Siemens needs corporate governance overhaul

Shareholders of the German group gave short shrift to corporate principles when they re-elected Gerhard Cromme as chairman. Rules had to be changed to allow the man who also chairs Thyssen Krupp to run again. But Siemens badly needs fresh faces to face its many challenges.

If everyone had acted by the book, Siemens’ Chairman Gerhard Cromme would soon be enjoying more free time. Internal regulations covering the German group’s supervisory board originally stipulated that its members not be older than 70. Two years ago, that age limit was amended. It now allows Cromme, who will soon celebrate his 70th birthday, to seek another five-year term. His re-election was a mere formality – and it will be a major mistake.

Cromme’s new stint at Siemens is an illustration of bad German corporate governance. Cosy relationships between a few well-connected peers are still at the heart of German capitalism. Weak external supervision allows vanity projects and corporate negligence. And it is a perennial threat to both shareholder wealth and industrial jobs.

Cromme’s performance at Siemens is mixed to say the least. In 2007 he personally enthroned the current CEO, Peter Löscher, who, after a good start, has become a controversial figure. Profitability has taken a beating. Issues with high-speed trains and North Sea wind farms have cost the company hundreds of millions of euros, and tarnished its reputation.

Moreover, in 2011, Cromme backed Löscher’s ill-advised growth strategy, which caused profit to shrink. The CEO waited until late 2012 to launch a cost-cutting programme. A debt-financed 2.9 billion euro share buyback, pursued in the second half of 2012, may have pleased investors but looks inconsistent with the stated growth strategy.

Replacing Löscher prematurely might become necessary. It would be a personal blow for Cromme, who would find it difficult to evaluate the CEO’s performance objectively.

Finally, the last argument against Cromme is his other job as chairman of ThyseenKrupp, where his track record is even worse. Under his watch, the ailing steelmaker has burned billions of euros in America. Cromme’s two chairmanships create serious conflicts of interests. In 2011, for instance, when he needed a new CEO for ThyssenKrupp, he hired a member of Siemens’ executive board. Heinrich Hiesinger. That turned out to be a good choice for Thyssen, and a loss for Siemens.

Real corporate governance works differently. The biggest irony it that Cromme should know that well. From 2001 to 2008, he was the head of the German corporate governance commission – which may explain why the country’s major companies still have much work to do on the matter.

This is a slightly edited version of an article initially  published as a Reuters Breakingviews comment on 22  January 2013.)

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