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Volkswagen Can Cure Germany’s Neurotic Investors

Volkswagen AG and Siemens AG are two of Germany’s most important industrial companies. Both have suffered scandals in the past decade. But in at least one key respect they’re now poles apart.

If you asked an ordinary VW employee what the carmaker's share price is, I’d wager many couldn’t answer. But there’s a strong chance a Siemens worker would know about their company.

Having introduced a new employee share-matching plan in 2008, the number of participating Siemens workers has increased by about 80 percent. Nearly half of its staff own a combined 3 percent or so of the stock.

VW's last employee share plan was shut more than a decade ago. While ordinary workers get a yearly bonus (typically a few thousand pounds) linked to company performance, it’s paid in cash. 1 About one in 10 of Volkswagen’s core German staff still owns shares, estimates Gerd Kuhlmeyer, who heads a staff investor group. “Owning shares can help to increase an employee’s identification with the company,” he says. 2

VW could certainly benefit from a bit more of what Siemens CEO Joe Kaeser calls “ownership culture”. While VW employees are no doubt committed to their company’s success, that's not always the same thing as creating value for its owners.

Over the years, the car giant has made jobs a priority (625,000 at last count) and spent vast sums on research and development and new factories.

Workers and the state of Lower Saxony, who between them hold half of VW’s supervisory board seats and a 20 percent voting stake, went along with that spending even though it makes the company bloated and inefficient. With a $25 billion diesel scandal bill to pay and amid broader fears about electric cars and ride-sharing, VW shares trade on a pitiful six times estimated earnings.

By contrast, the Siemens stock price touched a record high this year, as Kaeser pressed ahead with overhauling the portfolio, including a healthcare spin-off.

There’s plenty VW could do in the same vein. While executives say they're open to selling non-core businesses, labor representatives aren't fans of asset sales. VW has overhauled its pay for top bosses to include a share-based component, saying it was “more capital market orientated”. Perhaps if employees had a bigger stake, they’d be more receptive to ideas that might re-rate the shares.

There would be broader benefits too. Share ownership is woefully inadequate in Germany: only about 14 percent of the population hold stock. 3 Since the dotcom bubble burst 4 most Germans have had an ingrained suspicion of market “speculation”. Policy has reflected this.  5

But with interest rates dropping towards zero, Germans’ preferred method of saving–bank deposits and life insurance–don't offer much return. This risk aversion is cementing the wealth gap between people with financial assets and those without.

Company share plans can help staff get comfortable with investing. With more than 270,000 employees in Germany, VW’s commitment would make a big difference. Daimler and BMW already do this.

Employee share ownership is not a panacea. It isn't a good idea to tie up too much personal wealth in a single company. If the shares crash you might also lose your job. Meanwhile, giving VW workers new shares wouldn’t be easy because of its complicated share structure. 6

Still, if the people in the VW factories had more of a financial stake, both workers and outside investors might be better off.

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

  1. Volkswagen also pays bonuses to employees who suggest useful process and production improvements. 

  2. Some VW employees were tempted to sell up when its shares rose to as high as 1,000 euros in 2008. Porsche’s attempt to take over VW triggered a short squeeze and VW briefly became the world’s most valuable company.  

  3. Refers to people aged over 14.

  4. The slump in Deutsche Telekom stock, owned by many Germans, also played a role in disillusionment with the market.   

  5. In Germany, the tax-free allowance for employee share benefits is just 360 euros. In the U.K., an employer can grant up to 3,600 pounds in free shares a year.

  6. There’s a limit on how many new non-voting preference shares VW can create.

Read more: http://www.bloomberg.com/

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