Dr. Hans-Christoph Hirt, Co-Head of Hermes EOS
In the light of the emissions scandal, which broke in September 2015, and the lack of information until today who bears responsibility for it, Hermes EOS will recommend its clients to vote against the discharge of both the management and the supervisory board at Volkswagen’s annual general meeting on 22 June 2016. In addition, we have initiated a request for a special audit to investigate their acts and potential breaches of duty.
In contrast to the litigation that has been brought against Volkswagen to date by a number of shareholders, the proposed special audit will focus on underlying corporate governance issues, not least the influence of the principal shareholders, the composition and effectiveness of the supervisory board and the corporate culture, as well as potential liability of the members of the management and supervisory boards.
Our initiative for a special audit follows a decade of Hermes EOS’ engagement with Volkswagen.
Main concerns about the alleged acts and potential omissions of Volkswagen’s management and supervisory boards in relation to the emissions scandal:
1. Management board’s failure to ensure compliance with laws and regulations and to implement an effective monitoring system: We believe the management board has failed to ensure compliance with laws and regulations, as required under section 76 I German Stock Corporation Act, and failed to put in place an effective monitoring system that meets the requirements of section 91 II of the German Stock Corporation Act. Moreover, in our view, there are significant concerns about the escalation processes.
2. Supervisory board composition: We believe that Volkswagen’s supervisory board lacks a sufficient level of independent members. In our view, this may have contributed to the apparent deficiencies in its monitoring of the management board. We also believe that the company’s declaration regarding the German Corporate Governance Code is wrong with regard to the supervisory board’s level of independence.
3. Supervisory board’s monitoring of management board: We believe there have been deficiencies in the supervisory board’s monitoring of the management board in breach of section 111 I German Stock Corporation Act.
4. Management board remuneration: We believe the remuneration Volkswagen paid to management board members for the financial year 2015 breaches the statutory framework set out in section 87 of the German Stock Corporation Act.
5. Capital market communication: We believe Volkswagen was late in informing the market about the emissions scandal, thus breaching section 15 of the German Securities Trading Act.
For full details of our counterproposal and the request for a special audit, please refer to the website of Volkswagen AG.
Background: Vote on discharge and special audit in the German Stock Corporation Act
In Germany, shareholders have the opportunity to vote on the so-called discharge of the management and supervisory boards for the last financial year at annual meetings. This is generally regarded as approval of the actions of boards but has no legal implications. By voting against the discharge, shareholders can formally express concerns and a lack of confidence in the boards.
Furthermore, by presenting a counterproposal on the discharge, encouraging other shareholders to oppose the discharge, a shareholder can also request a special audit to investigate the acts and potential breaches of duty by the supervisory and management boards in the last financial year.