Risk Management

Moody’s Questions VW’s Response to Scandal

"The emission crisis might cause lasting damage to VW’s once-solid reputation with adverse effects on its future earnings and cash flows," says Moo...
Matthew HellerOctober 27, 2015
Moody’s Questions VW’s Response to Scandal

Moody’s Investors Service warned Tuesday that Volkswagen Group may not be going far enough to address “serious” governance deficiencies exposed by the scandal involving rigging of diesel engine emissions tests.

The automaker has taken remedial actions including management changes since the scandal erupted last month. Among other things, former CFO Hans Dieter Pötsch was elected chairman of VW’s supervisory board and former Porsche chief Matthias Müller has replaced Martin Winterkorn as CEO.

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VolkswagenBut Moody’s said in a report that Pötsch’s appointment “raises questions from a corporate governance standpoint because it means that VW’s top two positions will be held by insiders. It also suggests that investors should expect no drastic change in corporate culture, which we think investors expect, given the magnitude of the crisis.”

The credit rating agency suggested that “sweeping governance reforms could limit the damage to VW’s once-solid reputation,” but noted that “it will be difficult for the company to make significant changes to the supervisory board” and that its governance structure is dominated by three controlling shareholders — Porsche Automobil Holdings, the German state of Lower Saxony, and Qatar Investment Holdings.

“In the past, we have viewed the ownership as a potential source of stability for creditors, allowing the company to take a longer-term view on strategy and operations,” Moody’s said. “But their interests may not always be totally aligned with each other or those of the company’s creditors and are therefore a source of potential conflict.”

The report said governance deficiencies that have come to light as a result of the emissions cheating crisis include ineffective internal controls to uncover improper activity and poor risk management by VW’s management and supervisory board.

The management changes, it said, should help to address VW’s organizational complexity, but “a turnover of this magnitude creates risks, and additional changes following the conclusion of an internal investigation may put added stress on the quality and depth of the senior management team.”

Moody’s also cautioned that the relative lack of independent voices on the supervisory board “is a governance weakness for VW because it can result in less diversity of opinion and weaker management supervision” than at other multinationals.

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