Volkswagen Group’s powerful supervisory board on September 25 threw its full support behind the embattled leadership team of Herbert Diess and Hans Dieter P?tsch, the company’s chief executive and chairman who were indicted earlier this week on criminal charges related to the four-year-old Dieselgate emissions-cheating scandal.
Both men, the supervisory board said in a statement, “are to remain in office. This was unanimously decided on September 25 by the company’s Supervisory Board in an extraordinary meeting.”
First brought to light in September 2015, Dieselgate has already cost the company roughly €30 billion euros, including a total of €2.3 billion in German fines. This is not the carmaker’s first brush with the law in Germany. Audi boss Rupert Stadler was arrested on the job in July 2018 after Munich authorities, who had tapped his phone, feared he was tampering with evidence and influencing witness testimony connected to the emissions controversy.
The allegations of manipulating capital markets levied at Diess are not new. The Austrian first became a suspect in June 2016. Indeed, the supervisory board tasked with management oversight acknowledged in April of last year that it had discussed the legal risks before moving ahead with his appointment anyway.
JP Morgan auto analyst Jose Asumendi believes the VW CEO will be able to continue on the job unimpeded. He’s well liked where it counts. Money managers, he said, are primarily focused on whether Diess can ensure the carmaker meets Europe’s 2020 fleet emission targets, improve profitability especially at the VW brand and maintain its dominance in the crucial Chinese market.
“These allegations have been known for three years,” Asumendi told Fortune. “One of the core jobs of an investor is to manage risk and take a view, and Diess is seen as being best in class, one of the very few people capable of managing a group as complex as Volkswagen.”
District prosecutors in Germany concluded their criminal investigation into market manipulation on Tuesday, delivering a 636-page indictment that claimed Volkswagen’s top executives had conspired with intent to withhold news of the emissions fraud in the weeks leading up to its uncovering.
Along with Diess, they also charged P?tsch, the current VW Group Chairman and the finance chief at the time the scandal broke, as well as the then-CEO, Martin Winterkorn. Together the three are alleged to have had full knowledge of the fraud by the end of July 2015 at the latest, and that none of the three chose to inform shareholders of the financial risks as required by law.
The charges highlight the continuing problems with the group’s corporate governance. In the case of Winterkorn, the disgraced veteran CEO was days away from a contract extension before the scandal cost him his job. Stadler secured himself another term as Audi CEO in May 2017, just two months after authorities first raided the company’s headquarters.
Up to five years behind bars
It is now up to a regional court in Brunswick, near VW’s headquarters of Wolfsburg, to determine whether to hear the case after attorneys for the state brought over 22 moving boxes full of documentation and evidence. A decision is not expected until next year and a ruling could take much longer.
Should they be tried and found guilty of deceiving shareholders to protect the stock price, a judge could sentence the trio to anything from a hefty fine to a prison term lasting up to five years.
Even the prospect of fines and jail, however remote, is unlikely to undermine the VWGroup CEO's rock-solid hold on power.
“Diess is not one to skirt controversy,” said Professsor Ferdinand Dudenh?ffer, founder of the Center Automotive Research (CAR) at the University of Duisburg-Essen. “He appears in TV talk show against the likely recommendation of his advisors... But he does it anyway, and it demonstrates how self-assured he is.”
No smoking gun
A company source familiar with the supervisory board's thinking told Fortune the five ranking directors who discussed the matter on September 25 were unimpressed with the substance of the charges, particularly after having conducted an investigation of their own.
“Independent lawyers mandated by the board have been intensively sifting through evidence for three and a half years. You can call them up in the middle of the night and they can recite the issues at length, so the question is whether the prosecutor has now suddenly come across any new legally damning evidence, any smoking gun?” the person said.
Given that these allegations were previously known, JP Morgan’s Asumendi does not expect any pressure to come from professional shareholders either. They would have already taken the prospect of arrest into consideration before buying stock.
“Based on the conversations I have had, the two (Diess and P?tsch) enjoy the full backing of the investment community,” said Asumendi, who rates VW preferred shares a buy.
Diess also received support from an unusual corner yesterday when the CEO of Tesla sprang to his defense. “Herbert Diess is doing more than any big carmaker to go electric. The good of the world should come first,” tweeted Elon Musk in a demonstration of solidarity. “For what it’s worth, he has my support.”