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Faced with steering the global conglomerate through a major bribery scandal, Kaeser was forced to take "extremely unpopular actions."
Lori Calabro, CFO.com | US
June 1, 2007
It's hard to imagine a CFO in a tougher job right now than Joe Kaeser. Just over a year into his position at $107.4 billion Siemens A.G., the 49-year-old finds himself confronted with a bribery scandal, uncovered last fall, that has shaken the German electronics company—and Germany itself. So far, some $571 million in possible bribes have been disclosed, but Siemens's own internal review warns of "a significant increase" in that amount. Meanwhile, the Securities and Exchange Commission has launched a formal investigation into the matter; ditto the Department of Justice. Casualties include both the chairman of the supervisory board, Heinrich von Pierer, who resigned in April, and CEO Klaus Kleinfeld, whose contract was not renewed. (Siemens named a new CEO Peter Loescher, current president of Global Human Health at Merck & Co., after the interview was conducted. Loescher takes over July 1.)
Even as Kaeser seems like the proverbial last man standing, it should be noted that the scandal has had little impact on Siemens's financials. The business has responded well to a restructuring tagged "Fit 4 More," and the stock has soared more than 50 percent since the program was launched two years ago. Still, even Kaeser admits that Siemens is facing a time of "unprecedented" crisis. And he believes part of his responsibility is to remain visible so "people can see there is someone here to lead the company through hell or high water."
In the second quarter, all core divisions either met or exceeded margin targets — targets that had been set just two years ago. What was the key decision that allowed that to happen?
Everything started with the Fit 4 More program in 2005. We knew all along that this company needed transformation to just take it to the next level ... And if you asked me what the key element was, it clearly has been the leadership of the CEO [Klaus Kleinfeld]. Because he said, "Look, this is what our targets are, and I stand for them and together with my management team and everyone else, we’re going to make it happen."
What was the biggest hurdle you faced?
From the stakeholder perspective, there were a whole bunch of extremely unpopular actions that had to be taken...[including] the strategic reorientation of one of the [foundations] of the company, the communications business. That certainly caused a huge ripple and caused a lot of questions over whether this new course would not cut at the root of the company. People needed to be reassured and reoriented.
In announcing targets for the next three years, you were adamant about your own commitment. How you can be so sure "Fit for 2010" will stay on course given that a new CEO will soon be named?
The major reason I was so adamant [is]that the market needs confidence. The market hates uncertainty. And the Fit 4 More would never have been possible to achieve if we hadn't had the leadership of Klaus Kleinfeld in the beginning. But Fit for 2010 is different ... and the market needs to understand that this is not only related to the leadership of the CEO. [This is about] cultural change in the last two years [that will] carry us forward to achieve those goals no matter who is going to be the new CEO. [Moreover] someone needs to take the helm now and say, look, no matter who is going to come in, I stand for achieving those goals. I have felt compelled to take on that role.
But typically when a new CEO comes in, he or she has their own ideas and their new agendas.
Whoever the new CEO is, if that CEO is wise, which we believe he or she will be, then that CEO will first try to understand the company. That may take maybe 6 months, maybe 12 months. It could very well be that in the next 9 to 16 months there is not going to be a huge impact of a new CEO. So that means the company is running well based on the commitment of the 2010 program. And if and when the new CEO then puts his or her mark, well, it can only be better.
How distracting have the current controversies been for you?
Let’s face it, the company has several [issues] to manage. One, of course, is the business itself. We believe we are doing a decent job, and the markets have confirmed that ... The other piece is our compliance challenge, which will take a lot of time. We will get to the bottom of everything and clean it up. And last but not least, we've had this ripple on the personnel front. But you just have to take it, go through it and execute well, and emerge even stronger as a company. That's our mantra. And we're not going to be distracted by anything. This is a big company. It's also a very broad, broadly based management team, which is able to execute on matters and also take the challenges as they come.
There is a disconnect, though, between how shareholders view you and the public perception. How much responsibility do you, as CFO, take for fixing the company's public image?
We believe the best answer is to stick to the facts, get to the bottom of the compliance matters, and cooperate with the SEC and the DoJ as [best] we can. Then, as we remediate matters and at the same time improve our business, the reputation of the company will come back.
