Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Siemens Board Engineered the Digital Industrial Transformation
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- Lucas: Most people still think of Siemens as the company that builds trains, power turbines, and hospital MRI machines. And that's accurate — they do all of that. But over the past decade, the Siemens board has quietly turned it into one of the world's largest industrial software companies. Luna: Software? As in, actual code they sell? Or software that just runs inside the hardware? Lucas: Both, but the big bet is on the software that runs factories. Think of it this way: Siemens now has a digital twin platform called Xcelerator — it's basically a simulation environment where you can build a virtual version of a factory, test production changes, train AI models, and then deploy them to the real plant. They bought Mentor Graphics for $4.5 billion in 2016 and Varian Medical Systems for $16 billion in 2020. Those aren't hardware plays; they're software and data. Luna: So the board approved those acquisitions. But what's the strategic logic for a 175-year-old industrial giant to pivot into software? Lucas: The logic is margin expansion and recurring revenue. Siemens's traditional power-generation business — gas turbines, steam turbines — has operating margins around 10 to 12 percent. Digital industries software? That runs closer to 20 to 25 percent. And software is less cyclical than selling power plants. The board under chairman Jim Hagemann Snabe — who was previously co ceo of SAP — pushed hard for this pivot. Snabe joined the supervisory board in 2013 and became chairman in 2018. His entire career has been enterprise software. Luna: So the board composition itself changed. It wasn't just strategy — the people on the board shifted to reflect where they wanted to go. Lucas: Exactly. That's the key structural point. In 2013, Siemens's supervisory board was dominated by German industrialists, trade union representatives, and a few academics. By 2018, Snabe had recruited board members like Michael Sen — who came from the energy industry but also led Siemens's own restructuring — and more recently, software and finance executives from outside Germany. The board now has stronger digital and international experience. And that mattered when they made the decision to spin off Siemens Energy in 2020. Luna: Spin-off is a big word. Why did they do it, and how did the board handle it? Lucas: The spin-off of Siemens Energy — which includes the gas and power business plus the wind turbine division Gamesa — was part of the broader Vision 2020 restructuring announced by then ceo Joe Kaeser. The board's logic was that the energy business was capital-intensive, had lower growth, and faced massive disruption from renewables. Meanwhile, the digital industries and smart infrastructure businesses were growing faster. By separating them, Siemens could unlock value for shareholders and let each business pursue its own strategy. The board approved a structure where Siemens initially retained a minority stake — around 35 percent — but has since reduced that to under 20 percent. Luna: But they didn't spin off Healthineers the same way. They IPO'd it but kept majority control. Lucas: Right. That's a deliberate distinction. Siemens Healthineers, the medical technology arm, went public in 2017. But the board chose to retain a 75 percent stake. Why? Because Healthineers is a high-growth, high-margin business that benefits from being part of the Siemens ecosystem — shared R&D, global sales channels, and the digital platform. The board saw it as a crown jewel, not a non-core asset. And they've been right: Healthineers' market cap has roughly doubled since the IPO. Luna: So the board made a nuanced decision — spin off energy, keep health care. That's not a one-size-fits-all approach. Lucas: It's not. And it required the board to really understand the different competitive dynamics. The energy business competes against GE and Vestas in a commodity-like market. Healthineers competes against GE Healthcare and Philips in a market where innovation and regulatory expertise create durable moats. The board's willingness to treat each unit differently — rather than just slashing costs everywhere — is a sign of good governance. But it also created tension. Luna: Tension between whom? Lucas: Between the German unions on the board and the shareholder representatives. Under German codetermination law, half of Siemens's supervisory board is elected by employees. The union reps were naturally worried about job cuts and the loss of industrial heritage. The spin-off of energy meant moving thousands of jobs into a separate company. The board had to negotiate a 'master agreement' that protected employment levels and site commitments for several years. Snabe and Kaeser spent months in closed-door sessions with union leaders like Birgit Steinborn to get the deal done. Luna: That's a radically different dynamic from a US board, where shareholder primacy is the default and unions have far less formal power. Lucas: It's night and day. And I think this is one of the most interesting lessons from Siemens. The board had to balance long-term strategic transformation with near-term social obligations. They couldn't just say 'maximize shareholder value' and fire everyone. They had to build a consensus. And the result is a slower, more deliberate process — but arguably more sustainable. The energy spin-off took over three years from initial discussion to completion. Luna: Let's talk about the digital twin bet. How did the board evaluate that? It's a very different risk profile. Lucas: The digital twin platform — now called Xcelerator — was initially an internal project. Siemens started building it in the early 2010s, and the board under Kaeser approved significant R&D funding. But the real test came when CEO Roland Busch, who took over in 2021, proposed making Xcelerator an open platform that third-party developers could build on. That meant Siemens would cannibalize some of its own proprietary software sales. The board had to decide: do we protect our existing high-margin software licenses, or go for platform scale? Luna: They chose platform scale. Was that a board-driven decision or management-driven? Lucas: It was a board-backed management decision. Snabe's experience at SAP was crucial here. SAP had gone through a similar transition with its HANA platform, moving from on-premise software to cloud-based subscriptions. Snabe understood that the risk of not opening the platform was greater than the risk of opening it. The board gave Busch the