Volkswagen bids farewell to a ferocious patriarch

Volkswagen has long epitomised both the strengths and weaknesses of the German corporate model. The carmaker is widely admired for its long-term focus and commitment to engineering excellence. Fewer souls would choose to ape its governance regime.

It is a dichotomy made flesh in the person of Ferdinand Piech who, until his resignation last week, served as the longstanding chairman of the group.

No one can doubt Mr Piech's commitment to VW or his skills as a carmaker. A talented engineer and descendant of Ferdinand Porsche, the designer of the company's iconic Beetle car, Mr Piech embodied VW's obsession with quality and its product flair. As chief executive in the early 1990s, he rescued VW when it nearly collapsed. To many at its Wolfsburg base, he is close to a saint.

But in recent years, Mr Piech became more of a liability than an asset. Former chief executives who become chairman often continue to hold sway over strategy. Mr Piech's grip was legendary. It stemmed not only from his lineage and record but, after 2009, from the majority voting stake accumulated in VW by Porsche, the financial holding company that he partly controls.

Mr Piech's prestige made it all but impossible for any chief executive to escape his shadow, or to make changes that might suggest the chairman had ever made mistakes.

Patrician and aloof, he was ruthless in dealing with hired hands he felt were turning uppity. He forced out VW's previous chief executive, Bernd Pischetsrieder, in 2006. His own resignation follows an attempt to mete out a similar fate to Martin Winterkorn, the former Audi chief he handpicked to replace Mr Pischetsrieder.

It is telling that investors remain largely in the dark about the reasons for the falling out between the two men. Mr Piech's gnomic observation that he was "at a distance to Winterkorn" has never been amplified, nor his resignation adequately explained.

Mr Piech was not solely responsible for VW's lamentable governance record. Like all German companies, it labours under the system of co-determination, which gives workers a strong say in the management of companies, and is prone to abuse. Second, a special German law passed at the time of VW's privatisation in 1960 continues to require an 80 per cent vote for major decisions. That means few big moves can be made without the consent of Lower Saxony, which still has a 20 per cent voting stake.

Mr Piech brought to the mix his own particular brand of hauteur. Relations with external investors were often strained. Uninformed about strategy, their concerns were simply sidelined when it came to product development and dealmaking. In recent years, VW has spent richly on a string of costly and barely justified acquisitions, such as the trophy purchase of Ducati, the Italian luxury motorcycle brand.

Holders of the company's non-voting shares have been diluted to pay for these baubles. Dividends, meanwhile, have been subordinated to the imperative of costly, and not always profitable, growth.

Governance will not automatically improve because of Mr Piech's departure. That will depend on many things. The controlling Porsche family would need to take a more enlightened view of outside shareholders; the government would have to reform co-determination, which can lead to an incestuous carve up between management and labour interests.

Much also depends on Mr Piech's successor. After 20 years under the patriarch's pitiless scrutiny, it is time for a fresh pair of eyes.

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