Roland Dürre
Thursday May 22nd, 2008

corruption, monoculture, multiplicity, shareholder value

Siemens AG is currently often in the media, mostly negatively, in particular as regards the Siemens corruption scandal. This saddens me, since Siemens was my first employer and moulded my views.

5 years ago, with Marc Borner – a philosophy student from Darmstadt – I produced a lecture about corruption with the title “Das Käufliche des Unkäuflichen” for a seminar at the Wolfgang-Goethe-University and repeated it at various Universities and meetings. I still get reactions to it, so I will be happy to repeat it where there is interest.

Briefly, the (reasoned and substantiated) message was:

  • Corruption has existed as long as mankind.
  • So corruption can be regarded as normal.
  • Under exceptional circumstances corruption can even be ethical or even necessary.
  • But since corruption generally damages society it should be combated and limited as far as possible.
  • Corruption in many countries, including Germany, significantly exceeds what is acceptable.
  • It may be that we have gradually got used to it.
  • “Training” in corruption starts in childhood and continues in social systems and at work (see my posting “target-setting” – Zielvereinbarungen, if you understand German).

Enough for now about corruption:

When I started at Siemens in 1976, all new employees were greeted in the fine canteen in Hofmannstrasse in Munich by a real live director. His talk covered the social balance of Siemens AG and then described the Siemens corporate strategy in detail.

I summarise his talk:

“Siemens has 25 different divisions. Most make a profit, as one would hope. Two or three have crises. That is inevitable. These divisions will be sanitised as quickly as possible so that they are profitable within a couple of years. It is an illusion to think that all can always make profit. Siemens very rarely gives up a business area.”

“Modern” managers would probably dismiss this as an antiquated principle. But I believe it is a modern and wise company strategy, which has proved right in recent decades too, giving intelligent diversification coupled with synergy.

In 1976 synergy was not a dirty word. It really happened in Siemens. It was not always easy and friendly, but generally worked well. Personally, I know of Siemens products that were particularly good due to influences coming from different divisions.

Siemens was jokingly referred to as “a bank with associated electric business”. Financial health, customer utility, business respectability, solid, sensible cost planning, stability and long-term thinking were epithets associated with Siemens.

Nobody at Siemens then talked about Shareholder Value. Good results were expected. Good return on investment was the natural result of good engineering and a solid centrally integrated sales force. The company profited from a healthy value system. Siemens had a few weaknesses, but prospered while other electro-firms (AEG, Grundig, and Telefunken) failed.

What went wrong?

My explanation is quite simple. Siemens like many other European companies fell into the “Shareholder Value” trap. After more than a century, Siemens’ own successful strategy was sacrificed to the international analysts. Widespread dubious ideas were thoughtlessly adopted and became the new management principles. The following two were particularly damaging:

  • A multinational concern does well only when it is number 1 or 2 in the world
  • Corporate “styling” by merger or takeover or by selling parts is a good way to solve problems

“Number 1 or 2”

The belief that a major concern must be Number 1 or 2 gives me toothache. Perhaps there are special cases where this makes sense (e.g. Intel processor chips, or Microsoft operating systems), but I have doubts there too in the long term.

In business history one sees that the number 1 often goes downhill or even disappears completely. And there are many examples of companies ranked 3 to 10 in the world that constantly earn very well. Particularly in Germany there are firms whose good work (and luck as the founders willingly admit) made them number 1 in specialised areas. But when they go onto the stock market, the problems start. BMW is now finding out how hard life is as number 1. (Comment from the translator: I thought GM and Toyota were top).

I fear that the new Siemens strategy of concentrating exclusively on three mega trends is very damaging. The utopian aim to be number 1 or 2 in the world will fail. A multi-culture of 25 divisions with separate business areas seems to me a better form for a long term functioning company, than 3 mono-cultures that must always be number 1 or 2 worldwide.

“Merging and divesting”

I need not write much about mergers. The literature shows that most mergers fail. The desired positive effects very rarely happen. Siemens-Nixdorf, BMW and Daimler are recent German examples. Compaq, HP and DEC also bear this out. The hope is that 1 + 1 will give more than 2, but often 0·5 or less, results. Regarding sell-off, in Germany one thinks of BenQ, Fujitsu-Siemens, Infineon, Quimonda (all dubious Siemens spin-offs), and (soon to come) NSC.

Uncritical foolish adoption of the above two beliefs has damaged Siemens AG more than the currently well publicised corruption. Corruption is one of the moral problems of our time, but should not be overrated. Siemens was perhaps recently a bit more corrupt than other firms, but I do not really believe it. Probably Siemens just hid things less cleverly, (which could be taken as a sign of positive culture).

