Klaus Kleinfeld took over as CEO of Siemens in 2005 from Heinrich von Pierer and was at the helm of the company until his resignation on the 25th April 2007. During his time he was seen as an enigmatic premier who transformed the company. The stock had grown by 39% since he took over (Global Business 07/05/2007). He streamlined the organisation by cutting costs, boosting innovation and expanding abroad. He even maintained a rise in the company’s share price during the bribery scandals publicity. Was the board right to accept his resignation?
This was a highly sensitive decision at the time because the bribery scandals came to light whilst Kleinfeld was CEO but he had worked magic at Siemens in a very short amount of time, in only two years he had transformed Siemens and their share price had grown exponentially as a result. Based upon his track record at the company he did not deserve to be released in that manner.
The bribery came to light during Klienfeld’s tenure but most of payments were made during von Pierer’s time as CEO. Kleinfeld pushed Siemens employees to make faster decisions and put as much emphasis on the customers as on the technology. He sold off the unprofitable mobile phone production to BenQ and fostered a JV between Nokia and Siemens to merge their mobile and fixed line phone equipment businesses to create one of the world’s biggest network firms. In addition he invested $6 billion in 2006 on acquiring positions in growing areas such as medical diagnostics and wind power. Overall he left the company in a very strong position, indeed only hours before he tendered his resignation the company announced that its operating profit in the most recent quarter had soared by 49% to $2.7 billion.
It is also apparent that Kleinfeld was forced out to an extent by other executive members who disliked his management style and used the publicity of the scandal to orchestrate his departure when Kleinfeld was never actually charged with any wrongdoing. On the other hand although Kleinfeld was not directly implicated, he and von Pierer were criticised for failing to trace the embezzlement of large company funds and large payments being made over several years which shows how weak the internal controls over the financial reporting were. By jettisoning Kleinfeld it gave a huge signal to stakeholders both internal and external that Siemens were putting their soiled bribery past behind them and starting a new from the very top.
The corruption scandal represented a failure of leadership and therefore it was the right time for a change whether it was Kleinfeld’s fault or not. Kleinfeld’s management and leadership style were aggressive and his vision for the company was modern, in attempting to achieve this he was brought into conflict with more conservative defenders of the Siemens’ existing business culture. Worldwide he was seen as a visionary championing German reform but in Germany he faced critique, largely for his lack of social responsibility to Siemens employees.
This is epitomised in the sale of the mobile handset unit to BenQ whose German subsidiary subsequently filed for bankruptcy a year later resulting in many redundancies whilst at the same time, the board of Siemens were awarded a pay rise. Although the executive forfeited the pay rise to assist their former employees, the German media speculated that the sale of the division was to avoid the costs of its failure.
Overall, there were numerous reasons why Kleinfeld should have stayed and as many reasons why it was right for him to go it appears that although he was an amazing leader at the time the corruption scandal overshadowed all of his prior work. He failed to communicate the company’s code of conduct and ethics as well as the rule of the law and if Kleinfeld truly did not have a clue as to the ‘systemic’ bribery practices taking place at his company then he was not fit to lead if the scope of his control was so poor. A new CEO was a signal of true change at the company and so it was right that Kleinfeld left. What is likely to be the impact of his departure on the company?
Kleinfeld’s work at the company had left it in a very strong position with loss making units shed, strong public reception reflected in an ever increasing share price and large investment into new markets and new industries. Allowing his successor to take up the reins and continue the trend. Kleinfeld’s departure also allowed for new CEO to make changes from the top, coming in at the head of the organisation allows for perspective and the fact that a new CEO had to come in indicates that there are issues at the executive level. Given Kleinfeld’s success as CEO and the fact that he was allowed to resign indicates that nobody at the company was irreplaceable, paving the way for the new CEO to restructure as they saw
The resignation of Kleinfeld and the corruption scandal which caused it provided a catalyst for change, a sense of urgency and a need for reform, without which people would simply say ‘why alter anything?’ One of the biggest impacts of Kleinfeld’s departure would have been the beginning of closure on the corruption scandal at Siemens providing a ‘scapegoat’ in essence his resignation could have been perceived as an acknowledgment of guilt of some kind. Ultimately though, his departure would have created uncertainty. Indeed Siemens stock slid 3% upon the announcement of his resignation, a clear signal from the markets that they were uncertain as to the next step for Siemens.
As previously mentioned Kleinfeld was viewed by many as a good leader, his departure would have created some resentment from employees who admired him and may have had a negative effect on morale even to the extent that some may have left the company. The negative goodwill created from the scandal may have required the company to pay a premium to hire new employees especially to the position of CEO given the vast amount of work which would be required to rectify the company corporate governance record. Was Siemens really at fault or was it just unfortunate to have got caught given the perception that many companies have to resort to bribing to win contracts? In a domestic context, until 1999, paying bribes abroad was legal in Germany. In fact, German corporations could deduct bribes from taxable income.
That finally changed under pressure from the United States, which has had an anti-foreign-bribery law on the books since 1977. But Siemens, with its huge infrastructure and global footprint, found it hard to break the habit and it was not the only German company that did. Around the same time as the Siemens scandals emerged, unethical practice at other German giants such as; Volkswagen, Deutsche Telekom, Deutsche Bahn and Deutsche Post were also brought to light. Analysts have attributed this in part to the Co-determination laws in Germany which allowed the labour unions to hold considerable power over management and fostered a suspicious relationship between management and labour representatives. In the case of Siemens they attempted to usurp the labour unions by weakening the power of the most influential, IG Metall by bribing a competitor. In the international context it was a well known that in emerging economies bribery was common practice.
Reinhard Siekaczek; a mid-level accounting executive at Siemens admitted to overseeing an annual $50 million budget for managers and salesmen to use in bribing government officials around the world, including those from Bangladesh, Nigeria, Argentina, Israel, Venezuela, China, Iraq, and others. It was seen not as illegal but as for the benefit of the firm a necessary cost of doing business. That said it does not mean that the ends justifies the means. There are numerous ways for companies to operate effectively and legally in new markets. QUESTION 2
Was the board right in not extending Kleinfeld’s term, especially in view of his overall performance as CEO? •Based upon his track record at the company he did not deserve to be released in that manner. The bribery came to light during Klienfeld’s tenure but most of payments were made during von Pierer’s time as CEO. •However by jettisoning Kleinfeld it gave a huge signal to stakeholders both internal and external that Siemens were putting their soiled bribery past behind them and starting a new from the very top.
The corruption scandal represented a failure of leadership and therefore it was the right time for a change •Overall, there were numerous reasons why Kleinfeld failed to communicate the company’s code of conduct and ethics as well as the rule of the law and if Kleinfeld truly did not have a clue as to the ‘systemic’ bribery practices taking place at his company then he was not fit to lead if the scope of his control was so poor. A new CEO was a signal of true change at the company and so it was right that Kleinfeld left.
What is likely to be the impact of his departure on the company? •Allowed for change of the company’s strategies and signalled that the company were serious about cleaning up their act. •Internally may have signalled that the company was cleaning up their act with big changes starting at the top. Was Siemens really at fault or was it just unfortunate to have got caught given the perception that many companies have to resort to bribing to win contracts? •Siemens were unlucky to get caught given that bribery was legal in German until 1999 •Corruption is widespread in developing countries
•However it is illegal and there are many ways firms can operate in new markets and win business without being corrupt.