Reference no: EM132228005

Directions Review the case study provided below.

Which you answer the following four questions:

1. How would you describe the culture of Siemens before Kleinfeld's appointment as CEO?

2. Kleinfeld's leadership style was criticized as being “brash” and “American.” Is that a fair assessment? Why or why not?

3. Do you think the decision to “clean house” in the Siemens executive offices was the right one? Why or why not?

4. What challenges does Peter Löscher face in restoring the company's reputation?

Siemens' Commitment to “Clean Hands”

After CEO Klaus Kleinfeld put Siemens back on the road to recovery, a bribery scandal threatened to undo all the progress made. If things had turned out a little differently, Siemens CEO Klaus Kleinfeld might already be on his way to executive stardom, like his role model Jack Welch. Just two years after Kleinfeld took over the Munich electronics and engineering behemoth in January 2005, Siemens was on track to hit its aggressive internal earnings targets for the first time since 2000. In fact, it was expanding both sales and profits 168 faster than Welch's former domain, General Electric. The 2006 sales rose by 16 percent and profits by 35 percent, and the future was looking very positive. Transforming Siemens was never going to be easy. With branches in 190 countries and over $100 billion in sales, the company has long been respected for its engineering expertise but criticized for its sluggishness. And Germany, with its long-standing tradition of labor harmony and powerful workers' councils, is highly resistant to the kind of change Kleinfeld tried to implement. Against the odds, in just two years Kleinfeld had managed a major restructuring. He pushed Siemens' 475,000 employees to make decisions faster and focus as much on customers as on technology. He spun off underperforming telecommunications businesses and simplified the company's structure. When one group of managers failed to deliver, he broke up an entire division—at the end of 2005, it became clear that the Logistics & Assembly Systems Division, which made products such as sorting equipment used by the U.S. Postal Service, would deliver only a 2 percent profit margin. Most unpardonable in Kleinfeld's eyes was that the unit's managers waited too long to alert him to the problem. So Kleinfeld transferred the most profitable parts of the division, such as baggage-handling systems for airports, to other parts of Siemens. The rest was sold. Within weeks, an entire Siemens division with $1.9 billion in annual sales was vaporized. Such aggressive tactics would inevitably lead to criticism of Kleinfeld's “American” style of leadership, but his eventual departure from Siemens (he is now CEO of aluminum giant Alcoa) came not, as many suspected, as a result of secret boardroom maneuvers. It came as a result of a need for a fresh start for the company after a scandal over bribery and corruption practices by senior managers to the tune of an estimated $2.5 billion. In December 2008, Siemens announced that it would pay fines and other penalties totaling $800 million after pleading guilty in U.S. federal court to violations of the Foreign Corrupt Practices Act. The company also agreed to pay $540 million to German authorities in addition to a $274 million fine already levied for evidence of systematic bribery and corruption, including the use of airline tickets that could be exchanged for cash, which executives in Siemens' medical division used to bribe clients in contract negotiations. Kleinfeld's eventual departure from Siemens came not, as many suspected, as a result of secret boardroom maneuvers, but as a result of a need for a fresh start for the company after a scandal over bribery and corruption practices by senior managers to the tune of an estimated $2.5 billion. Thanks to full cooperation and transparency in the investigation, in addition to a multibillion-dollar internal investigation in which Siemens provided most of the evidence for its own prosecution, the company did not receive a ban from competing for future government contracts. However, having clearly demonstrated that much of its commercial prowess was achieved through a willingness to “grease the appropriate palms” to win large government contracts from Nigeria to Norway, Siemens faced the challenge of rebuilding its reputation and proving that it can win business honestly (with “clean hands”)—even when competitors may continue to acquiesce to demands for bribes in order to win contracts. The responsibility for rebuilding the company's reputation fell to Peter Löscher, as a designated (and untainted) outsider who previously headed divisions at GE (Siemens' greatest rival) to draw a line under the scandal and start a new era for the company. One of his first acts was to declare an amnesty for all 169 managers to come forward and share what they knew about the bribery practices—110 managers came forward and provided multiple new leads to internal and external investigators. With Löscher's arrival and the need to wipe the slate clean, there was a dramatic housecleaning in the executive offices in addition to a cosmetic restructuring of the organization into three main divisions: industry, energy, and health care. It remains to be seen whether the restructuring is designed to improve operational efficiency or to make units more attractive to potential buyers.