What could have been done better?

It is easy to criticise. Effective advice is much harder, as I know from my own experiences as a businessman. I believe that lasting success in business only comes when three main requirements are satisfied:

  • Costs must be controlled!
  • Know-how – the best thing that a company has – must be protected!
  • The firm must continuously renew itself, and stay young!

Here some clarification of these three requirements:

“Costs must be controlled”

Clear control of all costs and economical operating are the first prerequisites for lasting success. This is particularly important while building new business. This used to be a strength of Siemens. Recently it went missing. I cannot really judge whether it was clever to shower Ronaldo and Real Madrid with money, in order to sell mobile telephones in South America. But I am allowed to register my scepticism.

“Protect Know-How”

In my time at Siemens, I was always impressed by its universal know-how. The joke “If only Siemens knew what Siemens knows” was absolutely justified. Regarding IT, I have recounted something about it in my posting “InterFace Stories”. Particularly technology firms live mainly from their know-how. To throw this away is the cardinal sin. I have personally experienced monstrous demolition of know-how in Germany, by Siemens and other firms.

“Stay young!”

This is probably the biggest and hardest demand on “old” companies! Keeping young is many-faceted. Company and working culture belong to it, as do the mental states of young and old employees, and simply the average age of the workers.

It is not easy in an aging society to find enough young people to reduce the average age of a firm. But we need them. They know life and the market. They bring dynamism. They are energetic and want to work in a collaborative environment. They bring a fresh wind to the firm. (Comment from the translator: Roland is trying to get better jobs for his 7 children. He has contributed to keeping Germany young)!

An average age of e.g. 46 (I know of a concrete case) is simply too high for an IT firm or department. As growth has its limits, older employees, who cannot all go into management, must be fitted into suitable alternative employment. Early retirement schemes are not the answer. We need the seniors. Perhaps the seniors must be ready to switch to new (worse paid) activities. This conflicts with the traditional rules of the job market, so new thinking and modest demands are needed.

We seniors must stay on the ball. Certainly we have many qualities that we can use constructively. But that will only function when we welcome change. Our children take things for granted that we do not fully understand. I know IT managers and businessmen, who did not know what a blog or podcast was, when I tried to get them to read my blog. And what that funny youtube or a twitter is good for, they don’t know either. This is not a joke. It is bitter reality.

We seniors and our younger colleagues together must see to it that the firm stays young!

Summary

The current decline of European technology concerns is not caused by corruption however objectionable that is.

Shallow American management slogans have been imported to Germany without due consideration, and healthy multi-cultures replaced by mono-cultures. In the business playpen, directors have played company-monopoly with gusto, busily buying and selling, merging and divesting. Megalomania and presumed omnipotence were their companions. Everything was judged to be successful and the rewards of success were quickly paid out by the players to themselves.

In “Germany Inc.”, the good old German company virtues have been forgotten. The challenges of change have been misunderstood or ignored. Real reform has not happened.

The various themes of the abandoned Siemens divisions were not bad. The main weakness was physical and psychological aging in the company. This was treated with the wrong medicine. Mega trends and dreams of world market leadership are useless. Only bold striving for change can help. Sadly, for some technologies in Germany it is already too late.

RMD

1 Kommentar zu “corruption, monoculture, multiplicity, shareholder value”

  1. Chris Wood (Tuesday May 27th, 2008)

    Here I disagree with Roland’s main point.
    Siemens traditionally was the company for things electric in Germany.
    Management, development, and production were largely in Germany
    Export mattered, but sales in Germany were the basis.

    A few years ago, it was realised that Siemens was not keeping pace in growth and profitability with successful competitors. This was particularly painful regarding a Finnish manufacturer of rubber boots (Nokia) that became world leader in mobile telephones. But Siemens fell behind in other areas too (e.g. computers).
    Shareholder value is really important. The shareholders own the company. They can get rid of directors and managers. They can use this power to force new strategies. Most shares are held by funds, life-insurance companies, etc, rather than a few rich old people, so a lot of people depend on them to maintain the value of their life savings. Fortunately, those managing the shares have been becoming increasingly professional. They keep better control of directors, which is why company boards started talking a lot about shareholder value.
    Roland mentions Microsoft and Intel as examples of firms that have world domination. There are various others that have generated great shareholder value recently by specialisation and by being clearly number 1 or 2 in the world in their fields. Google, EBay, Amazon, AOL, Vodaphone. Perhaps Airbus, Boeing, MacDonald’s and Coca-Cola are other examples. But BMW is not: Various car manufacturers are of similar size (and deliver similar products).
    Earlier Siemens had many areas of activity and tried to keep all profitable. This strategy has the danger that the directors concentrate their energies on the less successful areas, resulting in general mediocrity, rather than any real success. It is sad especially for older workers when their divisions suddenly go downhill, but is this worse than pervading under-achievement going on for decades, which is something like my experience of Siemens (1977 to 2002)?

