HBR.ORG November 2012 reprinT R1211A

How I Did It The CEO of On Using a Scandal To Drive Change The Idea: With Siemens reeling amid a global bribery investigation, its board hired Peter Löscher as the first outsider to become the company’s top leader. Here’s how he quickly moved to rebuild the organization. by Peter Löscher

This article is licensed to you, Tony Ocampo of Cinepolis, for your personal use through 03/16/17. Further posting, copying or distribution is not permitted. Copyright 2012 Harvard Business Publishing. All rights reserved. This article is licensed to you, Tony Ocampo of Cinepolis, for your personal use through 03/16/17. Further posting, copying or distribution is not permitted. Copyright 2012 Harvard Business Publishing. All rights reserved. For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org Peter Löscher is the president How I Did It… and CEO of Siemens AG. The CEO of Siemens On Using a Scandal To Drive Change

by Peter Löscher ate on a Friday night in May 2007, I and said, “Yeah, we’ll do it.” We didn’t dis- flew from my home in New Jersey cuss any contractual terms—there was im- L to a secret meeting being held the mediate trust. But it was still complicated: next morning at a hotel near the Frankfurt Before Siemens could hire me, it needed an Airport. For the past year I’d served as the official vote by the board, and it wanted to The Idea president of Merck, but three days earlier be able to announce the decision as soon as I’d received a call from Gerhard Cromme, the vote had been taken. That would leave

edux With Siemens reeling R amid a global bribery the chairman of Siemens. I had never no time for me to tell Dick Clark, my CEO worked at Siemens, and I had never met at Merck. So in order to set the stage, I had er/Laif/

b investigation, its board u H hired Peter Löscher as Gerhard. The company had never hired to talk to Dick and resign without a firm the first outsider to a CEO from outside since its founding, in job offer in hand and without telling him 1847. But it was caught in a bribery scandal, where I was going. It sounded risky, but it become the company’s and the board wanted change. I’d agreed to turned out OK. Two days later Siemens an- ans-Bernhard ans-Bernhard H top leader. Here’s how he meet with the chairman to discuss becom- nounced that I’d been hired. hy: p quickly moved to rebuild ing Siemens’s CEO. I arrived at Siemens at a very difficult the organization. Gerhard and I hit it off. We talked for a moment. The company faced allegations of

Photogra couple of hours, and then we shook hands bribery in several countries, and eventually

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The Bribery Scandal Until 1999, paying bribes abroad was legal in . In fact, German corporations could deduct bribes from taxable income.

it paid $1.6 billion in fines. But as I always re- That finally changed under pressure in Greece. German prosecutors followed mind anybody who is listening, never miss from the United States, which has had up, descending on Siemens offices around the opportunities that come from a good an anti-foreign-bribery law on the books the country in a mass raid in Novem- crisis—and we certainly didn’t miss ours. since 1977. But Siemens, with its big-ticket ber 2006. The company has since paid The scandal created a sense of urgency infrastructure businesses and global $1.6 billion in fines inG ermany and the without which change would have been footprint, found it hard to break the U.S., and criminal cases against several much more difficult to achieve, regardless habit: Eventually investigations uncovered former Siemens employees are still of who was CEO. Siemens is a very proud bribery schemes meant to help sell power pending. company with a history of innovation and generation equipment in Italy, telecom- The scandal brought unprecedented success. In the absence of a catalyst like munications infrastructure in Nigeria, upheaval to the 165-year-old German this, people would have asked themselves, national identity cards in Argentina, and industrial icon. CEO Klaus Kleinfeld and “Why alter anything?” so on—the company identified a total of board chairman , the Yet Siemens had to change. It’s not so $1.6 billion in what it called “questionable CEO from 1992 to 2005, were forced out much the uniqueness of your strategy that payments” from 2000 to 2006. in 2007 and replaced by outsiders: Ger- matters nowadays—it’s the strength of your All this began to come to light in 2003, hard Cromme, the chairman of Thyssen- execution. How can you adapt continually when auditors at a Liechtenstein bank Krupp, succeeded Pierer, and Merck’s to the changing world we are in right now? noticed suspicious activity in an account president, Peter Löscher, became the CEO. Siemens needed to execute more rapidly, controlled by a Siemens executive based —The Editors and to do that we had to take a hard look at both our organizational structure and whether we had the right people in the right jobs. Within months of my taking over, we replaced about 80% of the top level of ex- ecutives, 70% of the next level down, and 40% of the level below that. I fundamen- tally changed how our managing board made decisions. We also worked to stream- line and simplify our global operating units.