green light in 2022, and since then Xcelerator has grown to over 1 million users and 150-plus partner applications. But the revenue contribution is still small — maybe 2 to 3 percent of total sales. Luna: So the board is making a long-term bet that might not pay off for a decade. That requires patience, especially from institutional investors. Lucas: And that's where board communication to shareholders matters. Siemens's board has been very deliberate about investor relations. They hold regular capital markets days focused on digital industries. They've set specific targets: 8 to 10 percent revenue growth in digital business, 20 to 25 percent software margins. And they've linked executive compensation to those metrics. If the board didn't credibly explain the strategy, activist investors would have pushed for a breakup years ago. Luna: It's interesting that activists never really went after Siemens the way they went after GE or ABB. Why not? Lucas: I think three reasons. First, Siemens's share price, while not stellar, was never distressed enough to make a proxy fight worthwhile. Second, the board preemptively did what activists would have demanded — they spun off energy, sold non-core assets like Siemens Building Technologies, and returned capital through buybacks. Third, the German governance structure makes hostile takeovers very difficult. The employee board members and the foundation that holds a large stake — the Siemens family trust — act as a natural defense. Luna: But that same structure can lead to complacency. Has the board been bold enough? Lucas: That's the open question. On one hand, they've made decisive moves: the spin-off, the acquisitions, the platform bet. On the other hand, Siemens still derives the majority of its revenue from hardware — trains, building automation, industrial drives. The digital transformation is real, but it's incremental. Competitors like Schneider Electric have been more aggressive in pivoting the entire portfolio toward software and services. Some analysts argue Siemens should have bought PTC or Ansys years ago. Luna: And the current CEO, Roland Busch, came from within the company. He's a Siemens lifer. Does the board need more outside perspective? Lucas: That's the tension. Snabe himself is an outsider — Danish, from SAP. And the CFO, Ralf Thomas, has a finance background. But the operating management team is mostly homegrown. The board has added more international members — including former Alibaba executive Michael Evans and former McKinsey partner Rima Qureshi. But the pace of change is still measured in years, not quarters. That might be exactly right for a company of this scale, or it might be too slow. Luna: You know, listening to this, I realize how much of Siemens's transformation is about board culture, not just board decisions. They had to change the DNA. Lucas: Absolutely. And this is where I think the Siemens case offers a broader lesson for legacy companies. You can't just announce a digital strategy and expect it to happen. You need board members who have lived through digital transitions themselves. Snabe bringing SAP's cloud experience, Qureshi bringing telecom and software — those aren't just resume fillers. They change the questions that get asked in the boardroom. Instead of 'What's the ROI on this software investment?' the question becomes 'How fast can we scale the platform, and what's the path to network effects?' That's a fundamentally different conversation. Luna: And the union reps have to buy into that conversation too. That's a hard sell. Lucas: It really is. But Siemens has actually turned that into a competitive advantage in some ways. Because the board includes employee representatives, the workforce trusts the transformation more than they would at a company where the board is all shareholders. When the board approved the spin-off, they also negotiated a 'future agreement' that guaranteed no forced layoffs at the digital industries unit until 2025. That gave employees the security to embrace change rather than resist it. Luna: It is fascinating how a structure that looks clunky on paper — 50 percent union board seats — can actually enable faster transformation when handled well. Lucas: I think that's the single biggest takeaway from Siemens. Governance is not a one-size-fits-all formula. The German codetermination model creates friction, but it also creates buy-in. The Siemens board spent a decade shifting from being a guardian of industrial heritage to being a catalyst for digital reinvention. And they did it without destroying the company's culture or its balance sheet. That's rare. Luna: And the question going forward is whether they can keep that momentum as the industrial world moves further into AI and autonomous factories. Lucas: Right. Siemens is now betting big on generative AI for design and simulation. They've partnered with Microsoft to integrate ChatGPT into their engineering tools. That's another board-level bet — one that requires significant investment with uncertain near-term returns. But if the board has learned anything from the past decade, it's that waiting too long is riskier than moving early. Luna: I have to say, these deep dives into specific boardrooms really shift how I think about corporate strategy. It's not just about the CEO's vision — it's about the group of people who say yes or no. Lucas: And that's exactly why we do these conversations. It's easy to focus on the flashy CEO story, but the board sets the guardrails and the pace. If these discussions have helped you think more clearly about governance, or given you a framework for your own work, that's why we keep making them — ad-free, without sponsors, without any noise. Luna: Yeah, we deliberately keep this show independent. No ads, no product placements. Just the conversation. And if that model works for you, the simplest way to support it is at buy me a coffee dot com slash fexingo. It's a small gesture, but it keeps the server running and lets us spend time digging into these stories rather than chasing sponsorship. Lucas: Exactly. No pressure, no pitch. Just an open door. Now, back to Siemens: I think the ultimate test for the board will come in the next downturn. Every industrial company faces a cyclical slowdown at some point. When revenue drops, will the board protect the digital investments, or will they cut them to protect the dividend? That's when we'll know if the transformation is real. Luna: That's a good note to end on. The board's true conviction shows in how they allocate capital during hard times, not just good ones. Lucas: Right. And we'll be watching. Thanks for listening.