VW Sex Scandal Touches Ex-CEO

As the bribery trial of VW's labor boss starts up, fresh evidence appears to implicate chairman, Porsche scion, and leading shareholder Piëch

One question looms large over the trial in Germany of two ex-Volkswagen (VOWG.DE) managers in a sex-and-bribery scandal: "What did VW Supervisory Board Chairman Ferdinand Piëch know, and when did he know it?"

It has been two years since an internal sting showed Volkswagen managers funneled $2.9 million in secret payments to VW's once-powerful former labor boss and supervisory board member Klaus Volkert. The investigation revealed that works council leader Volkert used the bonus payments to finance "pleasure trips" including parties and prostitutes for himself and other VW labor representatives—news that shocked Germany. But as Volkert's trial got underway Nov. 22, new revelations raised questions about Piëch's knowledge of the affair.

Volkert, charged with 48 counts of incitement to breach of trust, produced a letter allegedly authorizing payments to him, signed by Piëch and former personnel chief Peter Hartz. Chief prosecutor Ralf Tacke said Nov. 26. that he will query Piëch about the document when Piëch appears at a hearing in the trial of Volkert on Dec. 9. The letter also prompted Tacke to call three associates of Piëch as new witnesses in the trial.

Parties, Samba Lessons, and Prostitutes

Piëch has insisted that he knew nothing of the illicit bonus payments to Volkert. In January, VW's former personnel chief Peter Hartz took the full blame for the affair and admitted authorizing the $2.9 million dollars in illegal payments to Volkert and $518,000 to Volkert's Brazilian former lover Adriana Barros to win labor support for management plans. The illicit payments were used by Volkert to fund lavish foreign trips for himself and VW's labor representatives, including luxury hotels in Brazil and Lisbon, parties, samba dancing lessons, and prostitutes—all disguised as business expenses. Hartz received a suspended two-year sentence in January and an $855,000 fine for his role in the scandal.

Klaus-Joachim Gebauer, a personnel manager on trial with Volkert for misuse of company funds and for organizing the payments to Volkert, insists he was acting on behalf of management and that the executive board knew about the slush funds since they triggered monthly reports on budget overruns. He said he was instructed to keep the payments confidential and to reimburse the expenses from his private account, booking them under "executive board miscellaneous."

Volkswagen issued a statement Nov. 26 saying that neither the company nor Piëch, who was chief executive from 1993 to 2002, had any knowledge of the misappropriation of funds. VW also said it is considering legal action over the allegations. Prosecutor Tacke said Piëch is not under investigation, but that if evidence emerged from new witnesses, then "an investigation could be considered."

German prosecutors are now seeking to question several managers who worked closely with Piëch from 1995 to 2005, including his former personal secretary, Rupert Stadler (now CEO of VW premium unit Audi (NSUG.DE)) and former Chief Financial Officer Bruno Adelt.

The Dark Side of Co-Determination

The drama over management misdeeds unfolds even as German automaker Porsche (PSHG_P.DE) tightens its control over Volkswagen with a 31% stake. Porsche scion Piëch is now VW's largest shareholder through his family's ownership of Porsche. Porsche moved deftly in October to weaken the influence of VW's once-powerful labor unions by reincorporating itself as a European company—thus reducing the number of VW labor representatives in the supervisory board. Under Germany's co-determination law, large companies must grant labor representatives 50% of the seats on the supervisory board.

When the VW scandal erupted, it sparked national soul-searching among industry leaders and economists about Germany's vaunted co-determination law, which many believed to be responsible for years of labor peace. The slush funds and sex escapades at VW, however, revealed the dark side of the alliance between business and labor that some insist has bred corruption and has undercut Germany's competitiveness.

The dilemma is clear: Germany's chief executives depend on votes from the labor reps to be reappointed. Instead of making tough decisions on restructuring or job cuts, some managers are prone to delay or avoid change, and curry favor with union bosses sitting on their boards—to the detriment of their companies. Volkert claims Piëch promised to pay him as much as an executive board member in charge of an automotive brand.

Blurring the lines and the traditional distance between management and labor, worker council representatives at Germany's largest companies often become the golf partners and drinking buddies of top management, enjoy management-style salaries, bonuses and stock options, and are routinely treated to everything from posh hotels to the CEO's pricey cigars. Volkert's trial could still reveal new evidence about just how cozy that relationship became at VW.

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