Search this website. You can use fund codes to locate specific funds

Hermes comments on the AGM of Volkswagen

Hermes EOS recommends voting against the discharge of the management and supervisory boards of Volkswagen, as well as its revised remuneration policy

Ahead of the Volkswagen AGM on 10th May, Dr Hans-Christoph Hirt, Head of Hermes EOS, the stewardship and engagement team of Hermes Investment Management, highlights issues he believes the company needs to address.

Our recommendation to vote against the discharge of the management and supervisory boards1 rests on Volkswagen’s unsatisfactory progress in uncovering the corporate governance and culture problems which contributed to the emissions scandal. We think that Volkswagen has failed to systematically address those problems to date. We also oppose the revised remuneration policy. While there have been some long overdue improvements to the policy, it still lacks sufficiently challenging performance metrics for the bonus component and, in our view, may provide an inappropriate level of pay for mediocre company performance.

At tomorrow’s AGM, we will call for three actions to be taken by the company immediately:

1. Call for publication of key findings of the external investigation

Following the breaking of the diesel emissions scandal (henceforth “scandal”) in September 2015, Volkswagen’s supervisory board commissioned the US law firm Jones Day to conduct an external investigation into the scandal. Volkswagen’s initial intention was to inform shareholders about the findings of the external investigation at the AGM 2016. However, no report summarising the main findings has been published to date and, according to the company, such a report will also not be provided to the public in the future.

In a statement by the supervisory board in October 2015, it promised that it would “do what is required of [the supervisory board] to make sure that the necessary consequences are drawn from the investigation.”2 Despite the publication of the Statement of Facts by the US Department of Justice (DoJ), we think that there is still no clarity about the underlying reasons for the scandal, the role and liability of the management and supervisory boards and, significantly, how the company intends to address the fundamental corporate governance and culture problems which have contributed to the unfolding of the scandal.

We believe that in order for the company to draw the necessary conclusions from the scandal, to overcome it and move on, the publication of the key findings of the external investigation should be mandatory.

2. Call for independent review of corporate culture

We remain underwhelmed by the progress Volkswagen has made on reviewing and improving its corporate culture since the emergence of the scandal in September 2015. This is concerning as we believe that a questionable corporate culture contributed to its unfolding. The Statement of Facts by the DoJ supports our view. It identified six “senior employees below the level of the [Volkswagen] management board”3 who were involved in deceiving customers and regulators about the emission levels of some of the company’s cars. Moreover, soon after the breaking of the scandal, Volkswagen admitted there was “a mindset in some areas of the company that tolerated breaches of rules” and that “deficiencies in processes have favoured misconduct on the part of individuals”.4

We recognise that Volkswagen has started to improve its integrity and compliance systems5. However, we believe that the efforts to date seem to lack an analytical basis, are insufficiently focused on corporate culture as widely defined, and remain vague on key performance indicators. In our view, the company should therefore undertake a systematic, independent review and analysis of what went wrong and the role corporate culture played in the scandal. Such a review should take a similar form to the so-called “Salz Review” that Barclays Plc commissioned in 2013 as an independent review to uncover weaknesses in the behaviour of employees and the culture of the bank following the Libor-rigging scandal. Based on this type of analysis and related recommendations, a comprehensive remedial plan with relevant actions and measurable objectives should be launched.

3. Call for an independent board evaluation

We remain concerned about the composition and effectiveness of the company’s supervisory board and executive remuneration. For over a decade, we have raised concerns about the composition of Volkswagen’s supervisory board, its effectiveness, and its lack of independence. The supervisory board oversees, and is ultimately responsible for, Volkswagen’s governance and culture in which the emissions scandal was able to unfold and remain undetected for many years.

Encouragingly, the chair of the supervisory board, Hans-Dieter Pötsch, has improved the supervisory board’s investor communication since he took office in October 2015. Over the last 18 months, we have witnessed the supervisory board starting to listen to investors’ concerns and beginning to take the feedback on board.

However, we believe that there remains significant headroom for improving the company’s governance. In particular, we question whether the supervisory board has adequate board and strategy-relevant experience and skills. In addition, we doubt whether the number of truly independent board members is sufficient. To further tackle these investor concerns, we urge the company to conduct and report on an externally-facilitated supervisory board evaluation to identify experience and skills gaps and assess the need for more independent expertise.

We welcome the supervisory board’s decision to put the revised remuneration policy to a shareholder vote at the AGM. We believe that the supervisory board’s proposal for a revised executive remuneration policy features some positive aspects such as the introduction of absolute pay caps. Furthermore, we are content with the above-average transparency of the performance metrics and targets for the variable remuneration components.

However, we recommend voting against the revised remuneration policy because of the following reasons:

1. The underlying performance criteria and metrics for the bonus component of the pay package are, in our view, not sufficiently challenging.

2. The underlying performance criteria for the long-term incentive (LTI) plan is earnings per share which does not set optimal incentives for the creation of long-term value in the interest of all stakeholders. In our view it should be underpinned by Volkswagen’s long-term, strategic goals which it specified in its Together 2025 strategy. Moreover, according to the company, the LTI is settled in cash after a three-year performance period6. We suggest that the LTI should be settled in shares going forward, in combination with specified holding periods which go beyond the tenure of the executives in order to strengthen the alignment of interests between them and shareholders.


  1. 1The annual formal vote of discharge (or vote of confidence) for the management and supervisory boards gives shareholders the opportunity to approve or disapprove the boards’ actions taken in the last fiscal year. A vote against the discharge therefore suggests that shareholders generally do not approve the action taken and policies introduced by the boards over the last fiscal term.
  2. 2Volkswagen press release, 7 October 2015 “Statement from the Supervisory Board of Volkswagen AG”
  3. 3Rule 11 Plea Agreement United States of America vs. Volkswagen AG, Exh. 2-2. Available at
  4. 4Volkswagen press release, 10 December 2015 “Volkswagen making good progress with its investigation, technical solutions, and group realignment”
  5. 5See, for example, Annual Report 2016, p. 96 on Volkswagen’s integrity program.
  6. 6Additional documentation for Volkswagen’s 2017 AGM: “New remuneration system for the board of management – Presentation of essential principles”

Related articles

Samsonite case study
Impact Quarterly Report, Q3 2021
Battling the superbugs
An asset class at a crossroads: reshaping credit through ESG
Reflecting on COP26
Federated Hermes appoints Responsible Investing & Sustainability Director to its Emerging Markets team

Press contacts

Johnny Weir, Head of Corporate Communications
Rachael Dowers, Manager - Corporate Communications
Hannah Bellfield, Assistant Manager - Corporate Communications
Harriet Hall, Associate - Corporate Communications