MISSED OPPORTUNITY

The Canada Pension Plan Investment Board would have been wise to jump into lawsuit against Volkswagen,

The first answer is “No.” The second question is, “Why not?” The Canada Pension Plan Investment Board (CPPIB) has not joined an international group of 278 institutional investors suing Volkswagen AG in German court, seeking $3.6 billion (U.S.) in compensation.

It’s hard to see this as anything but a missed opportunity for CPPIB to exercise some institutional muscle on the world stage. All the more important as the pension plan continues to promote its international posture, both “harnessing the power of global capital markets” for the benefit of Canadian investors and emphasizing its mantra of seeking higher long-term returns. The lawsuit focuses on a specific time frame in the Volkswagen debacle.

On Sept. 3, the auto company notified the California Air Resources Board, in writing, of so-called “defeat devices” used to evade clean-air standards in emissions tests on diesel vehicles dating all the way back to 2009. (Jettas, Beetles, Audis, Golfs.)

On Sept. 18, the United States Environmental Protection Agency issued a notice of violation of the Clean Air Act. Cynthia Giles, an assistant administrator with the EPA, did not mince words: “Using a defeat device in cars to evade clean-air standards is illegal and a threat to public health.”

Two days later, Volkswagen issued a terse press release saying it had been notified by the EPA and the air resources board of “manipulations that violate American environmental standards.”

On Sept. 22, 2015, Volkswagen said it was “working at full speed” to clarify these “irregularities.”

The latest lawsuit alleges that Volkswagen failed to inform investors in a timely manner. Between Sept. 3 and Sept. 22, Volkswagen shares plunged by close to 40 per cent.

Earlier this month, Volkswagen announced it had met its disclosure obligations under Germany’s capital markets law, that “stock price relevance” occurred only as of the Sept. 18 notice of violation and that the company “promptly” published its announcement on Sept. 22.

Let’s pause here to remember that the scandal dates back much further. A study indicating emissions irregularities, carried out by the non-profit International Council on Clean Transportation, was released in the spring of 2014. Volkswagen met with the California Air Resources Board late that year.

“The diesel matter,” Volkswagen said in a press release this month, “did not initially receive particular attention at the management levels of Volkswagen.”

A memo on the international council’s study had been prepared for erstwhile CEO Martin Winterkorn. We don’t know whether he saw it. We do know that the car company expected simply to bring the vehicles into compliance and pay a fine “in line with prior U.S. settlements.” Such fines historically, the company noted, “were not especially high for a company the size of Volkswagen.”

There’s a high note of arrogance in those comments.

Two weeks ago, when the California State Teachers’ Retirement System announced its intent to join the German securities litigation, chief executive officer Jack Ehnes described Volkswagen’s actions as “particularly heinous, since the company marketed itself as a forward-thinking steward of the environment. Its deceitful and hypocritical actions ultimately caused great harm to the atmosphere and the emissions-cheating scandal has badly hurt the company’s value.”

Calstrs has about $180 billion in assets under administration and bills itself as the largest educator-only pension fund in the world. Ehnes emphasized that Calstrs defines itself as an “actively involved, long-term shareholder” and one that wanted to send a clear message to Volkswagen “as well as the entire automotive industry, that we will not tolerate these illegal actions.”

Not all that long ago, the CPPIB saw Volkswagen as a fine example of the kind of company that eschewed the shorttermism that too often defines capital markets.

The Porsche and Piech families control the majority of shares, thus enforcing the corporate commitment to the long term. A public share listing is meant to usher in transparency.

Volkswagen and others — Adidas, Henkel — were held out as exemplars. It hasn’t turned out that way. At last report (as of March 31, 2015), the CPPIB’s position in VW was small — 7,000 common shares and 95,000 preference shares, for a market value, then, of $34 million (Canadian).

In this instance, size doesn’t matter. What matters is that the pension plan has an opportunity to lend its voice to the outraged chorus.

A spokesman for the pension plan says that taking action, including legal action, is something being considered.

“We are making a decision on the best course of action,” he says. What that might be and when that might happen is not yet known. jenwells@thestar.ca