Corporate Governance-Value Creation and Destruction of Family Businesses

Ursula Piech is the wife of Ferdinand Piech, who is the chairman of Volkswagen and grandson of the VW beetle inventor. Being a car fanatic, she knows much about the industry and the company in particular. However, her control over Volkswagen, which is listed publicly, is exercised in a specific manner based on family ties. For this reason, there is a certain criticism of such a management as it resembles a personal fiefdom.

The critics use private benefits as one of their reasons to oppose her appointment. Private benefits of control are the “psychic” value some shareholders assign simply to being in control. It includes the use of the company’s money to pay for privileges of the controlling parties. This may lead to corporate resources being appropriated by a considerable shareholder through the outright theft. This happens mainly when he or she diverts company’s assets to a personal use. It encourages some value not being shared among all the shareholders, since it is only the party in control that enjoys the value (Dyck & Zingales 2004).

A family succession can destroy value, hence being disastrous. This can be seen in the fair transfer price, which is difficult to prove in court. These small deviations can generate sizeable private benefits if applied to the large volume trade.

Managers have many pressing duties. This makes them significant individuals in terms of the success of any company. Maintaining a controlling block requires the largest shareholder to be not well diversified; he or she should have a narrow specialization. It might lead to valuing of the controlling block less. The company might inflict a loss on the reputation of the controlling party and, in some extreme cases, even some legal liabilities (Dyck & Zingales 2004).

If managers are not properly trained, the company is at risk of a poor leadership. This leads to them lacking skills or motivation to perform the appraisal practice in an effective manner. This leads to the employment of family members and friends to delicate positions, which compromises profit. In this sense, Ursula Piech was depicted as a kindergarten teacher with added skills in business and law. She had to adjust to a change of her career from being a nanny to being on the supervisory board of VW. This gives the critics another base for argument.

They fear that the information acquired by an executive pertaining the company’s business and potential opportunities may be used improperly. He or she might choose to exploit these opportunities through another company associated with him or her. This bears no advantages to other shareholders. Families function as an internal capital market; thus, as a rule, shareholders are simply being notified of decisions made by the family. These decisions do not increase the earnings of other shareholders.

Voting by shareholders lies at the basis of a broad variety of companies that are being managed and organized in a manner of the corporate governance. Shareholders have the right to select a board of director members, approve new equity matters, endorse mergers and acquisitions, and revise the firm’s articles of organization (Yermack 2010). In relation to Volkswagen, they had never had a chance to vote for Ursula Piech as a member of the VW’s supervisory board that consists of 20 persons. However, now, she will influence every crucial strategic decision of the company to a considerable degree. The critics suggested an idea that Ferdinand was unwilling to give up the control to others and often wanted the final say in terms of the cash flow. Thus, it was the reason behind the inclusion of his wife in the supervisory board.

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