Siemens Goes Mega

Klaus Kleinfeld had a solution to one of the world's pressing problems. For the first time in human history, more people live in cities than in a rural environment. This massive urbanization is taxing public infrastructure, such as roads, railways, health-care systems, power networks and water resources. In the old industrial countries, infrastructure is aging. In the developing world, the infrastructure needed to sustain a modern economy often doesn't exist. A study by Booz Allen Hamilton concludes that from now until 2030, the world will spend $41 trillion just to maintain infrastructure at current levels. Kleinfeld, 49, the CEO of Siemens, which makes everything from power plants and water systems to CT scanners and dishwashers, was determined to be the go-to guy to take care of the planet's fix-it list.

"If you want to label it and call it infrastructure in a broad sense, it's what Siemens is really about," Kleinfeld told TIME earlier this year. "Everybody should have the opportunity to lead a reasonably good life. And if we really, truly believe this, I think we have to act on those types of challenges--water, clean water, as well as a clean environment and energy. Those are massive problems."

But before Kleinfeld got a chance to solve the world's troubles, he couldn't adequately solve one massive problem at Siemens. For months now, prosecutors and securities watchdogs in Europe and the U.S. have been investigating current and former Siemens employees, including some senior executives, on various allegations of corruption and foul play. In November, police raided some 30 Siemens offices--Kleinfeld's among them--confiscating documents and detaining several executives in connection with alleged illegal bribes paid to foreign officials to win telecommunications contracts.

Although Kleinfeld has never been implicated in anything illegal, key directors on the supervisory board that oversees management felt a clean sweep at the top was necessary to restore the company's credibility. Kleinfeld's future took a dismal turn on April 19, when his predecessor and mentor, Heinrich Von Pierer, most recently the chairman of the supervisory board and under whose watch the alleged crimes occurred, resigned under pressure. The board then took off the table discussions to extend Kleinfeld's contract, which is due to expire in September, until it had a better idea of where the investigation was heading. It was a prudent action, but Kleinfeld, disgusted by the lack of confidence, took himself off the table, telling the company he would no longer be available as of Oct. 1. "Every day I have to go out there and put my credibility on the line," he told reporters on April 26. "The team needs to know there is clear leadership. It's not about individuals but whether you have the entire supervisory board united behind you. That was the issue for me."

It's a loss for Siemens--and bitterly ironic in that Kleinfeld had acted boldly not only in responding to the investigation but also in separating Siemens' culture and strategy from that of Von Pierer's. Kleinfeld appointed the law firm Debevoise & Plimpton LLP to do a complete audit of the company, and another heavyweight, Davis Polk & Wardell, as corporate counsel. He named Daniel Noa, a former German prosecutor, as the company's new chief compliance officer (CCO) and hired Michael Hershman, a former U.S. military intelligence officer and one of the founders of anticorruption watchdog Transparency International, as a compliance consultant.

Kleinfeld and Hershman met in early December at the Bayerischer Hof Hotel in Munich, where the consultant sized up the Siemens boss. At one point during dinner, Hershman leaned forward and said, "Don't hire me if you've got a problem, because I'm going to find it, and if I feel misled or hindered, I will leave, and that won't be good for your company." Stirring the ice in his Diet Coke, Kleinfeld coolly replied, "I have nothing to hide."

During the first phase of his tenure, Kleinfeld focused on putting out the fires that were burning up the company's earnings. Despite accruing restructuring charges of $1.2 billion, the company managed acquisitions totaling $8.6 billion. In the past year, profits were up 35%, to $3.96 billion, and sales 16%, to about $117 billion. Investors rewarded Kleinfeld's decisiveness. Siemens shares have risen more than 40% since he took the helm in January 2005.

In repositioning the company as a focused solutions provider, he split with his predecessor and broke the back of the traditional German business culture that ruled Siemens. Von Pierer, CEO from 1992 to 2005, had begun to transform the company from a sprawling bureaucracy that largely lived off fat contracts from Germany's state- owned firms into a global operator. He rationalized Siemens' many disparate businesses into a group of 13--such as automation, power generation, medical technology and telecommunications. By the end of last year, Siemens employed 475,000 people in 190 countries and generated 81% of its sales outside Germany. "He turned Siemens into a proper company," says Michael Hagmann, a London-based analyst with investment bank UBS Ltd. "If you're a purist, you could say he could have done more. But there were a lot of people trying to prevent change."

Von Pierer was ultimately a defender of the old Siemens corporate tradition, however, always trying to balance the interests of shareholders and stakeholders, often at the expense of the former. He believed that synergies among the various divisions justified Siemens' cumbersome structure; well-performing businesses would offset weaknesses in other divisions.

Kleinfeld wants Siemens to go to market as a seamless, flexible provider of infrastructure--from lightbulbs to electrical grids--a program the company calls Siemens One. He points to Qatar, where massive development is under way. A number of firms could supply, say, light rail equipment. But Siemens can build a transportation system and power grid in one contract, optimizing its strengths in each of these segments. "If you put some of these things together, you can really have a competitive advantage," says Ken Cornelius, who heads Siemens One. For a hospital, Siemens can deliver 40% of a total project, from imaging machines to IT systems to power management, with one contract. "We are," Kleinfeld says, "the only company that has that capability. And there are customers, when they build a new hospital, that say, I might only have the chance once in my lifetime and then I want to do the full thing."

Kleinfeld was influenced by his three years in the U.S., which included being in charge of Siemens U.S., a collection of cats and dogs that didn't work well together. There he developed a program to get everyone to play nice with one another. Now, Siemens One is in 40 countries.