VW’s emissions crisis highlights serious corporate governance problems, says Moody’s — Management reshuffle is positive, but high turnover creates risks

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asmina Serghini-Douvin, vice president and senior credit officer at Moody’s says:

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“VW’s emissions crisis has brought to light serious corporate governance issues within the company that we view as a credit negative. These deficiencies include ineffective internal controls to uncover improper activity and poor risk management by VW’s management and supervisory boards. The emission crisis might cause lasting damage to VW’s once-solid reputation with adverse effects on its future earnings and cash flows.

 

“The management shake-up will empower VW’s brands and improve regional coordination across the organisation. These changes should also help address the company’s organisational complexity, which we have viewed as a long-standing credit negative. However, a turnover of this magnitude creates risks, and additional changes following the conclusion of an internal investigation may put added stress on the quality and depth of the senior management team.”

 

 

Overview:

 

· Emissions crisis points to serious shortfalls in oversight. These deficiencies include ineffective internal controls to uncover improper activity and poor risk management by VW’s management and supervisory boards. Sweeping governance reforms could limit the damage to VW’s once-solid reputation, which threatens to hurt earnings and cash flows.

 

· Management changes are positive to date, but high turnover creates risks. In our view, the management shake-up will empower VW’s brands and improve regional coordination. For example, key production functions will be de-centralised at both a brand- and regional-level, in an effort to enhance the company’s agility. The management changes could also help address the company’s organisational complexity, which we have viewed as a long-standing credit negative. However, given the magnitude of the changes, we think it will take time for the new management framework to take shape and become an integral part of the company’s corporate culture. There may be further changes following the conclusion of the internal investigation, which could put additional stress on the quality and depth of the senior management bench.

 

· Lack of independent voices persists on supervisory board. The relative lack of independent voices on the supervisory board is a governance weakness for VW because it can result in less diversity of opinion and weaker management supervision than in other large, rated diversified global corporations. Of the 10 supervisory board members who represent shareholders, there is only one independent director.

 

· Three controlling shareholders to determine extent of corporate governance reforms. VW’s relatively complex corporate governance structure is dominated by three controlling shareholders: Porsche Automobil Holdings SE (which is wholly-owned by the founding Porsche/Piëch families), the state of Lower Saxony and Qatar Investment Holdings. These parties play the most active roles in VW’s governance. In the past, we have viewed the ownership as a potential source of stability for creditors, allowing the company to take a longer-term view on strategy and operations. But their interests may not always be totally aligned with each other or those of the company’s creditors and are therefore a source of potential conflict.

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