Is there a financial penalty for reputational damage?
The bookings have been strong. Fiscal Q2 [orders] were $23 billion, almost 10 percent above the same quarter a year ago ... So we cannot see any financial impact at this point. And as far as any potential fines or charges or whatever, it would be pure speculation at this point to talk about numbers.
In response to the scandal, you have been overhauling your compliance system. How?
Basically, everything started November 15, when we had the raid of the German prosecutors. All of a sudden, we were confronted with that matter.... [In response,] we put together a task force—called the 20F Task Force—which had subteams on a global scale to make sure we got all the evidence [necessary] ... You have to personally lead such a task force to make sure that everyone can see that we’re 100 percent committed to [getting to the bottom of it].
How sure are you that all conduits for potential bribery payments have been closed?
There's a whole set of actions we had to take immediately [to fix] where the company was not compliant ... [For example,] we had some 5,000 decentralized accounts. We centralized all the payment systems worldwide, made sure that every transaction goes through one system [and] that there is always a liability booked before a payment is made ... There are a whole bunch of other actions that we reported in our 6K filing ... [But] those conduits have definitely been closed.
Under Sarbanes-Oxley, companies are mandated to test internal controls. Will that become routine at German companies?
We've been listed on the NYSE since 2001, so we are well aware of 302, 404, and 906. As a matter of fact, we actually did the Sarbanes-Oxley 404 testimony one year earlier than requested by the SEC. What we learned, unfortunately, was ... [that despite] a fairly comprehensive information-control system by documentation, enforcement has been the weak link. That's what we need to fundamentally improve.
How have you improved enforcement?
We significantly stepped up the internal-audit department... and [developed] a very well-structured compliance project. It has four modules: investigation, remediation, training, and internal and external communication ... We are very confident that this will eventually become the benchmark for how to manage compliance in a big, complex company.
So, some good will come out of this?
I'm a firm believer that there will be a lot of good coming out of it, because after you reach the bottom of matters, you emerge stronger and with a very effective, state-of-the-art financial-control system.
Do you have any advice for other CFOs who may face a similar gap?
My advice to other CFOs, especially of big companies that are highly diversified, is to have a very centralized financial-control [system].... You cannot do too many financial audits. You have to have very active enforcement in your regions and in your groups, otherwise you run the risk of pursuing almost perfect documentation but not getting it enforced in your divisions or regions.
Critics contend that part of the problem with Siemens is its massive size. Do you agree?
One should not use complexity as an excuse for not [having] effective processes and financial controls. You have to apply very strong processes and discipline, and make sure that there is an active dialogue between corporate and the divisions. Make sure...executives know at any given point what their responsibilities are and that all your people are trained time and again. It would be very unfortunate if someone said it was just too complex or too big.
Is it going to help matters that you are streamlining the company into three different areas/businesses?
It does because it gives the company more focus. The more you streamline, the less complex you are. [Still] one should not feel compelled to use complexity as an excuse. It just needs to be dealt with. Either you reduce the complexity or your increase your control.
Are there any benefits to your size? There has been speculation that a private equity buyer might make a play for Siemens now. But aren't you too big for that?
That would be pure speculation. What we have achieved in the last two years was a significant increase in our share price from the high 50’s up to the low 90’s [euros]. Could it have been better? Maybe, but it's been quite an achievement. And we achieved it by focusing and making good on what we promised ... [Besides] there is only one way to prevent yourself from being taken over, no matter whether it's private equity or anyone else, and that is that you be the best owner of your business. We have said we want to be in businesses where we are extremely strong, number one or number two; where we do have good access to intellectual property; and where we do have unique sales channels. That’s what we continue to do. And that’s what we believe will be the most effective answer to any rumors on takeover or some sort of — let's say — active shareholder participation.
In May, you marked your one-year anniversary as CFO. What have you learned?
As you can imagine, I have learned a lot, factually as well as how far you can push the envelope with motivation and dedication ... [But] I can tell you it has been exciting and if I were asked again whether or not to take that job knowing [what I know now about] those 12 months, I would say I'd be happy to. Because this is the company you want to be with. It's got so much potential and it's got so many great people here and this is just what it is.