January 16, 2008
Volkswagen Corruption Trial Includes Seamy Testimony
By MARK LANDLER, NY TIMES

BRAUNSCHWEIG, Germany — Rarely have so many top auto executives been summoned to talk about something other than cars.

On Tuesday, the former chief executive of Volkswagen, Bernd Pischetsrieder, and the chief executive of Audi, Rupert Stadler, reported to a courtroom in this northern German city to testify in a corruption case at Volkswagen involving charges of bribery, illicit sex and company-paid shopping sprees.

Both men told the court they knew nothing about the reported abuses, echoing the testimony last week of Volkswagen’s chairman, Ferdinand K. Piëch, who said he had no idea his company had set up a secret multimillion-dollar slush fund to pay off powerful employee representatives.

With its seamy details — a Volkswagen secretary testified that she had been ordered to rent an apartment for officials to use for romps with prostitutes — the scandal was bound to arouse prurient interest.

But by exposing the underside of German-style labor relations, it has struck a deep chord in Germany. Under a system known as co-determination, employees wield considerable influence in the boardroom through representatives who are guaranteed the same number of board seats as shareholders and who are paid like senior executives.

Nowhere is this system more entrenched than at Volkswagen, Germany’s largest carmaker, which is still partly owned by the state and has long been viewed as a bulwark of workers’ rights.

With German companies becoming more international, however, critics say the country’s labor practices will have to change. Porsche, which owns 31 percent of Volkswagen and is close to a takeover, plans to weaken the role of VW workers on the board of its new holding company.

“The Volkswagen story may be a wake-up call for other German companies,” said Michael Fichter, an expert in labor relations at the Free University of Berlin. “It points out the problems that can arise from employee representatives getting too cozy with management.”

At Volkswagen, these ties are said to have included payoffs, pleasure trips to Portugal and elsewhere, and sex; visits to prostitutes by Volkswagen employee representatives were common, as were gift certificates at expensive boutiques for wives.

Prosecutors say that Klaus Volkert, the former head of Volkswagen’s works council — the main representative body for employees — received more than 2.5 million euros ($3.7 million) in bonuses and other improper payments to buy his support for management policies. They are charging him with breach of trust.

Mr. Volkert denies demanding payoffs.

He is one of two defendants in the trial — along with Klaus-Joachim Gebauer, a former Volkswagen personnel executive — accused of setting up the system of blandishments. If convicted, Mr. Volkert faces up to 10 years in prison. Mr. Gebauer could get up to five years.

The scandal has already brought down one of Germany’s most prominent business figures, Peter Hartz, Volkswagen’s former personnel chief, who admitted he had steered quid pro quo bonuses to Mr. Volkert.

Mr. Hartz, who helped compose and lent his name to a package of landmark economic reforms adopted by the previous German chancellor, Gerhard Schröder, received a two-year suspended sentence last year after a separate trial. He was fined 500,000 euros ($739,000).

Mr. Hartz’s trial seemed to draw a line under the scandal; he testified that he had acted without the knowledge of senior Volkswagen executives, like Mr. Piëch or Mr. Pischetsrieder.

Then German newspapers published a letter from a former Volkswagen employee to Mr. Piëch dated April 2003, warning him of improper payments to labor representatives. Volkswagen denied receiving the letter, but it drew the attention of prosecutors at the regional court here, not far from the company’s headquarters in Wolfsburg.

So far, Germany’s big names have not dropped any bombshells. Mr. Piëch, who was chief executive from 1993 to 2002 before becoming chairman, said he was not aware of any improper arrangements. “If I had heard of such things,” he said last week, “I would have acted to stop them.”

Mr. Stadler, who served as the head of Mr. Piëch’s office at the time, said he did not recall a letter alerting his boss to problems. Nor, he said, did he know anything about an account, No. 1860, which financed overseas trips, shopping excursions in Paris and other perks.

A rising star in the auto industry, Mr. Stadler now runs Audi, the luxury carmaker owned by Volkswagen.

Mr. Pischetsrieder, who succeeded Mr. Piëch, said he first learned of the corrupt practices in June 2005, when one of the company’s suppliers alerted Volkswagen that Mr. Gebauer and another official had solicited a bribe. Mr. Pischetsrieder said he had consulted Mr. Hartz immediately. “Mr. Hartz was shocked,” he said, and agreed that the two should be dismissed.

But Mr. Volkert’s hefty paychecks did not initially raise red flags. Mr. Piech said he was too busy trying to save Volkswagen from a “catastrophic situation” in the 1990s to focus on such details.

Mr. Pischetsrieder said he was satisfied by Mr. Hartz’s argument that Mr. Volkert should be compensated like a senior manager at one of Volkswagen’s operating units. Such a person, he estimated, would be paid 250,000 euros to 600,000 euros a year, depending on performance.

Mr. Pischetsrieder left Volkswagen in 2006 after a clash with Mr. Piëch. But in court he sided with his former boss, saying Mr. Piëch was focused on the quality and cost of cars, not on labor relations.

In one respect, his testimony may have helped Mr. Volkert’s case.

Lawyers for Mr. Volkert contend that his conduct did not harm Volkswagen — a necessary condition for him to be convicted of breach of trust. On the contrary, the lawyers contend, Mr. Volkert was worth the money.