My First 100 Days For me, Siemens had always been an icon. I worked for years at Hoechst, the German pharmaceutical and chemical company, where we watched Siemens closely. When CEO Klaus Kleinfeld after announcing his departure, April 2007 I was at General Electric, in 2004 and 2005, we faced head-to-head competition with Siemens in medical devices. This experi- ence actually turned out to be a big plus Getting to know the company meant Doing this repeatedly gives an ex- for me, because although I was Siemens’s really engaging with people. So I went off tremely good view of what is really hap- 12th chief executive, I was the first one who traveling around the world. I developed a pening. What I learned was that Siemens knew the company not from the inside but daily routine: First I would have breakfast employees were frustrated with bureau- from the outside. with customers. Then morning sessions cracy and wanted more independent deci- Before I arrived at the head- with either individual customers or poli- sion making. At the same time, people felt quarters, people obviously had all kinds ticians. Lunch with young high-potential that the corruption scandal represented a of questions: What will he do? Will he come Siemens employees. After lunch, busi- failure of leadership. They were shocked

with his own team? Will he trust us? So for ness reviews with the local team and then and ashamed, because they are very proud ages Im me, two things were immediately very im- a town hall meeting. Dinner with the top to be part of Siemens. etty portant: getting to know the company and leadership team of the specific location. When it came to changing the company, G hy: working quickly to change how it was orga- After dinner I would fly out and follow ex- I worked with my immediate team. I didn’t p nized. I wanted to use my first 100 days to actly the same routine in another city the want to bring in consultants to tell us what

focus on those goals. next day. to do. The exercise became very painful at Photogra

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the end. Four-fifths of the managing board dal, it was very clear that legal counsel and members had to leave. In Germany compa- compliance had to be at the table and had nies have two boards: One is the supervi- to be somebody from the outside. I was sory board, with 50% employee represen- very pleased when one of my former GE tatives and 50% lenders and shareholders. colleagues, Peter Solmssen, came on board At Siemens, Gerhard Cromme was and is as general counsel. the chairman of this board. The other is Asking longtime employees to step the managing board, made up of top ex- down is never easy. I wanted to have a ecutives, with the CEO as chairman. But transparent process in which we bench- at Siemens the managing board consisted marked each of the positions externally. of two levels as well: some “coaches” and I asked the search firm Egon Zehnder to their direct reports, who operationally led manage this. Many people welcomed the the business as part of committees within process, but it was highly threatening for each Siemens division—miniboards. others. Some of them showed up in my of- At my first managing board meeting, we fice and said, “You know, I’ve been running had blue binders containing all the deci- this business successfully for 20 years. I’m sions that were supposedly before us. But not willing to go through the process.” My Business they had already been made, at all kinds answer was very simple: “Either you go of previous meetings. A managing board through it, or you have to decide for your- Not As should be a decision-making body where self to leave the company.” you say, “OK, these are the two or three By November 2007 the executive level options. Let’s have a robust discussion and just below the managing board was a good Usual then decide.” Instead, the agenda was pre- mix of experienced people who were al- sented as preapproved decisions that the ready running the divisions and people board was being asked to rubber-stamp. who came from below in the organization. Harvard So at the first meeting I said, “Before we By the end of the year the new CEOs two go into all the agenda items, let’s go around levels down had decided on their teams. Business the room and report on how the business Then there were the country organiza- is doing.” The reaction was “Actually, we tions. It was clear to me from the time I’d should invite the operating units to pro- spent competing against Siemens that its Review vide the update.” I said, “Just give me a fla- strong country organizations were one vor of what is really happening right now.” secret to its success. Nevertheless, some But the people on the board were surprised of these organizations had become like and not really prepared to answer those separate companies, with the local teams questions, because they weren’t deeply operating almost independently. For ex- engaged in operations. ample, many years ago Siemens decided We got rid of this two-layer system. For to get out of the mobile-phone handset me it immediately became one business, business. Some of the country organiza- one boss. There were 12 units, and I could tions decided that for them it was a great not afford to have all 12 operating CEOs business, and they’d stay in it. So we found sitting at my table. So we had to decide ourselves with a very eclectic collection of what businesses we were in. Initially we local businesses, and we immediately got came out with an eight-member manag- rid of them. I decided that every business ing board: the heads of three operational needed one person who was accountable units—energy, industry, and health care— for global performance. plus the HR head, the CFO, the new head Together with my new leadership team, of supply chain management and sustain- I also decided to group these country oper- ability, me, and a new position for legal ations into fewer clusters. Siemens is prob- counsel and compliance. Except for the ably the most global industrial company last, all the members came from within the in the world: We operate in 190 countries, hbr.org company. In the wake of the bribery scan- and our only real rivals in terms of reach are The Revival of Smart

