Global Insight Perspective | |
Significance | Allegations related to the operation of a multi-million-euro slush fund have forced Siemens’ chief executive to stand down. |
Implications | Although criminal prosecutions would inevitably follow if the company is found to have operated slush funds, the hierarchy of the personnel involved will determine how the company is affected. |
Outlook | Although a guilty verdict could threaten Siemens’ survival, political manoeuvres will largely see it through the debacle. |
The chief executive of Siemens, Klaus Kleinfeld, has resigned as concerns mount over the implications of an ongoing investigation into a corruption scandal at Europe's largest engineering company. Siemens admitted yesterday that the U.S. Security and Exchange Commission (SEC) and the U.S. Department of Justice have launched a formal investigation into allegations of slush funds in the company and possible criminal violations of U.S. law. Siemens also confirmed that a U.S.-based shareholder has also filed a lawsuit against current and former Siemens executives for complicity in the scandal, which emerged in November 2006.
Kleinfeld, whose contract runs until 30 September 2007, quit yesterday in what the United Kingdom’s Times newspaper called a "boardroom coup". Despite announcing an encouraging 36% rise in first-quarter profits to 1.3 billion euro (US$1.77 billion), the Times said Kleinfeld was forced out to ease the relationship between Siemens and the SEC. Commenting on his resignation, Kleinfeld said the company needed strong leadership to wade through its current problems. “In these times, the company needs to retain clarity about its leadership," he said, adding that, "The company must remain effective”. Apart from Kleinfeld, Heinrich von Pierer, chairman of Siemens supervisory board, also quit yesterday. Von Pierer was chief executive of Siemens at the time the alleged corruption occurred during the 1990s. Siemens is accused of operating a slush fund at that time in order to channel bribes totalling 426 million euro to foreign clients.
Outlook and Implications
Scandal Dents Reputation: The ongoing turbulence in the Germany-based conglomerate has dented the company's reputation and threatened to derail some of its strategic plans. Although the company has moved to distance itself from the allegations and hired the law firm Debevoise & Plimpton to conduct an investigation into various payments, several managers have already been arrested in Germany. Earlier in the year, it emerged that the take-off of the Nokia-Siemens joint venture had been delayed as the two parties worked out how to proceed. While that joint venture has now taken off, concerns remain about the culpability of Siemens executives in the corruption scandal.
Could a Takeover Happen?: The biggest concern for Siemens investors is to what extent the investigation will unsettle the company. An unfavourable outcome would weaken the company further, making it more vulnerable to a takeover. The company's telecoms unit has already suffered adversely with both the mobile handset divisions and the network infrastructure divisions offloaded to reduce losses. Siemens has been put on the global radar because of its global acquisitions, particularly in the United States. While a guilty verdict would increase the likelihood of a takeover, political manoeuvres could see the company through the debacle. The company may, however, be forced to offload some of its U.S.-based assets to pacify US financial authorities (see World: 15 March 2007: Nokia Siemens Networks Scheduled to Start In Apriland 19 June 2006: Nokia, Siemens in Multi-Billion-Dollar Networks Unit Merger).