Call this a partial victory for Christopher Hohn’s TCI Fund Management.
A little more than one week after the London-based activist manager launched a campaign against Volkswagen Group, the German carmaker agreed with most of TCI’s criticisms and said it planned to address most of the complaints. In a letter sent to Hohn and seen by Alpha, the firm called many of the points raised by TCI “valid.”
Volkswagen also used the response to stress that it wants to resolve “as quickly as possible” U.S. government charges that it fabricated diesel emissions data.
Volkswagen’s quick endorsement of TCI’s recommendations further strengthens Hohn’s credibility and standing within the activist hedge fund community, which has been rocked by losses over the past year or so. TCI was roughly flat in the first quarter, while most activist firms posted declines in the mid- to upper-single-digits. One, Pershing Square Capital Management, was down 24 percent.
TCI, which runs a very concentrated portfolio, also gained 14.4 percent last year, making it among the best-performing activists, as well as hedge funds in general, in 2015. In fact, very few activists were even profitable last year.
Last year Hohn received a seat on the board of directors of Spanish airport owner and operator Aena, whose stock surged about 80 percent in 2015. At year-end TCI was managing $11 billion, way up from $8.8 billion at the start of 2015.
Shares of Volkswagen climbed 1.25 percent on Wednesday but are still down about 3 percent for the year. Earlier this month Hohn, whose firm has an economic exposure of more than 2 percent in Volkswagen, called on the company to change its compensation policies, asserting that VW has been held back by “underperforming and overpaid management.”
In the letter, Hohn pointed out that the company has experienced six years of flat profits and that the core business “has gone significantly backwards.” Yet during that period nine management board members earned about £400 million, or $577 million in today’s exchange rate, he pointed out.
Hohn called this corporate excess “on an epic scale.” He called for a new remuneration system with transparent and measurable criteria for bonuses, which should be submitted to an annual shareholder vote for formal approval.
In Wednesday’s response, Volkswagen said that it has implemented a new structure, most importantly, appointing Dr. Herbert Diess as a member of the board of management last July. “His number one priority is to address the performance of the Volkswagen Brand, a topic you addressed in your letter,” the automaker stated. “Significant progress is being made in terms of cost improvement as well as management realignment,” it added, stressing the introduction of products “where the best ideas from Porsche are being introduced into the engineering processes of the Volkswagen brand.” VW acquired Porsche in 2012.
Volkswagen also said it will emphasize changing the culture and having the right plan “to capitalize on the strength” of its brands. It also agreed that it needs to change its remuneration systems. “We will be addressing this as part of our strategy review,” Volkswagen stated.
In response, Benjamin Walker, a TCI partner, said in a statement: “VW’s response reflects a positive and refreshing new stance from the new management team. It is good to see that they welcome constructive dialogue with investors. And it is good to hear that they are ‘under no doubt’ that their ‘financial performance needs to improve’ and that the current management remuneration system ‘requires change.’”
Walker added that TCI urges the Lower Saxony government, which owns 20 percent of VW, and the unions to “fully back the new management team.”
