corporate governance, innovation and economic performance on

7/27/2019 Corporate Governance, Innovation and Economic Performance On

1/22

CORPORATE GOVERNANCE,INNOVATION AND ECONOMIC

PERFORMANCE ON VOLKSWAGEN

DIWAKAR CHUGH

GAURAV SHARMA


2/22

ABSTRACT

This case relates to car manufacturingcompany Volkswagen.

Pressure of high rates of return had led the

company to change its policies. Short term profit orientation, increased

dividend pay outs to investors and innovation

potential of companies have to suffer. In this case, Volkswagen tried to reduced this

gap.


3/22

QUESTIONS

Response of Volkswagens corporate

governance to the shareholders value

Role of stock market for the company

Effect of incentive, target setting andcontrolling to shareholders value

Effects of investment/disinvestments on

innovation potential of the firm Effects on economic and financial

performance of the company


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BACKGROUND

German Car industry had a prominent role in

German Economy regarding the

manufacturing sectors share and growth.

Car manufacturing firms are under the threat

of hostile takeover.

Pressure of Capital Markets - Institutional

investors favoring change in the corporate

governance systems.


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SHAREHOLDING PATEERN OF CAR

COMPANIES

0

4.90%

0

11.30%

4.60%

4.90%

28.60%

Renault

1

2

3

4

5

6

7

8

0

6.60%

00

8.00%

5.30%

3.70%

40.00%

PSA

1

2

3

4

5

6

7

8

0 0

13%

3.30%

2.00%

2.50%

37.90%

Fiat

1

2

3

4

5

6

7

8

0

10.20%

12.10%

3.50%

3.00%

51.40%

VW

12

3

4

5

6

7

8


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RELATIONSHIP B/W MARKET VALUE

AND VOLUME OF PRODUCTION

0

50

100

150

200

250

Market Value*

Turnover


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VW TRADITIONAL CORPORATE

GOVERNANCE SYSTEM

Example of German neo-corporatism.

In 1960, Volkswagen Works Limited became a stockcorporation (AG) and was partially privatised.

Governmental representatives remained a dominatinginfluence on the supervisory board.

In 2000, Boards composition: 3 representatives of IG Metall and 6 Representatives of Volkswagens

works council (Labour Side)

4 representatives from other companies, 3 persons representing banksand a shareholder association

2 representative of Lower Saxony, among them Prime Minister of CurrentSocial Democratic government


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CONTD

High degree of Joint-ness between

management policy and works councils in

company policy.

Union proposed general agreements on wages

and salaries and working conditions which

resulted with increase in the costs of

production but quality improved.


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BASE OF CG SYSTEM

A high degree of union membership.

Top management committed to the goals of

social responsibility and competivity.

A priority on location and employment

interests.

A company-based bargaining system betweenIG Metall and the Executive Board of the

Volkswagen.


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CHANGES IN CG SYSTEM

Corporate governance of VW towardsshareholder value orientation.

Stock market now play a vital role in framing

rules. Changes in the incentive system.

Changes in target setting and controlling like

were reframed to higher return on sales. Changes in investment and disinvestment

policy of VW.


11/22

CORPORATE GOVERNANCE OF VW

TOWARDS SHAREHOLDER VALUE

ORIENTATION Measures taken in by Volkswagen to enhance communicationwith shareholders:

Enhancing relationship with investors by arranging meetings to

explain corporate strategy

Buy Back scheme

Companys commitment to support OECD principles on

Corporate Governance

Adoption of International Accounting standards and segmental

reporting in the annual reports

VW trying to establish the relationship between Work holder

Value and Shareholder Value due to external pressure


12/22

EVENTS WHICH FOSTERED

REORIENTATION

Failed attempt to increase capital in 1997.

The second event was the Mannesmann case.

The fear of a hostile takeover became an issueon which management and works councils

were united.


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ROLE OF STOCK MARKET IN

COMPANYS FINANCING At Volkswagen, recently the importance of stock markets is

realized.

Rare events when company goes for expanding equitybase.

Expanding operations to financial services requires capital. Investor relationship hasnt been good and reacted

negative to issue and thus embarrassing Volkswagen whichwas thinking of acquiring BMW.

Refinancing is one of the major concern.

Mindset of company thus have changed. Stock market is the main source of providing acquisition

money.

CASH FLOW AND CAPITAL


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CASH FLOW AND CAPITAL

INVESTMENTS IN TANGIBLE FIXED

ASSETS

0

50

100

150

200

250

300

350

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Cash flow as % of capital investments in

tangible fixed assets

VW AG automo- tive division


15/22

Return on Sales of VWs Brands

-100

-80

-60

-40

-20

0

20

2000

1999


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CHANGES IN THE INCENTIVE SYSTEM

Companys was aiming to improve Workholder Value.

Bonuses are also paid at the level of employees subjectto collective agreements.

The introduction of the 28.8 hour week and thecorresponding reduction of wages.

VWs measures:

Esops (Employee Stock Option Plans)

Restructuring of the Pension Scheme

Employment Protection

Personnel Flexibility

Short Term Liabilities (Overtime Pay, etc.)


17/22

TARGET SETTING AND CONTROLLING

Companys initiative to Increase profitability.

Targets were set that focuses on return on salesand sales growth figures in a number of years.

Introducing result oriented controlling system todeliver the commitment.

Targets based on return on capital/return oninvestment are not differentiated according todifferent business units and group companies.

Targets are set as peer the risk and the capitalcosts.


18/22

FINANCIAL TARGETS

Financial targets:

Return on capital should be within a corridor between 9%and 11%;

break-even of max. 60%;

return on sales should reach 4.7% and increase to 6.5% by2005;

investments should be paid out of the cash flow and havea cap of DM 6 billion.

Various performance targets were set such as materialprice reduction of2%, fixed cost reduction of 3%, etc.


19/22

INVESTMENT/DISINVESTMENT POLICY

OF VW

There has been general increase in the investment intangible assets due to increase competition.

Same hold true for Research and Development as well.

They have also started to concentrate on Conglomeratepolicy as well as mergers and acquisitions.

As far as disinvestment goes, there has been noindication of shift towards downsizing or distribute.

From the Investment policy the real gainers are State(Taxes), Creditors (Interests) and Company (Reserves).


20/22

INVESTMENT TO SALES


21/22

CONCLUSIONS

Distinctive corporate governance system Concentrates on benefits on all the stakeholders of thecompany

All measures related to Shareholder Value is carried

out by Management and Work Councils VW relies on Cash Flows for funding the investments

except few time

In the view of unfavorable conditions and negativeresponse of investors, VW has not used thisinstrument

There can be future expansion in the equity base formergers and acquisitions


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CONTD

Incentive system has been changed in the direction ofcapital market oriented performance measures

ESOPS being used to increase the employees ownership

Fixing the targets has been there to correspond to the

shareholders expectations It would signify the strong commitment of top

management and thus would help in maintaining goofinvestors relations

Investment policy is still inclined towards long term

perspectives Strongly supported productionist orientation vs

financialisation

corporate governance, innovation and economic performance on

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