Bribes, Sex and Lies

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For Volkswagen’s Chairman, it’s the beginning of the end at best and the end itself at worst. And only because he just made a wrong choice a decade back

There are two obvious paths to fame; one is through diligence and sincerity and the other, through treacherous but easy freeway of dishonourable shame. And all along you hear of the arduous zeal, passion and commitment of those holding the sceptre over billion dollar isles. But how about an easy imagination exercise? Confused?! Well, there of course have been those unlucky few who have broken the speed limit on the freeway and are now being handed a tough ticket by the law – the former CEO and current Chairman of the €44.5 billion giant German automaker Volkswagen (VW), Ferdinand Karl Piëch falls into the same category. He has been accused of bribery, endorsing company slush fund to pay for prostitution, sponsoring expensive leisure trips for members of the VW Works Council, as well as regular visits to brothels, cash gifts for their wives and even free supplies of Viagra, during his decade-long reign as the CEO of Europe’s biggest carmaker between 1993 and 2002.

And if you thought that this was some bolt from the blue for VW stakeholders, you couldn’t be more wrong. As per an insider, this wide-scale and gut-wrenching practice had existed for close to a decade, albeit behind closed doors. And why do we blame Piëch for it all? Well, isn’t a CEO supposed to ensure ethical practices within his boundaries? And when he derives personal benefits out of it, why would he bother in his decade-long reign to put his foot down? He didn’t and there he stands today before an enraged German public and the German Labour Bribery Court, fighting desperately to prove his innocence.

The current turn of events (which included the most recent January 9, 2008 trial of Piëch) is just a culmination of the scandalous developments which first surfaced in 2005 when the then CEO Bernd Pischetsrieder learnt about the existent corrupt practices. Apparently, the company had set up a camouflaged multimillion-dollar slush fund to pay off powerful employee representatives (in the form of ‘special bonuses’ and ‘expensive free tours’), which prominently included the former head of the Works Council – Klaus Volkert and his management liaison, Klaus-Joachim Gebauer.

Going against the testimony of Piëch, Volkert went public and announced, “All I know is that there is very, very little that went on at Volkswagen that Piëch didn’t know...” As per a Volkswagen secretary, she was even mandated by Piëch to rent an apartment for officials to use for prostitution acts. However, Piëch claims innocence as thus, “Had anything reached my ears, I’d have vehemently pursued it and put an end to it!”

Known as the tyrant who held dictatorship powers at the auto major’s headquarters in the north-central German city of Wolfsburg, the 70-year-old Piëch is the grandson of Ferdinand Porsche. He joined Porsche in 1963, and was instrumental in the roll-out of the 5000cc Porsche 917. He also played a pivotal role in VW’s successful acquisition of British brands – Rolls-Royce and Bentley. Piëch has always been known for his aggressiveness and his urge to venture into newer markets. He retired from the VW management board in 2002 and half-a-decade later, faces a high-profile trial in Brunswick.

On his part, Piëch denies having any voluntary involvement in unethical acts. He justified that “I did not concern myself with this. I was at no point during my time on the executive board aware of the abuse of expenses by the works council. At no point did I hear about any irregularities and the treatment of labour leaders wasn’t in my field of responsibilities at the management board.”

However, the effect of this trial on the automaker’s share price has been really depressing. Its share price on the Frankfurt exchange as on January 18, 2008 stood at a pathetic €150.1 – 23.84% lower when compared to a four-month high of €197.6 as on October 31, 2007.

To make accusations lighter, Piëch told prosecutors that he was not directly involved in corruption but delegated it to Peter Hartz, Piëch’s former personnel chief, who was found guilty in another trial last year of allowing payments to Volkert to maintain good relations with employees.

Confirming the same, Hartz admitted that he paid about €2 million annually to Volkert in illegal bonuses (to be moved to the slush fund) and was sentenced to a two-year imprisonment and €500,000 in fine. Surely, with many names coming to public attention, there remains one fact – Piëch had many associates, but remains the prime accused as proven by a document furnished by Johann Schwenn to German Labour Bribery Court. Even Volkert’s attorney confirms Piëch’s total involvement in the scandal through a document, which stated that instead of 40% of his last salary, Volkert was to receive up to 50% upon retirement. The document bore signatures of both Hartz and Piëch, thereby confirming that Piëch was aware of the irregularities taking place in the company.

Apparently, recent revelations have shaken up Germany and despite having earned glory for his aggressiveness; all that Piëch can do for now is to hope that his dark past casts no shadow on his future. It is not unknown that Piëch drove VW away from carrying an ordinary ‘car of the people’ tag to become a rival to BMW and Mercedes; however, for all the Piëches to become, it is more critical to realise pro-actively that ‘bribes, sex and lies’ and ‘business’ are two ends of a compass. Piëch chose his direction, the wrong one.

B&E edit bureau: Savreen Gadhoke

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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