The management and supervisory boards at the two car companies are no strangers to balancing the interests of shareholders and employees. Under the German Law on Employee Co-Determination, the so-called Mitbestimmungsgesetz, large companies are required to reserve half of their supervisory board seats for employee and labor representatives, with the other half being elected by shareholders. As a result, large German companies, notably those in the auto industry, have faced board-level resistance to cost-cutting measures, such as layoffs and factory closures.

At DaimlerChrysler's April 12 annual meeting, there are two shareholder proposals on the ballot calling for special audits of the Smart small car and the Maybach ultra-luxury sedan business units. Since their creation in the mid-1990s, the two divisions have racked up losses of several billion euros. Despite mounting calls from shareholders to shut down the two loss-making units, DaimlerChrysler has insisted on keeping them afloat.

According to the Financial Times, the Kuwait Investment Authority (KIA)--with a stake of 7.2 percent, DaimlerChrysler's largest shareholder--and several other large shareholders have publicly stated that they would like to see Smart on the auction block. "I don't think they have been successful in reforming the Smart operation, so the only solution is get rid of Smart," KIA managing director Mohammad Al-Saad, told Bloomberg News.

Nonetheless, DaimlerChrysler announced just this week that it would spend another 1 billion Euros ($1.2 billion) to restructure its Smart division.

In addition, DaimlerChrysler's supervisory board chairman, Hilmar Kopper, is facing potential insider-trading-related charges. While BaFin, the German capital markets regulator, dropped its investigation in November 2005 without filing suit, and the Stuttgart prosecutor did so March 29, the state attorneys' office in Frankfurt is still investigating whether to file charges.

Kopper is alleged to have tipped off Deutsche Bank CEO Joseph Ackermann shortly before DaimlerChrysler announced that then-CEO Juergen Schrempp would step down by the end of 2005. Following the public announcement on July 28, DaimlerChrysler's stock rose and Deutsche Bank, where Kopper was once chairman of the supervisory board, sold approximately 1.4 billion Euros ($1.66 billion) worth of DaimlerChrysler stock.

Deutsche Bank was a significant, long-term shareholder of DaimlerChrysler for many years. But when the company's shares rose after announcement of Schrempp's retirement, the bank sold most of its position. It is not clear whether the bank made money from the alleged tip. However, under German insider trading law, passing on insider knowledge may be punishable even if no illicit gains are derived from it.

The pressure from the automaker's shareholders has persisted despite aggressive steps by new CEO Dieter Zetsche to bring the company back on track, including the announcement that thousands of middle managers would be dismissed. It remains to be seen how DaimlerChrysler will reconcile shareholders' desire to cut losses quickly against the company's business judgment and the pressure by labor unions to keep Smart and Maybach running.

Meanwhile, at Volkswagen, actions by the company's two largest shareholders--Porsche and the state of Lower Saxony--are spurring opposition by other institutional investors, amid a criminal investigation involving labor representatives on the supervisory board.

As a result of Porsche's acquisition of an 18.5-percent stake in VW last year, the company has nominated Porsche's CEO and CFO to the VW supervisory board. This move has also been endorsed by Lower Saxony, which owns 18.1 percent of VW. At the company's May 3 annual meeting, shareholders are expected to oppose the nomination of these two candidates.

In addition, the company is bundling its supervisory board elections, which some shareholders have interpreted as an attempt to thwart opposition to the two Porsche executives. Since Volkswagen and Porsche have extensive transactional relationships, notably in the joint development and production of an SUV platform, some shareholders are concerned that the nomination of two Porsche executives to VW's supervisory board would create irreconcilable conflicts.

Moreover, VW has been embroiled in a scandal involving revelations that employee representatives on its supervisory board received lavish trips to Brazil and other far-flung places. This happened at company expense and at the behest of VW's head of human resources, Peter Hartz, in a long-running attempt to co-opt labor and employee representatives.

While some shareholders might appreciate VW's pragmatic approach to dealing with its worker representatives, these practices are under criminal investigation by German authorities. Due to the pending investigations, VW is proposing to postpone the discharge of liability for several of its supervisory and management board members. The so-called discharge absolves directors of liability for their performance in the preceding year.

While the discharge of the supervisory board's and the management board's actions in the past fiscal year is a routine item at German meetings, the postponement of this vote for some of the VW board members is highly unusual.

Some shareholders have interpreted this postponement as an attempt to deflect investor ire from board members who are not under direct investigation. As a result, a large number of shareholders is expected to vote against this selective discharge proposal.