FRANKFURT -- Volkswagen Group promised to improve profitability and review management pay, seeking to defuse growing investor criticism in the wake of the emissions-cheating scandal.
VW is working on a strategy, including financial targets, that will be presented this summer, Chief Financial Officer Frank Witter wrote in a letter to TCI Fund Management founder Chris Hohn.
The activist investor earlier this month slammed Volkswagen for excessive executive pay in light of poor stock performance and bloated costs.
“We are under no doubt that our financial performance needs to improve,” Witter said in the letter. “Volkswagen can and should be the most profitable company in the automotive world.”
Witter, who took over the CFO job as part of a series of management shifts spurred by the scandal, said he agreed with many of the points Hohn raised in his May 6 letter and welcomes “constructive dialogue” with investors.
The more open approach could help the automaker potentially raise money to pay for the scandal. VW Group, which owns brands including Audi, Bentley and Porsche, has set aside 16.2 billion euros ($18.3 billion) to fix rigged vehicles and pay fines.
The response to TCI, which led a shareholder revolt against Deutsche Boerse’s top executives in 2005, is an unusual step for Volkswagen. In the past, the carmaker has generally had a cool relationship with outside investors, who generally hold non-voting preferred stock, while its common shares are dominated by the Porsche-Piech clan and the German state of Lower Saxony.
Investors have been increasingly critical of the automaker. In addition to TCI’s letter, Norway’s $850 billion wealth fund said earlier this week that it plans to join a class-action suit in Germany against Volkswagen over its disclosure of the scandal.
Investors accuse the carmaker of being slow to reveal that it rigged the diesel engines of 11 million vehicles worldwide to pass official tests, reacting only after U.S. regulators went public with the violation in September.
Witter laid out five priorities for Volkswagen: finding a solution for affected cars, investigating the roots of the scandal, realigning its structure and decision making, reforming its corporate culture and refocusing strategy to tackle the challenges of digitally connected and autonomous vehicles under its so-called Strategy 2025. As part of its new plan, management pay policies will be changed, he said.
“This is our challenge and let us to be clear it is one that we accept,” said Witter. “We owe it to our shareholders and all stakeholders to demonstrate that we are a lot more than simply the sum of 12 unique brands.”
Reacting to Witter's letter, TCI urged VW's powerful trade unions and its home region of Lower Saxony to back management in a drive to cut costs at the automaker. "It's a letter of fine ambitions but the key point is that the unions and, in particular, Lower Saxony have to back the management team now. Then this could be the turning point for Volkswagen," TCI partner Ben Walker told Reuters.
TCI reiterated it wanted to see VW set tough financial targets, align management compensation with shareholders' interests and control spiraling labor costs. "Most companies have natural attrition of 4 percent to 5 percent a year from retirements and natural staff turnover. Now 5 percent of 600,000 employees is 30,000 employees. Don't tell me Volkswagen cannot be run with 580,000 employees," Walker said.
He said VW could save 3 billion euros ($3.4 billion) just from natural attrition.
VW admits 'frustration'
In Witter's letter sent on May 17, VW told TCI that the reforms made in the wake of its diesel emissions testing scandal were dragging on. "We are all frustrated at the time this is taking," the letter said.
VW said it has however made significant progress implementing a new structure for the company and the VW brand. "In particular we would like to highlight the introduction of product line management where the best ideas from Porsche are being introduced into the engineering processes of the Volkswagen brand," the letter said.
Management incentives and bonuses would also be looked at as part of a process of devising a new strategy 2025 which is due to be unveiled before summer.
Reuters contributed to this story