Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

VW has drawn the ire of one of Europe's own activist investors -- at long last.

TCI, Chris Hohn’s $10 billion hedge fund, disclosed late on Friday it has bought a 2 percent stake in the carmaker, still reeling from the diesel-emissions crisis.

In a letter to VW's top brass, TCI set out the by now familiar arguments that the company is grossly inefficient and its management overpaid. (Full disclosure: Gadfly has made similar criticisms and back in November called for an activist to force change.)

The fund can't call for new management -- CEO Matthias Mueller only took over September -- and can't call for a new strategy. Mueller isn't due to unveil that until June.

Instead, it wants to halt big bonuses until operating profit hits 19 billion euros ($22 billion), 50 percent more than 2014's level. Explicitly linking pay to performance is not only the biggest lever available to the fund, but entirely reasonable too.

In April, the company awarded 63 million euros in pay and bonuses to managers for their work last year -- a fraction less than the 68 million euros it paid shareholders in dividends.

TCI therefore concludes that VW "has a major corporate governance problem". Gadfly concurs -- but if TCI is to stand any chance of loosening the powerful nexus of family, state and labor interests that hold sway at VW, it will need support from other investors.

Round Trip
VW's shares doubled, but then shed all those gains due to China worries and the diesel scandal

The trouble is VW's productivity and governance problems were never a secret -- and yet equity and bond investors long chose to hand money to VW as if it were going out of fashion.

VW has spent huge amounts on new plants, vehicles, employees and R&D over the past five years without achieving a significant increase in operating profit or the share price.

Disappearing Profit
VW has kept spending on capex, R&D and wages -- even as profit evaporated last year
Source: VW annual reports and Bloomberg calculations

The Porsche and Piech families, the State of Lower Saxony and Qatar together hold almost 90 percent of VW's voting shares.

Whenever the company needed fresh capital it was able to call upon non-voting preference shareholders to provide money. As long as the stock price and dividends were rising and VW's burgeoning sales in China promised large future profits, non-voting shareholders were happy to provide the cash. That model has been broken.

The diesel crisis marks an opportunity for the company's owners and creditors to make their interests a higher priority in Wolfsburg.

Until recently, VW's workers (who fill half the seats on the supervisory board) signed off on lavish pay for executives and in return those executives promised not to cut jobs. But that quid pro quo is starting to look brittle. For example, trade unions are annoyed that some managers are using the crisis to push through cost cuts. Qatar Holding is said to be pushing for more influence having seen the value of its 17 per cent voting stake decline.

Investors have two opportunities in coming weeks to make their displeasure public.

A key test will be when VW returns to the bond markets. The carmaker's business model relies on borrowing cheaply so it can offer attractive financing to customers.

VW's post-tax cost of debt in 2015 was 1.4 percent, according to its annual report. Even with the ECB poised to start vacuuming up corporate bonds for the first time, investors need to look more carefully at the risk they are taking on by lending to a company whose controls were evidently so lax they permitted cheating to go undetected for years.

An increase in the premium investors demand to hold VW bonds would send a clear message to the Porsches, Piechs and Qatar that things need to change.

Another opportunity will come at the carmaker's annual general meeting in June. Last year, not a single major fund manager addressed the gathering -- a sign they were neglecting their responsibilities as owners. Even though most don't have a vote, VW's shareholders should make their demands clear. TCI's involvement is a good start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. To be fair, some of that figure is being withheld pending an improvement in VW's share price. It also includes payments to compensate two new executives for switching employers.

To contact the author of this story:
Chris Bryant in Frankfurt at

To contact the editor responsible for this story:
Edward Evans at