Siemens' Boss Steps Down

Chief Executive Klaus Kleinfeld steered the German electronics firm to unprecedented profits, but the scandals marring his tenure caught up with him

Klaus Kleinfeld is only the sixth chief executive Siemens (SI) has had since 1966—and of those six, he's had the shortest tenure. Yet he may go down as the person who most radically changed the Munich-based electronics giant.

Ironically, Kleinfeld's statement Apr. 25 that he will not seek an extension of his contract, which is set to expire Sept. 30, came a day before the company was scheduled to present quarterly figures that are likely to deliver on a promise the 49-year-old made to investors shortly after taking office in 2005. Kleinfeld staked his personal prestige on meeting long-held but never-before-achieved profit goals for the company's units, ranging from 5% for the power generation business to as much as 13% for the division that produces X-ray machines.

In a preliminary earnings statement issued late on Apr. 24, Siemens said operating profit in the quarter ended Mar. 31 soared 49%, better than expected, to $2.7 billion—confirmation of what Kleinfeld was able to achieve in his short time at the helm.

Tarnished by Legal Problems

Kleinfeld sold or spun off money-losing telecommunications equipment units, made plans to list the profitable, but non-core, VDO auto electronics unit on the stock exchange, and spent $7.6 billion last year on acquisitions to strengthen core businesses and build Siemens' presence in emerging markets such as China and India (see, 1/30/07, "IPO for Siemens' Auto Electronics Unit?").

At a press conference scheduled for Apr. 26, Kleinfeld was set to announce plans to take Siemens to a new level. The company says Kleinfeld will continue to serve as CEO until the end of his contract, and will preside at the press conference.

Kleinfeld's success in making Siemens more profitable was tarnished by legal problems. Munich prosecutors are investigating whether the company systematically bribed foreign officials to win contracts. Siemens admits hundreds of millions may have been misused. A separate investigation is probing whether Siemens secretly financed a workers' organization that was supposed to act as a counterweight to IG Metall, the militant labor union that negotiates on behalf of most Siemens workers in Germany.

Pressure for New Management

In an interview with BusinessWeek columnist Maria Bartiromo before his resignation, Kleinfeld expressed his frustration with the scandal. "The most difficult thing in those situations is that the rumors are dominating the media, and you cannot go out with the facts because, sometimes, you don't have all the facts or you're not sure whether you have all the facts…. You are dealing with an ongoing investigation by a state authority, and you can't get involved with that through a public debate."

The investigations have clearly damaged Siemens' reputation. Though Kleinfeld has not been implicated, and says he didn't know about any illegal activity, the scale of the alleged bribery raises the question of why he didn't know. After the investigation reached the top layer of management with the arrest of Johannes Feldmayer in March, pressure grew to start over with a new management team. Supervisory Board Chairman Heinrich von Pierer, Kleinfeld's predecessor as CEO, resigned on Apr. 19 (see, 4/20/07, "Siemens' Von Pierer Falls on His Sword").

Kleinfeld's departure hardly spells the end of management turmoil at Siemens. His ouster appears to have been engineered by supervisory board members Gerhard Cromme, chairman of steelmaker ThyssenKrupp, and Josef Ackermann, CEO of Deutsche Bank (DB). Both men have served on the supervisory board for four years, and Cromme was chairman of the audit committee.

Shareholders Upset

Critics are already asking why they shouldn't also be held to account for activities that occurred on their watch. Ackermann himself is no stranger to corporate scandal: He has faced charges that while serving on the board of German mobile operator Mannesmann he approved excessive bonuses paid to the company's top executives when it was sold to Vodafone (VOD). Acquitted of the allegations in 2004, he eventually paid a $4.2 million fine in Nov. 2006.

Kleinfeld's tenure at Siemens was marked by controversy over the management changes he tried to force on the famously stolid company. But shareholders, who applauded the CEO's restructuring, are deeply upset at the way his departure was handled (see, 1/29/07, "Siemens' Cultural Clash").

Leaks to the German press ahead of the Apr. 25 supervisory board meeting wounded Kleinfeld's authority and apparently sealed his fate before a succession plan was in place. Press speculation about a replacement has focused on Wolfgang Reitzle, a former BMW and Ford Motor (F) executive who gets high marks for his restructuring of German industrial gas supplier Linde. But Reitzle says through a Linde spokesman that he doesn't want the job.

Whoever replaces Kleinfeld is likely to come from outside the company. An outsider will not be tainted by the scandals, and will bring a fresh perspective. But it will be a huge challenge to manage a company as big and complicated as Siemens without the internal contacts and knowledge of a Siemens lifer like Kleinfeld. Just as Siemens finally begins to deliver world-class profits, it has disappointed investors once again.

Before it's here, it's on the Bloomberg Terminal.