Ferdinand Piech wants to go out with a bang. But not the sort that emanates from clapped-out cars. The 64 year-old chairman of Volkswagen is set to retire next year after nine years at the helm of the German automobile giant and he has made no secret of the fact that he intends to swap his manual shift for the tiller of a yacht.
First Piech wants to see the company shift up a few gears. Few believe he’ll leave Volkswagen completely when he collects his pension, yet his chances of becoming the much-coveted chairman of the supervisory board will be severely diminished if the share price continues to underperform.
His bid to improve results has been matched by an equal determination to improve VW’s terrible investor relations record.
Piech has been relatively successful at turning the company around since he took over in 1993 but he has failed in his mission to win friends in the financial community. The company’s various brands – from Audi to Bugatti to Skoda and VW itself – have served it well. It has also made significant inroads into the US, Latin America and Asia – no mean feat in a highly competitive sector.
Unfortunately, VW’s financial performance has had a bumpy ride and the company has done itself few favors by failing to keep analysts and institutions on side during the difficult times. ‘Miscommunication’ is how one spokesperson terms it, and anyone searching for a sparkling model of transparency and disclosure during the late 1990s would have been sorely disappointed with VW.
Analysts certainly have been. Get this from John Lawson, automotive analyst at Schroder Salomon Smith Barney, speaking just over a year ago: ‘The one great weakness of the company from an investor’s perspective is that it really has been a bastion of German traditional accounting and disclosure. Both of which, by the standards of their peer group, are frankly abysmal in terms of transparency.’ Adam Collins of Dresdner Kleinwort Benson was not much more impressed: ‘Volkswagen is Europe’s least transparent car maker. So it does make life very difficult.’
Piech finally got the message and let it be known that Volkswagen would be taking its investor communications more seriously. Accounting procedures would change, with a shift to international accounting standards by 2002. He was even on the look-out for a suitably experienced investor relations director to report directly to the board.
Change management
Enter Gillian Karran. Fresh from investor relations stints at Dresdner Bank and UBS, coupled with experience as an analyst, she joined VW in May 2000 charged with the task of shaking up IR. Since then the department has grown from two to ten, operating from the head office in Wolfsburg and a new satellite office in London – something the board was very keen on, partly as a means of targeting the London sell side.
‘What surprised me was how many international non-UK investors we end up meeting in London,’ says Karran. ‘There are obviously US and Japanese investors visiting for a week and it’s just much easier for them to visit us here in Piccadilly than in Wolfsburg.’ She adds that setting up the fledgling IR operation in London is a little bit like operating in a start-up company within a very established organization. ‘We’re trying to do the daily work and set up an infrastructure which is challenging – we’ve got a couple more positions to fill but we’re almost there now.’
The first few months she reported directly to Piech but has since switched to report to the CFO, Bruno Adelt. The formal structure ensures at least one meeting a week between the two but informal communication is more frequent. She presents a review of IR activities to the whole board at least once a month, adding in feedback from the financial community. Communication between the board and the market has stepped up considerably since Karran joined, with several board members going out on roadshows – something almost unheard of in the past.
When you talk to Karran and the investors and analysts on the receiving end of VW’s newfound approach to IR, they all refer to a process, a slow transition from the closed, traditional VW of old to a modern, open company. ‘The biggest challenge is coming into a company like VW which has very established processes – most of which work very well,’ she adds quickly, ‘and influence some of those processes. There is a constant situation of reminding people that investor relations is here and that we’ve got something to say.’
Those on the outside refer to the need for a cultural transformation, too. Yes, Piech can make it clear that IR is at the top of the company’s priorities. Yes, VW can devote annual report pages to the changed approach to IR. But when it comes down to it, do years of bad communications practice vanish overnight?
‘The whole company culture has to change,’ says WestLB Panmure automotive analyst Arndt Ellinghorst, acknowledging an increase in one-on-one access to the board. ‘There is some improvement in how often they communicate and how often the board goes out on roadshows but it hasn’t improved the way they present the financials. The year-end report resulted in more questions [than it answered]. Karran is trying very hard but she needs to get the information in the first place.’ As long as the personnel at the operating level remain stuck in the old way of thinking, suggests Ellinghorst, Karran is going to have a very hard job indeed.
‘You can definitely see that this process has started. But it is a process, not a one-off event,’ says John Lawson, the Schroder Salomon hyper-critical analyst of yesteryear. ‘There didn’t used to be any real attempt to manage expectations.’ He has a certain amount of faith in the new approach and is willing to give the board the benefit of the doubt as they get their act in order. ‘There is much greater accessibility of board members to the financial community.’ Still, when you start from a very low base a massive increase is not that hard to achieve. Lawson hopes that ‘rights issues popping out of the blue’ and ‘sudden swings in profit guidance’ are consigned to the past and places his greatest faith in the move towards IAS. ‘It’s something the board seems to stand behind.’
