An icon under fire

Jul 8th 2005
From The Economist Global Agenda

A corruption scandal at Volkswagen, Europe’s largest carmaker, has called into question Germany’s consensual business model

AS A symbol of Germany’s traditional consensual model of business, there is none better than Volkswagen (VW). Europe’s biggest carmaker is a famed practitioner of the Mitbestimmung system of co-operation between managers and workers. A high percentage of its workers are unionised. Gerhard Schröder, Germany’s chancellor, is a former member of its supervisory board and the government of the state of Lower Saxony is its biggest shareholder, making it the most politically sensitive of the country’s corporations.

Hence the excitement now gripping Germany over an unfolding bribery scandal at VW. Many of the details are still uncertain, but the allegations of fraud and improper deals between representatives of management and workers to secure union support for cost-cutting and other unpopular measures seem grave enough for many Germans to lose any remaining faith in co-determination—already badly shaken by the country’s economic woes.

Last week, the Brunswick state prosecutor announced an investigation into whether Helmuth Schuster, an ex-head of personnel at VW’s Skoda unit who unexpectedly quit last month, and another (unnamed) employee, were involved in fraud. Mr Schuster was an adviser to Peter Hartz, VW’s personnel chief, and a business partner of Klaus Volkert, VW’s powerful works council chief. Late last week Mr Volkert quit amid allegations of wrongdoing connected to Mr Schuster. VW called in KPMG to look afresh at its books.

The story then took a political turn. On Tuesday July 5th, Mr Schröder defended Mr Hartz by praising the reform of Germany’s labour-market laws that bears his name. On the same day, Mr Hartz and VW’s works council denied newspaper reports that VW managers had bought off senior union leaders, for instance with trips to Brazil. Nevertheless, on Friday the carmaker said that Mr Hartz had offered to give up his seat on the company's management board.

Under German law, workers can form a works council that has a role in management decision-making. Worker and union representatives are entitled to half of the seats on the supervisory board—which oversees the management board—in corporations with over 2,000 employees and to one-third of supervisory board seats in firms with 500-2,000 workers.

Critics argue that this co-determination discourages bosses from taking tough measures that might annoy the board’s labour representatives. It slows decision-making. It tends to deter foreign investors. And it may tempt managers to buy labour’s support. “The more influential the works council, the stronger the temptation to make some arrangement with labour,” says Peter von Blomberg of Transparency International, an anti-corruption group. But some executives, including Jürgen Schrempp, boss of DaimlerChrysler, another carmaker, like the system. Workers accept tough measures more readily if they are part of the decision-making, they say.

The German government is now forming a committee to examine reform of co-determination. Last year the Confederation of German Employers demanded change. Yet, although it was expected to call for the end of co-determination, says Martin Höpner, at the Max Planck Institute for the Study of Societies in Cologne, in the end its main demands were for smaller supervisory boards and for firms of all sizes to be able to decide on the number of their board seats allocated to unions.

The scandal may have a silver lining for VW. Bernd Pischetsrieder, the chief executive, and his ally, Wolfgang Bernhard, are trying to make the firm more “Anglo-Saxon”, with more focus on performance. Thanks to labour’s power within the firm, VW workers earn about 20% more than the average salary of workers in German car firms. Mr Bernhard, who recently joined VW from DaimlerChrysler, is putting the finishing touches on another round of cost-cutting. Adam Jonas, an analyst at Morgan Stanley, says the alleged scandal may be just what the management needs to be able to push through the changes it wants. How convenient.

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