VW Investors Want These Reforms in Wake of $4.3 Billion Emissions Settlement

January 12, 2017, 1:12 PM UTC

Volkswagen investors demanded reforms and questioned executive bonuses after the carmaker admitted to criminal offenses in rigging U.S. emissions tests and U.S. prosecutors indicted six current and former managers over the scandal.

The German company agreed to pay $4.3 billion in civil and criminal fines in a settlement with the U.S. Department of Justice (DoJ) on Wednesday, the largest ever U.S. penalty levied on an automaker.

Volkswagen (VW) admitted about 40 employees at its VW and Audi brands deleted thousands of documents in an effort to hide from U.S. authorities the systematic use of so-called defeat devices to rig diesel emissions tests, a scale of wrongdoing that led some investors to call for deep reforms.

“For senior management to receive any bonuses in 2017, we would now expect VW to deliver a dramatic improvement in profits,” said Ben Walker, partner at activist hedge fund TCI, which last year publicly criticized “corporate excess on an epic scale” at the carmaker.

“Seventeen billion euros of EBIT (earnings before interest and tax) should be the minimum amount for any bonus to be received by executive management. Below that, zero bonus,” he wrote in an email, noting VW’s admissions of guilt in the DoJ settlement did not extend to any board-level managers.

VW (VLKAY) has forecast an operating margin of 5-6% on expected sales of around 213 billion euros ($227 billion) for 2016, implying EBIT of around 10.6-12.8 billion euros.

It has set aside more than 18 billion euros to cover the cost of the diesel scandal, a figure it is expected to raise in light of the DoJ deal.

Moody’s credit-rating agency said the deal could raise its provisions expectation of 21.2 billion euros by around 1 billion euros, but welcomed the removal of uncertainties.

“The settlement agreement … should also help VW and VW’s management to refocus its efforts into the development of its operations, and therefore is a positive partially balancing the need to increase its provision,” it wrote.

VW still faces lawsuits from about 20 U.S. states and from U.S. investors, and will spend years buying back or fixing nearly 580,000 polluting U.S. vehicles. It also faces claims from investors and customers in Europe and Asia, after it admitted in September 2015 that up to 11 million vehicles worldwide could have defeat device software installed.


More Independent Directors, Openness

“What is most disturbing… is the pattern of deception, both in developing and perfecting the defeat devices, as well as deliberately obstructing the subsequent investigation,” said Annie Bersagel, an adviser for responsible investments at Norwegian Mutual Insurance company Kommunal Landspensjonskasse (KLP). KLP and KLP mutual funds have small investments in both VW equities and fixed income products.

“Going forward we would like to see more truly independent directors. This may change governance at the company where we see some issues, for example the awarding of large bonuses to current and former managers. We would like to see a clawback provision relating to violations.”

Ingo Speich, a fund manager at Union Investment which holds about 0.6 percent of VW preference shares, said on Wednesday the company needed to “put everything on the table” about its wrongdoing to regain the trust of investors.

For 2015, the year the scandal was uncovered, VW agreed to pay 12 current and former members of the management board at total of 63.2 million euros in fixed and flexible remuneration. It said board members would have 30% of their variable bonus withheld if the share price remained below 140 euros.

VW shares are currently trading at 149.85 euros, around 7% below pre-scandal levels.