    Globalisation has been going on since the Roman Empire, if not sooner. The British Empire also intensified this. There has been a further surge in the last decade. This seems to have been good for the majority of people in the world, but there have been big differences from one country to another. The main effect has been to help some relatively poor countries to catch up, particularly China and India, but also some other countries including East Europe. Another effect has been to enlarge the gap between richer and less rich in wealthy countries.
    (It has always surprised me to what small extent socialists concern themselves with poor foreigners. Socialists tend to hold the moral high ground nationally, but their international attitudes often show that this is expediency rather than ethic).
    (It remains to be seen whether globalisation is really good, or is hurrying the world towards the destruction of civilisation and much of nature).

    Under this pressure, Siemens has started a very bold strategy change. This has become particularly evident since the von Pierer days. I believe this change is right, but only time will tell. Perhaps things will still go wrong, even if the right decision was made with the available information. Siemens has decided to become really multinational. It has not got the strength to be in the forefront internationally with everything electric. No one company could do this. So Siemens is winding down everything else, in favour of three areas, power generation, electric transport, and medical. I know too little to judge whether three is a good number or whether they are the right three. I can imagine Siemens eventually concentrating on just one. Power generation and electric transport look good with increasing oil prices. New methods of power generation are vital world wide, whether nuclear fusion or solar or others. Electric transport will remain important even if clean liquid fuel can be manufactured. Medical machines are a growth area because of aging populations. Hopefully the world population will follow the aging trend of Europe. (The alternative is either early death for most people or continued population explosion leading to early death for all). These three areas also have in common that they are little involved with individuals as customers. It seems that Siemens sales force is better equipped to sell to big organisations.

    In fact Siemens has separated itself from business areas before. When Infineon (computer chips) was split off, it was said to be because the volatility of this business area was damaging for Siemens shares. I could not believe this. Surely there is nothing better for working in a boom-bust area than having a big stable organisation as back-up? So Infineon would lose value by splitting off. I believe the real reason for splitting was that Siemens was (again) getting too big for the capabilities of its management. Epcos (passive electronic parts) was a similar case a little earlier. Fujitsu was originally Siemens-Japan. English-Electric was originally Siemens-England (it was confiscated in World War 1).

    One important reason for globalising is to take on clever young ambitious people who are not overpaid. Unless a world crisis develops, it is better to employ them mostly in their own countries. Germany has neglected education for decades, particularly regarding young children. For various reasons, few young Germans want to study science and engineering. Of course youth is not everything, There was an interesting short scientific article in Süddeutsche Zeitung (23.05.2008), explaining that old people have a different intelligence from the young, (not necessarily weaker). It seems that a mixture of ages can work well.

    Of course it is sad if jobs and competence are lost in these splits. This has happened particularly in recent splits, such as the bungled BenQ affair. I myself was pushed into slightly early retirement due to the poor Siemens results in computers and telephones, coupled with the strange German employment laws.
    There are certainly cases where synergy benefits (working together) are more important than the difficulties of running different businesses at the same time.
    Of course there are other routes to success than the one Siemens has now chosen. Many small German firms are doing very well at present.
    I see great dangers that the world is heading for a general disaster anyway, due to population explosion, with dwindling resources and a climate catastrophe. Subject to the need to get support from ignorant people, the politicians generally react wrongly or too slowly. (Perhaps the only major exception to this is the way China has limited its population). Since I do not see how I can do much about this, I just hope that the abyss will be avoided.
    Meanwhile, I shall keep my Siemens shares.

    Finally a few words about corruption; giving bribes can be moral in special circumstances, but corruption (by definition) cannot be. Bribery within a country has been generally prohibited for ages. USA prohibited bribery abroad in about 1972. This was a fine thing. Of course it damages humanity to encourage corruption abroad. I remember getting certain moral views from American films such as “On the Waterfront” (“Faust in Nacken”), or “Grapes of Wrath”. USA used to spread moral attitudes, (despite intense racism). We can hope that they return to this task, rather than trying to spread religious and political fundamentalism. Germany took 25 years to adopt the same laudable ruling. Siemens has taken a few years to catch up with the German government, but things are getting better. The corruption scandal hardly seems to have affected Siemens shares. The recent plunge was due to other factors.

    Chris Wood

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