Is Volkswagen so Complicated Only Insiders Can Fix It?

October 25, 2015 Updated: October 29, 2015
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WOLFSBURG, Germany—Volkswagen’s effort to fix its emissions scandal will be largely led by company insiders. Some experts say it’s the only way, given the German carmaker’s unusually complicated structure and power groups.

Others, however, argue the company is just compounding its risks if it does not bring an outsider to change its ways.

Volkswagen has named a new CEO and chairman since the scandal became known Sept. 18. Both are longtime employees.

The effort to find the guilty and prevent a recurrence is in the hands of new CEO Matthias Mueller, who has been with the group for almost three decades. Mueller, who previously led Volkswagen’s highly profitable Porsche brand, took over when Martin Winterkorn resigned.

The new board chairman, Hans Dieter Poetsch, had been chief financial officer since 2003. There’s no indication he knew about the decision to cheat on the U.S. diesel emissions tests with software installed in engines. But he was a member of the top management team in place when the cheating took place, a group of executives that hasn’t yet been formally cleared of involvement.

Mueller has promised a new, more open approach.

The question is, will Volkswagen identify the guilty—but miss the chance to change the culture that enabled the scandal in the first place?

The Volkswagen factories and administration and sales buildings in Wolfsburg, northern Germany, on Oct. 5, 2015. For Volkswagen, the cost of its cheating on emissions tests in the U.S. is likely to run into the tens of billions of dollars and prematurely end its long-sought status as the world's biggest carmaker. (Julian Stratenschulte/DPA via AP)
The Volkswagen factories and administration and sales buildings in Wolfsburg, northern Germany, on Oct. 5, 2015. For Volkswagen, the cost of its cheating on emissions tests in the U.S. is likely to run into the tens of billions of dollars and prematurely end its long-sought status as the world’s biggest carmaker. (Julian Stratenschulte/DPA via AP)

A Different Kind of Company

Volkswagen can be a complicated place to figure out.

The billionaire members of the Piech and Porsche families collectively control a majority of the voting rights through their holding company, Porsche Automobil Holding SE. They include Ferdinand Piech, who served as CEO from 1993 to 2002 and only left the board chairmanship in April.

And the local government and unions hold a lot of power, too.

Lower Saxony, the Germany state where Volkswagen’s Wolfsburg headquarters is located, holds a 20 percent voting stake, giving it the legal right to block plant closures. Employee representatives by law hold half of the board seats, and can also veto important decisions.

Dirk Toepfer, a member of the parliament of Lower Saxony, presents a commonly heard argument in Germany: that the peculiarities of Volkswagen mean company veterans are best positioned to lead the clean-up.

“Volkswagen is a different world,” says Toepfer. “That means this enterprise functions under different rules than other enterprises. That’s why they need someone that knows the structure.”

“Someone who comes completely from the outside and doesn’t know how the rules of the game go will fail at the cleanup.”

The management under Winterkorn also has been criticized as overly opaque and hierarchical. Employee representative Bernd Osterloh lamented last month the need for “a culture in which it’s possible and permissible to argue with your superior about the best way to go.”

Some question whether pressure to meet Volkswagen’s target of passing Toyota as the world’s largest car maker led people to cut corners. Volkswagen achieved that goal in the first half of this year, just before the scandal broke out.

Toepfer acknowledged that the inside-outside question has two sides: “Before it’s known who was involved and how, there’s the danger that those put in charge of clarifying matters were involved themselves.”

German Vice Chancellor Sigmar Gabriel speaks during a news conference in Wolfsburg, Germany, on Oct. 8, 2015. Gabriel traveled to Volkswagen's hometown to send a message of support to the automaker's employees, and urged the company to be pro-active in its efforts to clear up its emissions-rigging scandal. (Holger Hollemann/DPA via AP)
German Vice Chancellor Sigmar Gabriel speaks during a news conference in Wolfsburg, Germany, on Oct. 8, 2015. Gabriel traveled to Volkswagen’s hometown to send a message of support to the automaker’s employees, and urged the company to be pro-active in its efforts to clear up its emissions-rigging scandal. (Holger Hollemann/DPA via AP)

The Company View

Volkswagen has made some effort to reach outside, hiring U.S. law firm Jones Day to find out who knew and did what in the scandal. It has also brought in an executive from competitor Daimler, a former top judge, to oversee legal compliance.

Volkswagen also sought legal clarification about Poetsch’s move to become chairman, said Hans-Gerde Bode, the company’s director of communications. “Knowing that these questions would come up, we obtained a legal opinion ahead of time, which made this change possible to undertake, because we knew, yes, that will lead to multi-sided discussion.”

Bode said the company cannot predict what Jones Day will find but that it’s “relatively sure that the CFO and the very top management was not involved in this decision” to alter engine software so that the cars evaded the U.S. tests.

He added: “Naturally, if at one point or another possible conflicts of interest are indicated with anyone whatsoever, these people will surely not be part of any meeting where Jones Day reports something and where decisions are taken.”

A brand sign of the Volkswagen car company is seen at the car factory in Wolfsburg, Germany, on Sept. 29, 2015. More than a decade ago, the U.S. Environmental Protection Agency helped develop a technology that ultimately allowed an independent laboratory to catch Volkswagen's elaborate cheating on car emissions tests. But EPA did not apply that technology on its own tests of diesel passenger cars and instead focused on trucks, thus missing its best chance to foil the German carmaker's deception as early as 2007. (AP Photo/Markus Schreiber)
A brand sign of the Volkswagen car company is seen at the car factory in Wolfsburg, Germany, on Sept. 29, 2015. More than a decade ago, the U.S. Environmental Protection Agency helped develop a technology that ultimately allowed an independent laboratory to catch Volkswagen’s elaborate cheating on car emissions tests. But EPA did not apply that technology on its own tests of diesel passenger cars and instead focused on trucks, thus missing its best chance to foil the German carmaker’s deception as early as 2007. (AP Photo/Markus Schreiber)

Risks With Insiders

Carol Adams, a professor at Durham University Business School in Britain, questions the idea that only an insider could fix Volkswagen. She says that may stem from the scarcity of outside directors on its board, which is dominated by the owner families and employee representatives: “If you’ve got a board with independent directors on it, you’re less likely to have that fear of questioning a particular culture.”

“Do they really mean that an outsider couldn’t understand the culture, or that an outsider might question that culture?” she said.

Stephan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences-Bergisch Gladbach, says the Jones Day probe will likely identify the individuals responsible.

But that could stop short of changing Volkswagen’s culture.

The company, he says, should appoint an outside commission put together from experts, researchers and non-government organizations to investigate what happened and how to prevent it from happening again.

Fellow auto giants General Motors and Toyota stayed with insiders as CEOs as they faced scandals over defective vehicles. Toyota recalled millions of cars after a crisis in 2009-10 over unintended acceleration in some cars and GM had to fix vehicles where faulty ignition switches could shut off the engine and disable airbags.

But Siemens AG, a German engineering conglomerate, reached outside the company for a new CEO after it was hit with criminal investigations for using widespread bribery to win business in a number of countries.

Peter Loescher was brought from pharmaceutical company Merck and streamlined the company’s complex structure and, by his own account, purged 80 percent of top management.

Once the scandal was past, Loescher ran into trouble in 2013 with missed profit targets.

He was ousted by the board and replaced with chief financial officer Joe Kaeser—a longtime Siemens insider.