Why VW’s clunky governance is perfect

The very public power-struggle at the top of VW will seem familiar to many people in family businesses. The two sides of the family – the Piechs and the Porsches, led by cousins Ferdinand and Wolfgang – have clashed over the future of the non-family CEO, Martin Winterkorn. The situation is messy. But despite that, VW is a textbook example of how to run a family business.

The recent spat began when Piech told a German magazine that “I am at a distance to Winterkorn”. Porsche publicly backed the CEO and following a board meeting Winterkorn is still there, and the board – half of whose seats are filled by employees – says it will recommend that his contract is renewed when it comes to an end in February 2016. Piech lost the battle.

Although Winterkorn is still in place, the consensus is that he now has little chance of succeeding Piech as VW’s chairman, a position which it was widely supposed he was destined to take as Piech’s protege.

Most people have seen this episode as an indication that there are still serious problems inside the VW/Porsche businesses. These erupted in 2008 when Porsche secretly tried to take over VW and the latest spat makes it seem that this is still a dysfunctional dynasty. But the outcome might also be seen as a lucky escape.

A study* by a group of Canadian and Italian academics argues that the best management structure for the top of a family business is to have a non-family CEO supervised by a number of owners. That is pretty much exactly what VW currently has.

The paper, which studied 893 medium and large entirely private family firms in Italy with a turnover of €50 million plus, said that hiring a non-family CEO is a good idea because the family can bring in skills it doesn’t have. But the ownership structure of the firm affects how effective the non-family CEO is.

The paper looked at numerous leadership structures, including family and non-family CEOs, and the various combinations of co-CEO structures. The academics then factored in the ownership structure – whether there were lots of family shareholders, or only a few, which they call respectively “diffuse” or “concentrated” ownership.

They discovered that “non-family CEOs do best for a firm when working alone and monitored by multiple major owners; they do worst when working alone under more concentrated ownership.”

Why does this happen? “It may well be that having a single major owner leaves a firm without adequate expertise to monitor the non-family CEO who might be tempted to pursue personal opportunism at the expense of the business,” suggested the research.

The diffuse ownership model “combines the benefit of having an outside talent recruited from a significant pool with an effective monitoring capability in which multiple powerful owners are able to combat executive opportunism.”

(Incidentally, family CEOs performed less well whatever the ownership structure, although the variation in their performance was not so great. In other words, they are mediocre no matter how they are supervised.)

VW has a top-notch non-family CEO and he is overseen by a very diffuse bunch indeed, including the Piechs, the Porches, and a board of 20 which includes 10 employees and two representatives of the government of Lower Saxony. Like an old Camper van it might clunk from time to time, but in theory at least, its governance could hardly be better. 

Promoting Winterkorn – for all his skills – could have messed it up. VW might have just had a lucky escape.  

*When do Non-Family CEOs Outperform in Family Firms? Agency and Behavioural Agency Perspectives by Danny Miller, Isabelle Le Breton-Miller, Alessandro Minichilli, Guido Corbetta and Daniel Pittino published in the Journal of Management Studies June 2014