VW's Scandal: The Buck Stops Here?

Personnel chief Peter Hartz has accepted full responsibility for bribing union officials, but prosecutors wonder whether others may have been in the loop

by Gail Edmondson

The lurid details of Volkwagen's sex-and-bribery scandal set Germany Inc. reeling in the summer of 2005. VW's former Chief of Personnel, Peter Hartz, paid $2.5 million dollars in illegal bribes over nine years to the company's labor boss to buy support for management plans. The illicit payments were used by VW Works' Council Chief Klaus Volkert to fund lavish foreign trips for worker representatives, with prostitutes, parties, and luxury hotels in Brazil and Lisbon—all disguised as business expenses.

But who was behind the scheme? Did former Chief Executive—and now Chairman—Ferdinand Piech quietly approve the operation? What about labor leaders in Frankfurt?

One Bad Apple?

As it turns out, Germany will still have to wait for the answers to those questions—though few believe Piech will be ensnared in the scandal. In the courtroom last week, the 65-year-old Hartz admitted making illegal payments of $2.5 million between 1994 and 2005 to Volkert and $518,000 to Volkert's Brazilian lover, Adriana Barros. But on Jan. 25, he continued to insist that he acted alone in arranging the sex junkets.

Though Hartz faced a maximum penalty of 10 years in prison, he negotiated a lighter sentence in return for his confession. In the end, he received a suspended jail term of two years and a fine of $750,000. The state prosecutor also dropped charges that Hartz misused company funds by participating in the voyages and the sex parties, saying the monetary damage to Volkswagen was minimal.

More Trials Ahead

The Volkswagen scandal has triggered national soul-searching over the country's post-war system of corporate governance—and its vulnerability to serious abuse. Under a system called codetermination, labor representatives are by law granted half the seats on a company's supervisory board, giving them significant control over management decisions. The chairman has an extra vote, so he or she can tip the scales in votes that split labor and management.

That system normally gives shareholder representatives the advantage in close boardroom battles. But Piech has long wielded his close relationship with labor at VW to overrule disgruntled shareholder representatives on his board. At the Detroit Auto Show in January, VW's new Works Council Chief Bernd Osterloh said labor leaders would back Piech's reelection as supervisory board chairman in May, if he seeks it.

Hartz is the first of four VW managers to be put on trial. In addition, Hans-Jürgen Uhl, a member of the German Parliament for the center-left Social Democrats, has been charged with giving false statements and being an accessory to breach of trust over his alleged participation in the sex junkets. Those trials are expected later this year.

Gail Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau.