Siemens Toes the U.S. Line.

On Oct. 1, 2000, Siemens adopted U.S. GAAP accounting in order to prepare for listing its shares on the New York Stock Exchange. The listing was partly motivated by a desire to use its shares as an acquisition currency in the U.S. and partly by consideration of market access and liquidity. Siemens' shares began trading on the Big Board in the form of ADRs on March 12, 2001.

Founded a century and a half ago, Siemens Aktiengsellschaft has long maintained a position as one of the world's leading electrical engineering and electronics companies. The firm employs more than 460,000 people worldwide, 80,000 in the U.S. alone, For the fiscal year ending in 2000, Siemens' worldwide sales were approximately $74 billion -- 22 percent of that in the U.S.

Financial Executive spoke recently with Siemens' EVP and CFO Heinz-Joachim Neuburger to gain perspective on Siemens' thinking and international plans.

Neubuerger, 48, is an FEI member who earned his MBA from Insead in Fontainebleau, near Paris. He joined J.P. Morgan and spent the 1980s as a banker in the U.S., Germany and Japan. In 1989, he joined Siemens, where his first assignment was to build an investor relations function. He took over the treasury in 1993, became the CFO of Siemens' operations in India in 1996, returned to Germany in late 1997 and was appointed to the management board. In February 1998, he became CFO and a member of the executive committee.

Q. What went into Siemens' decision in October 2000 to adopt U.S. GAAP?

U.S. GAAP was required in order to list Siemens' shares in the U.S. Also, U.S. GAAP is better at reflecting the true economic developments of a business. It's very simple, relative to German GAAP. German GAAP used to be driven very much by tax considerations and [as such] did not reflect necessarily the economic developments of a business.

Q. On Siemens' decision to list in the U.S. and accept GAAP, was it at all controversial within the company?

No, there was never an issue. It was a matter of wanting to be listed in the U.S., and the platform for that was to use U.S. GAAP as an accounting standard. I think what others [companies] may have done -- though we deliberately did not -- is continue to run the organization on the back of German GAAP or the International Accounting Standards (IAS) and then centrally convert to U.S. GAAP numbers. We deliberately went for a bottom-up introduction of U.S. GAAP, and that's why the transition took two and a half years from start to finish.

Siemens now lives and breathes the U.S. GAAP air, though, on a local basis, we still have to comply with local regulations. In shareholder meetings, the only set of accounts of actual relevance and the subject of the debate are the consolidated accounts. To not do it this way would have introduced quite some complexities in a far-flung organization like ours. It's much more consistent to run everything under one set of rules.

Q. Moving from German to U.S. GAAP -- from the perspective of mindset and cultural values -- what sorts of changes and adjustments were necessary?

Due to obvious differences under the accounting rules, when we converted from German GAAP to U.S. GAAP, we trained more than 15,000 people throughout our organization. For instance, in German GAAP, the required accounting for large-scale long-term projects is on a completed contract basis; for U.S. GAAP, it's percentage of completion. This is a completely different approach, and it requires a completely different methodology to monitor the progress of a project.

For hedge accounting, pension accounting, valuation of inventories and receivables or securities, there are lots of differences. It's not that the differences are bad. I think U.S. GAAP requires a better presentation of facts on the back of economic reality, but as your rulebook gets more comprehensive and complex, you run into problems finding a sufficient number of qualified people who can properly utilize the rulebook.

Training goes up dramatically, not only with corporations, but with auditing firms globally. The U.S. represents close to 25 percent of Siemens' business -- but that means that we do 75 percent of our business volume elsewhere, [often] where people are not CPAs. Therefore training has to take place and -- as far as my organization is concerned -- continues to take place. But I think one has to be very careful that in the pursuit of intellectual purity of the rules not to neglect the fact that the rules have to be applied by people who may not be as deeply into the matter as an academic might hope. What I'm talking about here are purely practical matters.

Q. Do you believe there's a need for one global accounting or reporting system?

Clearly, it would be helpful to have one, and the initiatives are in place to achieve it. I think whether and when we achieve it is a different point. What we have to keep in mind is that global accounting standards are necessary and appropriate for globally operating companies. However, we can't ignore the fact that the various countries around the world have their national rulebooks, and even a globally operating company has to comply with them. So we will always have this dual setup of reporting to shareholders of a globally operating company -- global numbers according to a quasi-global standard -- while still having to satisfy local filing requirements.

Q. There's talk about the Anglo-American corporate governance model presenting a challenge to the Continental European models. What is globalization of capital markets doing to corporate governance -- how does it change?

