Volkswagen's rapidly expanding bribery and corruption scandal

["Miklos A. Vasarhelyi" <miklosv@andromeda.rutgers.edu>]

July 9, 2005

VW Executive Resigns as Scandal Spreads

By

MARK LANDLER

FRANKFURT, July 8 -

Volkswagen's rapidly expanding bribery and corruption scandal claimed
its most prominent victim yet on Friday, as Peter Hartz, the chief of
personnel and one of Germany's most politically influential executives,
submitted his resignation.

Volkswagen's supervisory board must decide whether to accept the
resignation, but the chief executive, Bernd Pischetsrieder, made it clear
that the departure would help Volkswagen move beyond a scandal that has
raised disturbing questions about its corporate governance.

"We respect the offer of Dr. Hartz to take the political
responsibility for the turn of events," Mr. Pischetsrieder said.
"He did this with the purpose of preventing damage to the
company."

Mr. Hartz, 63, has a far higher profile in Germany than his job title
suggests. A confidant of Chancellor Gerhard Schröder, he drafted the
government's much-debated proposal to overhaul the nation's outmoded
labor laws. The so-called Hartz Reforms are at the center of a fierce
political debate here - one that could push Mr. Schröder out of office in
elections this fall. 

The pressure on Mr. Hartz to step down had been mounting since last week,
when prosecutors began investigating charges that two former Volkswagen
executives siphoned an undisclosed amount of corporate funds into fake
companies. Both men had worked in his department.

While Mr. Hartz denies any wrongdoing, and is not himself under
investigation, his close ties to the suspects - as well as to allegations
of other corrupt practices - had made his position untenable.

"I don't think it's possible for V.W. to keep Hartz in his current
position," said Ferdinand Dudenhöffer , director of the Center for
Automotive Research in Gelsenkirchen. "Volkswagen has had too many
unclean connections and worked with people of bad
reputation."

Mr. Hartz occupies a pivotal position at Volkswagen, mediating between it
and its 336,000 employees. Last fall, he negotiated an agreement in which
103,000 German assembly-line workers agreed to a 28-month wage freeze in
return for seven years of job security.

That thrust him into a debate over how Germany's automakers, with their
high manufacturing and labor costs, can retain their competitiveness. Mr.
Hartz used the threat of moving plants outside the country to extract a
better deal from the union.

"We were at a crossroads," Mr. Hartz said in an interview last
November. "The question was whether Germany will maintain its place
as a global player with German roots, or whether it will become
impossible to stay in Germany."

Mr. Hartz's achievements are not without detractors. The government's
Hartz Commission began its work in 2002 with the promise that it would
cut unemployment in Germany by half within three years. Today, the
jobless rate is near a post-World War II high.

The Hartz proposals, which included relaxing rigid work regulations and
cutting Germany's generous unemployment compensation, provoked bitter
protests and cost Mr. Schröder much of his support.

Volkswagen's costs are also still too high - a fact acknowledged by its
new No. 2 executive, Wolfgang Bernhard. Some analysts say Volkswagen is
saddled with too many workers in Germany, where its factories are
operating below capacity.

As the point man for labor relations, Mr. Hartz has come to symbolize a
system of corporate governance at Volkswagen that critics say is rife
with conflicts of interest and opportunities for abuse.

Union leaders and employee representatives exert an unusual degree of
influence, in part because the company's largest shareholder is the state
of Lower Saxony, which owns an 18 percent stake. 

The Suddeutsche Zeitung daily reported that Volkswagen's management board
- a seven-member committee that includes Mr. Hartz - authorized bribes to
leaders of the works council to win their support for management
decisions. A spokesman for Volkswagen, Dirk Grosse-Leege, declined to
comment on the reports, which Mr. Hartz has denied.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Director RARC / CARLAB
Rutgers University
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 454 4377 (cell)
http://raw.rutgers.edu/mik los