblad, 3 December 1998). Eventually, the interest rates and thus the stock levels remained high which led to Volkswagen laying off 4,000 workers in their Brazilian plants in 2003 (Trouw, 22 July 2003).
had overcapacity and Volkswagen employees earned about 20% more compared to other employees in the automobile industry (Trouw, 18 November 2006). This, together with prestigious but unprofitable projects initiated by Piëch (Volkswagen Phaeton and Bugatti Veyron, De Volkskrant, 9 November 2006) and heavy price competition in Germany and the USA (BBC News, 15 September 2004), caused firm profitability to lag behind that of other automobile manufacturers. Remarkably, it had not tried to improve profitability by laying off workers in Germany (where it employs about half of its workforce16) until 2005.
In 2003 strikes to increase the working week to 35 hours organized by IG Metall caused the production at the Wolfsburg plant to stall (Het Financieele Dagblad, 24 June 2003). Given that employees already received relatively high pays and that a longer working week would probably mean job cuts, workers ultimately cancelled the strikes because of the threat of losing their job (Het Financieele Dagblad, 5 November 2004). This threat came back in 2004 when Volkswagen was entangled in collective bargaining with IG Metall.
Volkswagen’s finance chief Hans Dieter Pötsch said that Volkswagen could cut up to 30.000 jobs if the trade union didn’t agree to a two-year pay freeze. The fear of workers was
strengthened by the announcement of the State of Lower Saxony (which is likely to promote employment in its region) that it would not intervene in the bargaining (BBC News, 9
September 2004). In the final agreement 103.000 workers were guaranteed that no jobs would be cut in Germany until 2011 and that new models would be produced in Germany, all in return for a 28 months pay freeze and the arrangement that newly hired personnel is being paid lower wages than existing personnel (Het Financieele Dagblad, 5 November 2004).
Despite this new cost-saving collective agreement, Volkswagen still suffered from overcapacity, high labor costs and an excess of employees (estimates ranging from 30.000 to 40.000) (De Tijd, 11 July 2005; BusinessWeek, 4 May 2006). Former DaimlerChrysler manager Wolfgang Bernhard, appointed late 2004, was given the task in 2005 to make Volkswagen profitable again by cutting costs. Together with Piëchs successor Bernd
Pischetsrieder he launched plans in early 2006 to lay off about 20.000 employees in the next three years (De Tijd, 12 April 2006). The collective agreement however did not allow for forced lay offs, so they chose for early retirements and voluntary lay offs (Trouw, 18 November 2006).
16
Volkswagen Group Website,
A new collective agreement in late 2006 arranged a flexible working week for the same salary, which means that the working hours are adjusted according to production demand. In return the management ensured that they would produce more vehicles in Germany. By some this was seen as nationalistic politics (World Socialist Web Site, 13 December 2006) since keeping production in Germany would mean cutting production in other countries, but IG Metall vice chairman Berthold Huber (De Tijd, 23 November 2006) and chairman of the company works council Bernd Osterloh (World Socialist Web Site, 13 December 2006) denied this. Although not clear in this discussion, it could very well be possible that the State of Lower Saxony has played a major role in the negotiations since they are concerned with employment in their region and the agreement secured production of the new Golf for the Wolfsburg plant.
