Faulty Steering At Volkswagen

General Motors Corp.'s bitter battle with Volkswagen over purloined secrets is reaching a crescendo. After three years of investigation marked by police raids on VW headquarters, German prosecutors appear poised to charge Jose Ignacio Lopez de Arriortua with theft. The procurement wizard, who left GM in 1993 for VW, allegedly took reams of proprietary information with him. An indictment would be not only a serious rebuke to Chief Executive Ferdinand Piech, who hired Lopez away from GM, but also a slap at Volkswagen's supervisory board, which, under German law, is accountable for overseeing management. So poorly has VW's supervisory board performed this function that the company now faces up to $4 billion in damages from a civil lawsuit filed by General Motors in the U.S..

Blame Germany Inc. Volkswagen's supervisory board is heavily influenced by Gerhard Schroder, who is the prime minister of of Lower Saxony, which owns 20% of the company. Schroder is a possible opposition Social Democratic Party candidate for German Chancellor in 1998. Protecting Volkswagen and the thousands of voting constituents who work there is important to him. Schroder has been a vocal supporter of both Lopez and Piech. Given that German prosecutors indict only when they think they have a winnable case, it appears that those responsible for supervising VW may have been incompetent--or worse.

Germany has a unique system of corporate governance. There are two boards--one that manages the company and a second that supervises the managers. German supervisory boards rarely take responsibility for their companies' performance or behavior. This was certainly the case with Volkswagen, where benign neglect was seriously compounded by a political conflict of interest. It is time for Germany Inc. to take stock of the way it governs itself.

Before it's here, it's on the Bloomberg Terminal.