Kleinfeld and Wolfowitz: felled by endemic inertia

June 2007

by Jon Entine

Scandals are rarely what accusers say they are about - something to keep in mind when assessing the alleged misdeeds of Klaus Kleinfeld of Siemens and the World Bank's Paul Wolfowitz. These two "crises", which have pitted bureaucratic Europe against Anglo-American executive styles, illustrate what can happen when entrenched soldiers of the status quo throw ethical stink bombs at executives as a cover for their own crass power plays.

In the case of Wolfowitz, let's be clear: he is not the smoothest executive. He bred enemies, and even the smartest boss will not survive indefinitely if he cannot master the art of inclusive management.

But Wolfowitz's role at the World Bank was doomed from the start. He was a "change agent" and a threat to the European mentality of never rocking the boat - even if in this case, the poorer countries in the world suffer for it.

The World Bank establishment was in attack mode since the day Wolfowitz arrived from his controversial stint in the Bush administration. He ruffled feathers, cutting the bank's staff out of some meetings and bringing in new advisors.

He got only grudging support for his signature campaign against corruption in the developing world, which was wildly popular among Africans and a challenge to the bank's "let's throw money at the problem" approach.

The opening for his critics came when, two years after the event, Wolfowitz began to be attacked for supposedly having gifted a $60,000 raise to his girlfriend, a senior communications officer at the bank before he arrived.

To head off allegations of impropriety, Wolfowitz had asked the bank's ethics committee to excuse him from decisions regarding her career progress and pay, but was ordered to handle it himself. He transferred his friend, in line for a huge pay raise at the bank, to a dead end job at the State Department at a commensurate salary.

The ethics committee reviewed and accepted the proposed transfer. And now Wolfowitz is cast as a miscreant?

This case is not about ethics or squandering precious bank resources. According to one study, the World Bank wasted $300 million last year alone. It's about leadership and reform, and that's scary - and easily scuttled when the messenger is unaccustomed to the niceties of the establishment.

Reform reluctance

That brings us to the Klaus Kleinfeld case, which has parallels with l'affaire Wolfowitz.

Kleinfeld, who cut his executive teeth in the US, spent two years shifting up the financial performance of Siemens, the sprawling $114 billion German conglomerate. He was transforming Siemens into the current generation's General Electric when he was forced to take the fall for a bribery scheme that happened on his predecessor's watch.

As with Wolfowitz, the old guard grumbled that Kleinfeld was too demanding. "The fact is Kleinfeld has done nothing wrong," says Ben Uglow, a Morgan Stanley analyst. Under Kleinfeld's leadership Siemens' share price increased 50%, with the company meeting the ambitious two-year financial targets Kleinfeld had set for it.

But as in the case of Wolfowitz, he was seen as "too American" by those who believe the myth of innate European moral superiority. Kleinfeld's coup was engineered by board members Josef Ackermann, the head of Deutsche Bank, who himself went to court last year over dodgy dealings, and Gerhard Cromme, former head of ThyssenKrupp.

They view themselves as guardians of Germany Inc, with its brand of screw-the-shareholders-and-keep-the-workers-contented capitalism common throughout the laggardly economies of western Europe. They forged an alliance with the powerful IG Metall union that resented Kleinfeld's embrace of globalisation and his selling of underperforming divisions, GE-style.

The fact that he was applauded by his customers and shareholders meant little to those who caricatured him as just another heartless Anglo-American executive. Kleinfeld was in the process of blazing new industrial trails in Europe and was well on his way to creating thousands of new jobs.

In the end, even the usually clueless European press turned on Ackermann and Cromme, having grasped that, although reform can be messy, organisations need a vision to remain accountable to key stakeholders.

But the aftershocks are large. No European executive for a generation is likely to push through the kind of management reforms that much of Europe so desperately needs.

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