Stopping the rot

Mar 6th 2008
From The Economist print edition

Peter Löscher of Siemens attempts one of the biggest corporate clean-ups in history

Reuters

HE WORKED as a ski instructor to pay his way through university—and today Peter Löscher is once again expected to provide guidance in a fast-moving and potentially dangerous situation. The tall, loose-limbed Austrian, brought in as chief executive of Siemens last July, could hardly be more squeaky clean. Even the decor in his office above Wittelsbacherplatz in Munich is spartan, which seems fitting for the man leading one of the biggest corporate clean-ups in history. Most recently, on March 1st, he appointed legal officers to each of the sprawling engineering group's divisions. He wanted to emphasise that obeying the law is a vital aspect of every operational decision.

His hope, and that of 400,000 employees at Siemens, is that the steady flow of allegations about bribery and corruption will soon dry up—and with them the damaging investigations. Since November 2006, when police raided the group's offices across Germany, hardly a week has gone by without new allegations of wrongdoing by company officials in places from Botswana to Beijing. Siemensianers, as employees were once proud to call themselves, are fed up with being the butt of jokes about slush funds and secret accounts in Liechtenstein. Mr Löscher's job is to purge the company from top to bottom, so that Siemens can put the scandal behind it and enjoy its position as one of the world's leading companies, and one of globalisation's great winner.

Last month a Munich court rejected Siemens's claim that the practice of bribing the clients of its medical division with airline tickets, which they could exchange for cash, was not “systemic”. That is just one example of how €1.3 billion ($2.5 billion) is reckoned to have been illegally spent around the world in the past few years to beat the competition. Investigators allege that there was a culture at Siemens, endorsed by senior managers, to use bribes and slush funds to win contracts, especially in its communications and power-generation divisions. Last year Klaus Kleinfeld, then chief executive, and Heinrich von Pierer, his chairman and predecessor, resigned under pressure from shareholders. (Both have denied knowledge of any corruption.) One former board member is being investigated, and others are expected to share his fate. And because of its New York listing, Siemens is being investigated by the much-feared Securities & Exchange Commission, which can impose much heavier sanctions than the €660m in penalties Siemens has paid in Europe so far.

Appointing Mr Löscher, an untainted outsider, was an effort to draw a line under the scandal. He had previously headed divisions at GE, Siemens's great rival, and Merck, a pharmaceuticals giant. He spent his first few months at Siemens travelling and learning the ropes. Despite its problems, the group impressed him with its global culture. In many countries, such as his native Austria, it is regarded as a local firm. (Mr Löscher has absorbed plenty of different cultures himself: he studied at the Chinese University in Hong Kong and Harvard Business School, and his wife is Spanish.) Over Christmas he then dropped a bombshell, warning top managers in a letter that ignorance and loyalty were no excuse for having broken the law. Managers were offered an amnesty until January 31st—later extended by a month—to encourage them to spill the beans. And they have been doing so: 110 came forward, giving investigators dozens of new leads.

That prompted an unusual decision, just before Siemens's annual general meeting on January 24th, to postpone a shareholders' vote of confidence in the managing board (the spotless Mr Löscher excluded, of course). A law firm hired by Siemens to investigate corruption said it had new information pertaining to the conduct and knowledge of people who “have served on the managing board during the past several years”. This is an awkward situation. There must be a presumption that Mr Löscher's fellow board members are blameless, but it is like climbing with a string of mountaineers, one of whom may conceivably have doctored the rope. “I have no information to suggest I should not have 100% confidence in my colleagues,” says Mr Löscher.

Meanwhile, there is a company to run

None of this seems to have dented Siemens's ability to make money and win new contracts—so far, at least. Most of its units met their target operating margins in the most recent quarter, and order books are fuller than they were a year ago. “It proves you can grow with compliant business,” says Mr Löscher. He has left in place his predecessor's strategy of exploiting two “megatrends”: demographic change (in particular, ageing in rich countries, which boosts demand for health-care technology) and urbanisation (which creates demand for power, water and transport infrastructure). Whatever the near-term effects of the credit crunch and an economic slowdown, these trends seem likely to continue for years to come. It is a good story, spun around a wide collection of businesses which analysts had long penalised with a conglomerate discount. Mr Löscher claims most analysts no longer apply this to Siemens.

He has performed a cosmetic restructuring, however, streamlining the organisation into three main divisions: industry, energy and health care. Having shed its mobile-phone and car-navigation divisions, Siemens is still trying to unload its networking arm: on February 26th it said 6,800 jobs would have to go to make the unit more palatable to potential buyers. Its bulbmaking and computer-services divisions may be next.

Siemens shareholders are generally pragmatic: they have been more concerned about streamlining the business than the corruption scandal. The share price has responded favourably to news of a share buy-back programme, and the announcement in January that Mr Löscher had spent €4m of his own money buying Siemens shares. His fellow board members promptly bought €1.5m-worth of shares themselves, suggesting that they too are confident in his ability to stop the rot.