Mr. Pischetsrieder did testify that Mr. Volkert played a valuable role in overhauling the company’s labor practices, which Mr. Pischetsrieder said underpinned its turnaround. “There is no doubt that without Volkert, or a man like Volkert, Volkswagen’s restructuring in the 1990s could not have been achieved,” he said.

Though a verdict is not due until the end of March, Mr. Volkert’s lawyer, Johann Schwenn, had a spring in his step as he left the court Tuesday. “This was a good day for us,” he said.

November 8, 2006
After Power Struggle, Volkswagen Ousts Its Chief
By MARK LANDLER, NY TIMES

FRANKFURT, Nov. 7 — In a striking reversal, Volkswagen ousted its chief executive, Bernd Pischetsrieder, on Tuesday, six months after he appeared to win an internal power struggle by signing a new contract.

Volkswagen, Europe’s largest carmaker, gave no reason for the decision by a committee of its supervisory board, which it said was reached jointly with Mr. Pischetsrieder. He will be replaced by Martin Winterkorn, the head of the Audi division at the end of the year.

Analysts and industry experts said the sudden shake-up bore the fingerprints of Volkswagen’s influential chairman, Ferdinand K. Piëch, who had tried to maneuver Mr. Pischetsrieder out of his post earlier this year, saying the chief executive had lost the support of employees.

Mr. Pischetsrieder clung to his job then, partly because of support from the state of Lower Saxony, one of Volkswagen’s largest shareholders. But analysts said Lower Saxony’s influence had waned as the company’s largest shareholder, Porsche, tightened its grip.

“This is another step in Porsche saying we will increase our influence over VW,” said Ferdinand Dudenhöffer, director of the Center for Automotive Research in Gelsenkirchen. “Porsche and Piëch dominate the supervisory board of Volkswagen.”

The announcement left analysts baffled because Mr. Pischetsrieder’s future seemed secure in May, when the Volkswagen board, after lengthy deliberation, extended his contract for five years. It throws the company back into management turmoil after a period of relative tranquillity.

A courtly man with a trademark Cuban cigar, Mr. Pischetsrieder, 58, has now been forced out of two famous German carmakers: in 1999, he was dismissed as chief executive of BMW, after a calamitous investment in the British carmaker Rover.

Mr. Pischetsrieder’s latest troubles began a year ago when Porsche began buying shares in Volkswagen. Although Porsche said it wanted to shield the company from an unwelcome foreign takeover, it posed a potential challenge to Mr. Pischetsrieder’s efforts to streamline the company.

Porsche now owns 21.2 percent of Volkswagen and has signaled its intention to increase the stake to 25.1 percent. There were reports on Tuesday that it might buy up to 29.9 percent of Volkswagen’s shares — the most it can own without being legally required to make a takeover bid.

Porsche’s interests are closely intertwined with those of Mr. Piëch. A grandson of the founder, Ferdinand Porsche, Mr. Piëch and his family control the company. He was Mr. Pischetsrieder’s predecessor as chief executive of Volkswagen, with strong views as to how VW should be run.

In February, Mr. Piëch publicly questioned Mr. Pischetsrieder, saying it was an “open issue” whether the board would extend his contract, because of opposition to him from unions and workers’ representatives. Mr. Pischetsrieder was then warning about sweeping job losses.

Two months later, Mr. Piëch reversed course, saying he expected the contract to be extended. The governor of Lower Saxony, Christian Wulff, had thrown his support behind Mr. Pischetsrieder. Some analysts say that Mr. Wulff’s intervention saved the embattled chief executive on that occasion.

Mr. Winterkorn, according to analysts, is a protégé of Mr. Piëch. Both are talented automotive engineers with less experience in overhauling companies. Mr. Pischetsrieder was seeking to reduce Volkswagen’s labor costs by cutting jobs in its German plants and renegotiating union contracts.

“Pischetsrieder was trying to push through decisions that Piëch was resisting,” said Arndt Ellinghorst, an analyst at Dresdner Kleinwort. “Winterkorn is someone who will always do everything that Piëch says.”

Mr. Ellinghorst suggested that Porsche might be interested in taking over Audi, a luxury division of Volkswagen. Mr. Winterkorn has recently won praise in the German news media for closing the gap between Audi and the two leading German luxury brands, Mercedes-Benz and BMW.

Mr. Pischetsrieder’s departure also raises questions about the future of his chief lieutenant, Wolfgang Bernhard. As head of Volkswagen’s core brand, Mr. Bernhard is responsible for carrying out the cost-cutting plan devised by the board. A former No. 2 executive at the Chrysler Group, Mr. Bernhard had been viewed as a likely successor to Mr. Pischetsrieder.

Analysts expressed some skepticism that Mr. Bernhard would be able to work with Mr. Winterkorn. Mr. Ellinghorst, though, said a departure by Mr. Bernhard would unnerve shareholders, because he is viewed as integral to Volkswagen’s campaign to reduce its costs.

The shake-up also has potential implications for Volkswagen’s role in a takeover battle between the European truck makers MAN and Scania. Volkswagen had acquired a stake in MAN to influence its bid for Scania, and some analysts said Mr. Piëch might push for a central role.

“The market will not be scared simply by Pischetsrieder’s departure,” Mr. Ellinghorst said. “But the market could be scared by the two or three steps that might follow from it.”