Toyota and Volkswagen have been the two biggest vehicle manufacturers worldwide for the past several years. Just two years ago, Volkswagen was number one, but a look behind the numbers, shows that trouble had been looming for some time. In a recent New York Times article, Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said “the governance of Volkswagen was a breeding ground for scandal. It was an accident waiting to happen.”
Despite the many other public examples of failed corporate governance practices that have wrecked companies (WorldCom, Enron, Arthur Anderson, Toshiba) and lead to massive losses (AIG, Lehman), VW tolerated, if not encouraged, a level of corporate governance deception that would draw a raised eyebrow from Bernie Madoff.
Ferdinand Peich, the VW Chairman until this past April, exerted such control over the Board of Directors that he forced the appointment of his former nanny (now his 4th wife) to the Board of Directors. Her only prior experience was teaching kindergarten. With two children of my own, I deeply respect the role of teachers, but this appointment doesn’t pass the proverbial corporate smell test.
And then we have the new economy’s automotive darlings, Tesla and its CEO Elon Musk. The Tesla Board of Directors has adopted a fairly detailed set of Corporate Governance Guidelines. In its annual proxy statement, it details the criteria for board nominees, which they say, “must reflect a Board that is comprised of directors who (1) are predominantly independent, (2) are of high integrity, (3) have broad, business-related knowledge experience at the policy-making level in business or technology, including their understanding of Tesla’s business in particular, (4) have qualifications that will increase overall Board effectiveness and (5) meet other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to audit committee members.”
Tesla also completes an annual evaluation of its board and each of its members, and according to the proxy, these evaluations are considered by the Nominating & Governance Committee as part of their annual recommendation for board nominees. Based on the observable factors related to board governance, Tesla has modern, efficient, and effective governance structure, which stands in stark contrast to that of VW. The Tesla Model S has been described as a vehicle built around an iPad – where software is a driving force for ongoing innovation long after the consumer drives it off the lot. Like its governance practices, Volkswagen’s approach to software is painfully archaic.
Comparing the two company’s public disclosures is like test driving the Model S followed by a 1974 Volkswagen Thing. While driving the Thing might make some nostalgic, it won’t be a comfortable ride and even Lloyds of London would balk at the idea of a warranty. As vehicle consumers have done with their choice in cars, it’s time for investors to demand more from companies. Interestingly, the German institutional investors seemed more in tune with the failings at VW than their US and foreign counterparts. At the time the VW emissions scandal was discovered in September, just 2% of the company was owned by German institutions—while more than 26% was held by foreign institutions.
It is time that all institutional investors require more rigorous corporate governance, not government regulation. This should include disclosures as to why each board member was selected and metrics for board performance. Institutions should require more robust minimum requirements, before they invest, and insist on continued adherence or withhold their support from company board nominees and other proposals the company puts before shareholders. The investing public cannot rely on ISS as the sole gatekeeper. We need global institutional rigor to insist on sound governance practices.