Power struggle and corruption scandal. In September 2001 spokesmen of the State of Lower Saxony announced that former BMW CEO Bernd Pischetsrieder would be appointed by the supervisory board as the new Chief Executive of Volkswagen AG in April 2002. Ferdinand Piëch, the former CEO, became the chairman of the supervisory board (The New York Times, 5 September 2001). The four and a half years that Pischetsrieder was CEO were very turbulent and marked by a power struggle between him and Piëch and by a corruption scandal at Volkswagen. In 2003 the SPD party lost the elections in Lower Saxony to the CDU, which meant that the new Prime Minister of Lower Saxony, Christian Wulff and the Minister of Economic Affairs, Labor and Transport Walter Hirche were appointed to the Volkswagen supervisory board. Wulff was determined to end the long standing ties between the SPD and Volkswagen. One year later the news was spread that six prominent members of the SPD were on the Volkswagen payroll next to their occupation as public officer. This proved to be the beginning of the unraveling of a bribery scandal. Walter Hirche, on behalf of the State of Lower Saxony, reacted by starting legal investigations into rumors of possible bribery (Deutsche Welle, 5 July 2005) . Soon it became public that several managers
including IG Metall chairman Klaus Volkert, personnel manager Klaus-Michael Gebauer and Skoda executive Helmuth Schuster earned money through companies that supplied to
resigned from Volkswagen in 2005. Up to today many of them, including Piëch, are subject to legal investigations regarding these matters.
This bribery crisis indirectly displayed one of the biggest problems of Volkswagen. Many of the people involved in the scandals had been with the firm for years. Also, some had multiple relations with Volkswagen. For example, Hartz was not only human resource director, but he was also member of IG Metall and the SPD and he was very close friends with Piëch (De Tijd, 12 April 2006). This has enabled them to create a network of close personal and informal relations with much power (Deutsche Welle, 5 July 2005). On top of this, the ones that had to supervise possible misuse of corporate resources were themselves involved in nepotism (De Volkskrant, 12 December 2005).
It is believed that this culture has eventually caused Pischetsrieder to lose his job. First of all, he maintained distant and businesslike relations with IG Metall and the worker
representatives. Second, he did not have a long history of working at Volkswagen, like the rest had (De Volkskrant, 9 November 2006) and third, he had different views than his predecessor Piëch on how Volkswagen should be run. On top of that, Porsche had started buying a stake in Volkswagen from 2004 onwards, which meant that Piëch (who belongs to the Porsche family that controls Porsche) got even more control (The New York Times, 8 November 2006), much to the dislike of Christian Wulff, who based on an advice by JP Morgan insisted that Piëch would turn down his position of chairman of the supervisory board (De Tijd, 12 April 2006). Piëch however stayed and he soon got SPD and IG Metall member Horst Neumann appointed as the successor of Peter Hartz, whereas Pischetsrieder and Wulff had voted against the appointment of Neumann (De Tijd, 12 April 2006).
might have been justified, since Volkswagen announced late 2006 that “with mutual
agreement”, it was decided that Pischetsrieder would resign at the end of the year and while it was expected that Bernhard would be the new CEO (Beleggers Belangen, 21 March 2008), Pischetsrieder was succeeded by Audi boss and Piëch protégé Martin Winterkorn
(BusinessWeek, 4 May 2006).
Volkswagen law and Porsche influence. In 2004 the European Commission started proceedings before the European Court of Justice (ECJ) against the Volkswagen law on the premise that it restricted the free movement of capital and the freedom of establishment under the EU treaty (Lovells, 23 October 2007), thus making it more difficult for EU investors to invest in Volkswagen. In October 2007 the ECJ judged the Volkswagen law to be an
infringement of the free movement of capital as it gives the Federal Republic of Germany and the State of Lower Saxony considerable power beyond their shareholdings and thereby limits other shareholders to participate in firm management, but it found no breach in the freedom of establishment. This ruling effectively made Volkswagen vulnerable for a hostile takeover, as it allows investors to gain more than 20% voting rights and it restricts the veto rights of the State of Lower Saxony (European Court of Justice, 23 October 2007).
Automobile manufacturer Porsche recognized this threat at an early stage. They had joined forces with Volkswagen in the production of a SUV in 2002, which meant that Volkswagen as a partner had become important for them. When the European Commission started the proceedings against the Volkswagen Law, it was already very likely that the ECJ would rule out the Volkswagen law, just as it previously had done with similar cases (Lovells, 23 October 2007). This would make Volkswagen very attractive for foreign investors, and it was rumored that the firm was under the attention of US hedge funds that wanted to