This article is licensed to you, Tony Ocampo of Cinepolis, for your personal use through 03/16/17. Further posting, copying or distribution is not permitted. Copyright 2012 Harvard Business Publishing. All rights reserved. 16425_HBR_1third_vert.indd 2 12/3/10 1:16 PM How I Did It Siemens Facts & Financials Founded: 1847 Headquarters: munich Employees: 360,000 business Sectors: Energy, Health care, Coca-Cola, FIFA, and the Catholic Church. efficient and resource-efficient than the Industry, Infrastructure & cities Those 190 countries were grouped into marketplace average, and with which you 70 clusters before I came. We decided to can make a real difference. Siemens had Revenue reorganize them into 20 clusters and cre- never tracked things this way. We hired and Net Income ate a steering group that would meet on Barbara Kux, who was the head of sustain- € in millions 73,515 a quarterly basis. This group consisted of ability at Philips, as the managing board 69,577 70,053 68,978 6,321 2,497 the global CEOs of the divisions, the CEOs member responsible for the portfolio. 64,238 5,886 4,068 4,038 of the 20 clusters, and the managing board That was our first new strategic pillar. members. This is how we run the organiza- The second was that we put the company’s tion. We got rid of all the coordinating struc- focus back on infrastructure. The third is tures in between. Since then the 20 clusters that we are pioneers. Siemens has always have been further condensed into 14. differentiated itself through innovation, and even during the economic crisis we A Green Portfolio significantly increased our R&D spending. These organizational changes had a simple goal: to reduce bureaucracy and make Graphing Customer Orientation Siemens nimbler in a fast-changing world. I also wanted Siemens to be more cus- Nowhere is the world changing faster than tomer-driven. Historically, our customers

in emerging markets. I remember my first had relationships with the country orga- 2007 2008 2009 2010 2011 trip to Shanghai, around 1984. There were nizations, but I added the management Source Siemens hardly any cars. You looked across the river of key accounts to the managing board’s to Pudong and you could see rice fields. I responsibilities. We have around 100 key peo­ple have passed me, and most are near would never have been able to imagine accounts, so each member of the board is me at the top of the distribution—because how different it would become. When you responsible for roughly a dozen companies. everybody knows this matters and that see this with your own eyes, you realize In my first year, I tried to find other names will be up there at the next leader- that mankind radically and consistently ways to emphasize to the entire organiza- ship meeting. With this simple approach underestimates the speed of change. We tion that customers should be our primary we have achieved a much, much stronger will never be able to overestimate it, I think. focus. Once a year, our top 600 or 700 emphasis on customers in the top manage- What we didn’t have with the old Siemens managers gather for a leadership confer- ment echelons. structure was the ability to cope with that ence in Berlin. Before my first one, in 2008, That’s one example of how simple pace. In a slow-moving, relatively constant I collected the Outlook calendars for the things can have a big impact. Another at global environment, we could manage as previous year from all my division CEOs Siemens has been diversity. Never before we had in the past. Not anymore. and board members. Then I mapped how had a woman been on the company’s man- To push forward with appropriate speed much time they had spent with customers aging board. Now we have two. I didn’t after the reorganization, we needed a clear and I ranked them. There was a big debate put them on the board because they were strategy. To a degree we already had one, in my inner circle over whether I should women; I put them on because I was look- introduced by my predecessor—the strat- use names. Some felt we would embarrass ing for top professionals. But it had a big egy of megatrends, in which we organize people, but I decided to put the names on impact, because suddenly women knew our businesses to take advantage of broad the screen anyway. there was no ceiling in the organization. changes occurring in the world: globaliza- The rankings were a classic bell curve, I also made a very simple statement to tion, for one, and the aging population, with most people in the middle. I was the Financial Times in 2008: Our organiza- which calls for a focus on health care and number one, having spent 50% of my time tion is too male, too white, and too German. diagnostics. Those were in place. I added with customers. I said to the people at the That caused an uproar. But if you want to our environmental portfolio, which we leadership conference, “Is this a good sign change a big, complex organization like launched in July 2008. or a bad sign? In my opinion it’s very bad. Siemens, you have to make your agenda I was at GE when it introduced its highly The people who are running the businesses known, and you have to communicate in successful “ecomagination” strategy. So should rank higher on this measure than simple terms. In the beginning it was “Oh, when I arrived at Siemens, I said, “Where’s the CEO.” he is just talking.” I’m not just talking. Now, our environmental portfolio?” An environ- I put the rankings up again in 2009, in when I make a statement, people know I mental portfolio simply showcases those 2010, and in 2011. And now things have will follow through. of your products that are more energy-­ changed. The curve has shifted. Some HBR Reprint R1211A

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