Things do evolve. I think what you are referring to, seen from today's perspective, is reflecting a cliche -- at least for Germany. This point is very clear: Germany is, and always has been, an exporting country, and [as such has] always sought international business. It's much more global in its business setup, with both major and mid-size companies very well represented in the global market.

Germany tends to be much more willing than other Continental countries to adopt global trends and doesn't have a problem simply because the trend comes from the Anglo-Saxon world. They may debate and reflect on the appropriateness of a standard -- and I think it's good that this is done, because not everything coming out of the Anglo-Saxon world may be necessarily good -- and then they'll decide on the basis of what is best to do.

Q. Corporate governance in the U.S. is driven by shareholders, while Germany stresses different priorities, where the stakeholder model seems favored. As shareholders gain more power, what issues does that raise? And when referring to Germany's "shareholder culture," how does that affect Siemens?

I think that "shareholder culture" in Germany means the percentage of shares owned by retail investors. With respect to corporate governance and the corporation, shareholders are increasingly interested in this topic -- and may even take more interest in the company than shareholders in the U.S., where the proxy system lets shareholders avoid physical presence at shareholder meetings. In Germany, 10, 12, 13 thousand people show up for meetings, and I haven't heard yet that shareholder meetings in the U.S. are Webcasted -- but in Germany they are.

There are many facets where German shareholders are taken into account and are involved more than in the U.S. I'm not saying what is good or bad, just that there is a difference, and the U.S. standard may not necessarily be the only appropriate one.

On the question of stakeholder versus shareholder, annual reports of U.S. corporations may not talk about stakeholders, but they touch on all the facets beyond the shareholder. [Beginning with] the way they present results: they start out with what's of interest to the shareholder, but they get to what's important for the employees, for the communities and so on. Perhaps it's more openly debated in Continental Europe, but in the U.S., stakeholder aspects are very well taken into account.

Q. A key feature of the German financial model is the role of banks. What's happening with relationships between German companies and banks? Siemens chose listing on the NYSE for reasons involving capital access and market liquidity. One could say there are clear alternatives to banks for German companies, whereas 20 years ago there were no clear alternatives.

First, a look at why banks have been so much involved in German corporate life. There was no pool of savings available after World War II.

With the formation of the Federal Republic, everyone started off essentially with 20 marks -- 10 dollars -- because savings had been wiped out. It was the second time in this century that German savings had been wiped out; prior to that was the hyperinflation of the 1920s.

It probably wasn't a deliberate intention of banks to go after corporations, but it was the way the postwar reconstruction of Germany had been funded. Also, the pool of savings of insurance companies was wiped out, and so the natural suppliers of equity were just not available. The U.S., the United Kingdom and many other European countries have never had this experience. So, they [the banks] got involved through the lending side, as the only source to get the money circulating in the economy.

Now, 56 years after the end of WWII, things are naturally evolving and changing. Whenever they have an equity stake in a company, banks now look at [such things as] the market value of that stake, the return and the requirements of bank regulators, and decide whether it makes sense to hold on to the stake. It's a logical sort of behavior you see evolving, driven by economic considerations, and this is more than acceptable. It's a business-minded, logical development.

Q. What do you think financial executives here and in Europe ought to be thinking of that perhaps hasn't gotten the prominence or attention it deserves?

We touched earlier on global accounting standards. Probably in [both the U.S. and] Europe, there may be slightly different ideas on what the global accounting standard should be. I'd ask the SEC or FASB: Would they allow non-U.S. participants in the development of global accounting standards, for instance, to force the SEC and FASB to change the way they look at stock options? Is there the political will and interest in the U.S. for such a global acounting standard?

Q. The FASB wanted to account for stock options as a compensation expense...

I know, but the point is, there was political resistance. So do we have politically motivated global accounting standards, or do we have rational accounting standards which stand up to intellectual scrutiny?

Q. Do you believe there's a point at which accounting standards will founder on politics?

I'm a bit afraid of recent comments on what should be disclosed in terms of business contacts with countries the U.S. considers to be "non-friendly." I'm not commenting on whether it's good or wrong; I'm just saying that we have to be careful that the desire for global accounting rules doesn't get hijacked for political purposes. We've got to be careful that we stick to what accounting rules and SEC rules are all about -- to which we all subscribe. We have to be careful that we don't change this flavor, because that could throw back the initiative for driving for global accounting standards.

Going back to the stock options issue, if the non-U.S. body of thought would strongly advocate that stock options are an expense, what would the SEC and FASB do? Would they follow suit and say, "Yes you are right"? Or would they basically feel and be politically pushed to resist any such move? It's going to be interesting to watch.

Gregory Millman is a New Jesey-based freelance writer and frequent contributor to Financial Executive.