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GERMANY: Siemens chief says corruption scandal won't delay next strategic plan

by Mark Landler and Carter DoughertyHerald Trribune
February 27th, 2007

Klaus Kleinfeld's office here is dominated by a photograph of a storm-tossed sea off the Icelandic coast. Kleinfeld relishes the churning image, he said, though as a counterpoint, he has hung a soothing watercolor with pink blossoms on another wall.
The clashing dιcor aptly sums up the past four months for Kleinfeld, the 49- year-old chief of Siemens, the German engineering giant. Even as Siemens has reported buoyant financial results — thanks in part to Kleinfeld's overhaul of its operations — it has been hit with a fast-expanding corruption scandal that threatens to sink its reputation.
On Tuesday, Kleinfeld said the results of Siemens's internal investigation into bribery and other allegations would not be known before April, when he presents the company's next strategic plan.
"We are interested in getting to the facts, but getting to all of the facts," Kleinfeld said during an interview. "We are talking about things that are important, that we can't take light-heartedly."
That Siemens has not been able to put this scandal behind it, four months after German prosecutors first disclosed they were looking into improper payments in the company's telecommunications unit, attests to the extent of the malfeasance and its deep roots in this 160-year- old business.
Prosecutors in Germany, Switzerland and Italy are investigating Siemens, as are the U.S. Justice Department and the Securities and Exchange Commission. The company has its own team of more than 100 people trying to unravel some €400 million, or $530 million, of suspicious transactions over the past seven years — much of which appears to be bribery abroad, according to the prosecutors.
Still, Kleinfeld denied that the scandal reflected a broader German problem or a basic flaw in the corporate culture of Siemens, which makes products from light bulbs to locomotives and sells its wares in 190 countries.
Rather, he said, Siemens was undergoing a painful process of coming into line with more stringent German and European laws on corporate conduct, which came into effect in the late 1990s. As recently as 1999, bribes paid to foreign officials by German companies were tax-deductible.
"You need a certain amount of time for adjustment," he said. "Don't get me wrong: This is not meant as an excuse."
Other German companies, including DaimlerChrysler and Volkswagen, have also been hit with corruption allegations in the past year. And Kleinfeld noted that it was not just a German phenomenon.
"We don't need to be reminded of recent cases of other international companies that are U.S.-based, like an AIG or even like my good friends at Citibank," he said, referring to two companies that have recently battled corruption charges. (Kleinfeld is on the board of Citigroup.)
Kleinfeld made his name turning around Siemens's U.S. operations. In responding to the scandal, he has borrowed from the playbooks of scandal- scarred American companies.
He consulted several chief executives, though he would not say which ones. He hired a New York law firm, Debevoise & Plimpton, to conduct an independent investigation. Debevoise retained the accounting firm, Deloitte & Touche, to scrutinize Siemens's books.
None of this, however, will happen fast enough to meet the April deadline that Kleinfeld set for the first phase of his tenure. Siemens is on track to meet the profit targets that he set when he took the helm at the start of 2005, and he promised to announce a new set of "quantifiable measures," along with the company's second-quarter earnings in April.
"It helps inside the company to focus on certain targets, and to be clear on what you want to achieve in a certain period of time, and who is responsible," Kleinfeld said, without offering details.
To bolster compliance controls, Kleinfeld has hired a leading anti- corruption expert, Michael Hershman, to advise the management board of Siemens and the audit committee of its supervisory board.
Hershman, a one-time investigator for the U.S. Senate Watergate committee who now runs a consulting practice in Fairfax, Virginia, is spending 70 percent of his time in Munich these days.
Siemens, Hershman said during an interview, made the same mistake as many American companies: failing to take seriously new anti-corruption laws until it was ensnared in a scandal. But he said he believed that Kleinfeld was committed to stamping out illegal practices.
The challenge now, he said, is to create a culture in which its managers do not fall into easy, and illegal, patterns of behavior. Recalling a speech he gave to Siemens executives, he said, "I told them, 'Look, I'm tired of hearing that corruption is part of a country's culture.'"
For Kleinfeld, corruption is a threat — not just to the long-term health of the company but to its short-term profit.
"If you, in your mind, get it wrong and think, 'I just have to beat the competition,' and you are not working for the competitiveness of the customer, you are fundamentally doing something wrong," he said.
To avoid ethically compromised situations, Kleinfeld said Siemens would steer clear of some countries in competing for contracts. He declined to identify those countries. Siemens recently decided to pull out of Sudan because of concerns about human rights abuses in Darfur.
Shunning some contracts will not really hurt Siemens, Kleinfeld said, since its profit is constrained by its lack of capacity to respond to surging worldwide demand for its products.
As Kleinfeld sees it, Siemens is in a sweet spot — supplying power turbines to fast-growing cities in the developing world, and medical scanners for aging populations in the developed world.
Indeed, shareholders have largely brushed off the scandal. Siemens's shares, after dipping from €76 to around €70 when the allegations first surfaced, now trade at €81.76, even after falling 2.7 percent Tuesday in Frankfurt during a broad global sell-off.
Siemens reported a 6 percent increase in new orders during the quarter ending in December, and Kleinfeld has promised the trend will continue. Against the backdrop of rising profitability, morality plays little role, said Theo Kitz, an analyst with Merck Finck in Munich.
"Investors think in the direction of concrete numbers," he said. "Only the numbers can affect the share price."
While Siemens's aggressiveness has won it respect, some critics question whether it has contributed to its problems. Siemens was long known for having a paternalistic attitude towards its employees, and the shift to a more bare- knuckles style was jarring, according to people who have worked there.
The pressure on employees to deliver can create the atmosphere in which bribery becomes a tempting short cut, particularly if controls are weak, said Peter Fries, a lawyer in Nuremburg who works with Transparency International, an anti-corruption monitoring group based in Berlin.
"We have a much harder way of doing things in Germany now, and we have lost our sense of what is fair and what is not," Fries said. "I'm not sure how long it will take to turn that around."
Kleinfeld said such theories were far- fetched. He believes the remedy for corruption lies in tighter controls.
The scandal has clearly taken some of the shine off Kleinfeld's reputation as a management wunderkind. Police raided his office in November as a part of a sweep of Siemens's facilities. Prosecutors said Kleinfeld was a witness, though not a target, in the investigation.
He says he has no plans to step down: "There is a strong obligation to steer the ship, particularly in tough waters."
Kleinfeld even said he intended to make Siemens a model in corporate ethics in three to five years. "Every challenge has the flip side of opportunity," he said. Someday, he mused, Siemens might even be "a Harvard business case on how you do it right."



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