Siemens Sues Its Own Managers

The atmosphere in the clubhouse commonly known as Germany Inc. just got a lot less chummy.

In an unprecedented move, the supervisory board of German engineering giant Siemens AG on Tuesday launched plans to sue 11 former management board executives, including former CEOs Heinrich von Pierer and Klaus Kleinfeld, over alleged supervisory failings linked to a $2 billion bribes-for-business scandal.

The board’s decision marks the first time that all members of an executive board are being held personally accountable for alleged financial damages to a German blue-chip company. The development is widely seen as a sign that the traditionally cozy relationship between German supervisory boards and the executive management boards they oversee is breaking down once and for all.

In Germany’s two-tiered management system, shareholders elect the supervisory board. It has the job of appointing and supervising the executive board, which runs the company’s day-to-day business. Typically, though, a retiring CEO is appointed to chair the supervisory board, which often is a paper tiger with little incentive to scrutinize executives.

Siemens’ decision to seek financial damages from former executives is a warning to the rest of German industry that such practices are under threat. The personalities involved make up a veritable A-Team of German management: Siemens’ supervisory board is chaired by Gerhard Cromme, former CEO of German steelmaker ThyssenKrupp, and includes powerful business titans such as Josef Ackermann, the CEO of Deutsche Bank, and Michael Dieckmann, CEO of financial services giant Allianz AG. They were no doubt aware that a decision to go after previous execs Kleinfeld and particularly von Pierer — a former advisor to Chancellor Angela Merkel dubbed “Mr. Industry” by German media — would reverberate far beyond the walls of Siemens’headquarters in Munich.

“This is a paradigm shift in German corporate culture. The cozy times are over,” says Manuel Theisen, a management professor at Munich’s Ludwig Maximilian University and a leading expert on German supervisory boards.

The board’s decision came after the sentencing on Monday of Reinhard Siekaczek, a former midlevel manager in Siemens’ telecommunications business, the first conviction in connection with the bribery scandal, which became public in late 2006 and may reach back to 2000. Siekaczek admitted to overseeing a system in which he diverted company funds into secret bank accounts that were used to pay bribes. The Munich court fined Siekaczek $170,000 and issued a two-year suspended prison sentence. The Munich prosecutor said he hoped Siekaczek’s lenient sentence, offered in exchange for a full confession, would encourage many of the 300 additional suspects under investigation in the case to come clean.

No criminal charges have been filed in connection with the slush-fund scandal against either von Pierer, whose tenure as CEO stretched from 1992 to 2005, or Kleinfeld, who became CEO in 2005 and resigned under pressure in April 2007 as the bribery investigation widened. Both men maintain their innocence. Nevertheless, the supervisory board is seeking compensation for damages to the company, which it claims resulted as a failure of the executives to carry out their oversight responsibilities.

“The company bases its claims on breaches of their organizational and supervisory duties in view of the accusations of illegal business practices and extensive bribery that occurred in the course of international business transactions,” Siemens said in a statement.

Winfried Seibert, von Pierer’s lawyer, said his client “takes note of the supervisory board’s decision with shock and regret and will defend himself” against the allegations. Kleinfeld, who became CEO of U.S. metals group Alcoa Inc. in October 2007, issued a statement suggesting that the whole affair will blow over. “I have great faith in the German judicial system, and that is why I am not concerned about this development,” he said in a statement released by Pittsburgh-based Alcoa.

The decision may be partly a reaction to a wave of public anger over executive excesses in Germany. High management salaries and job cuts have been severely criticized at a time when German companies are earning record profits; there is a widespread sense that workers most often pay the price for the mistakes of senior executives. The outcry is not limited to the unions and leftist parties; even the conservative Christian Democrats are jumping on the bandwagon. A working group of the CDU parliamentary faction has suggested setting strict limits to remunerating executives with stock options, or even banning the practice outright.

Shareholder advocates suggest that the Siemens board may have another motive, too: to build goodwill with the U.S. Securities and Exchange Commission. The SEC is conducting its own investigation into the bribery affair and could slap hefty fines on the company unless Siemens demonstrates that it is taking convincing action to clean up the mess on its own. “The SEC plays a role in this decision in the sense that Siemens wants to show that it is pursuing everyone involved regardless of their past position or reputation,” says Daniela Bergdolt of the German Association for the Protection of Securities Ownership. “They hope that if they show remorse, it will reduce the penalty.” And while it still seems far-fetched to imagine any German business titan seen doing the perp walk like American Bernie Ebbers of WorldCom, for instance, the case could mark a sea change for corporate Germany.