Backfire
The switch to IAS was – and probably still is – the shining light in VW’s move to a more transparent future. Karran and her colleagues had announced that it would be introduced for the 2001 figures, so they intended to help the market by giving it a preview this year. It was all about ironing out the creases, making sure that next year things would be, in Karran’s words, ‘crystal clear’.
Unfortunately, the move backfired in the financial press. The influential Lex column in the Financial Times slammed Volkswagen for failing to fire on all cylinders in its attempts to become more investor friendly. ‘It finally unveiled figures based on international accounting standards – but only one year’s worth, preventing comparisons with the previous year… Until it really does become more transparent and shows it is putting shareholders first, investors are likely to stay away,’ it commented.
Not surprisingly Karran was livid, although given Volkswagen’s record she should probably have seen this coming. Many journalists have little respect for the company – partly as a result of a frequent ‘no interview’ policy. The interview for this article had to be delayed a couple of months after another blanket diktat on media relations from the board. That said, there has obviously been a bit more hand-holding on the IAS issue behind the scenes, because investors and analysts alike seem less perturbed than the Financial Times with the staggered approach.
They are not so happy with the lack of explanation and reconciliation information. ‘Transferring the accounting to IAS is a big move,’ says Sebastian Stein, automotive analyst at Bankgesellschaft Berlin. ‘But the report was based on German principles with just a small reconciliation. I’ll be patient and wait for the real IAS numbers next year – then we’ll all see whether there’s going to be some creative accounting.’
The trouble is analysts and investors have almost come to expect some sort of creative blip in the accounts. Changing that way of thinking takes an awful lot more hard IR graft than starting from a solid base. ‘Every year there’s a surprise,’ continues Stein. ‘It’s not good for their credibility. You are left almost guessing from Q1 to Q3 and then the answers come with the year-end figures and Q4. The surprises have been mainly positive but the 1999 results disappointed and thus broke the trend. So you never know what’s going to happen. We’ll probably get a positive surprise at the end of the year.’
Expectations are high that CFO Adelt will wave his magic accounting wand for Piech’s final set of results. Even if the results are worse than expected a certain amount of accounting jiggery-pokery is almost taken as a given. The big man wants to go out with a bang, after all.
Trying to overcome the fact that the market has come to expect surprises from Volkswagen is something that Karran acknowledges as a key task. ‘I think VW needs to be on double good behavior to win over investors. We have got to do more than a company that doesn’t have the same background that VW does. And it does take time. It’s pretty clear to me that to build up a department and establish communications – you’re probably talking a two to three-year horizon.’
Increased access to the board does appear to have had an effect on the way the market views the VW story. There was a gradual creeping up in the share price starting in June 2000 but then things turned sour again in March 2001 as the company struggled to explain how it was intending to meet its growth goals. Stein says the explanations were ‘a bit vague’ and ‘not very convincing.’
Karran is reluctant to use the share price as a sole measure, although she does initially cite its rise as evidence of an IR turnaround. ‘By and large there’s been a revaluation of VW which might suggest that investors are being a little more open-minded towards the company. And we’ve certainly seen that institutions that have been quite troubled by previous investment are now coming back – even without us targeting them.’
Attracting these big international investors back is key to giving the stock some real upward momentum. German institutions have remained fairly loyal and, with some 20 percent of the stock held by the State of Lower Saxony, the domestic base looks sound.
Karran thinks that the international holding is currently in the 20-30 percent range; her department is still in the process of completing VW’s first ever detailed shareholder identification survey with the help of Citigate Dewe Rogerson. ‘We think Volkswagen did have a much larger US shareholding but suspect that the decline in the share price between 1997 and 2000 was partly a result of US shareholders pulling out.’
Sebastian Stein says Volkswagen still has several mountains to climb. The automotive sector is out of favor and non-domestic investors have plenty of choice among more transparent players in the industry. The competition for capital is intense and VW still trails the leaders in disclosure and transparency – even just among its German market peers. ‘Volkswagen is far behind DaimlerChrysler,’ notes Stein, ‘which admittedly has the resources to spend. But it’s even worse than BMW.’
Breakdown
Still, Karran is having a positive effect. Figures are now clearly broken down into the automotive and financial services businesses, something welcomed by most analysts. Last year also saw the introduction of cash flow figures on a quarterly basis. Segmented reporting – that is, a complete breakdown for the performance of each of the brands – is still a long way off but within the financial community sentiment toward to the company is gradually improving. There is also a recognition that, as Karran herself says, the IR program cannot be turned around overnight. Clear IAS figures and decent levels of reconciliation will make 2002 make or break time.
‘They really are changing,’ concludes analyst Ellinghorst. He recalls when the VW board was presenting total figures for three quarters and was surprised when analysts subtracted Q1 and Q2 figures in order to grill management on the latest quarter. ‘They just weren’t prepared for that sort of thing. That has changed.’
Piech has a lot more change to oversee in the months ahead, not least of which is the question of his succession. The IR department will then really be in the spotlight. The cultural shift may have begun at VW but it is only the start. Few, except perhaps the soon-to-retire Piech, believe they are facing a stretch of road with no bumps.
