Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Siemens Board Rewired Itself for the Digital Age
Transcript
- Lucas: So let's start with a number that might surprise you. In 2025, Siemens generated more revenue from software and digital services than from its traditional gas turbines. That's a company that famously made its name building locomotives and factory equipment. Luna: That is a pretty radical shift. I mean, Siemens was the poster child for German industrial might — heavy, physical, analog. How did the board navigate that transformation? Lucas: That's exactly what I want to dig into. Because it wasn't just a CEO vision thing. The supervisory board — the German two-tier system, where the board oversees management — had to consciously back a strategy that would shrink huge parts of the legacy business and pour billions into software and data analytics. Luna: And that's not a comfortable position for a board whose job is often to protect the existing business. Lucas: Right. So let's set the scene. In 2014, Siemens was a sprawling conglomerate, touching everything from hearing aids to power plants to trains. Revenue was around 72 billion euros, and the profit margins were decent, but the market was starting to reward companies like Apple and Google that were eating the world with software. Luna: So the board had to decide: do we become a software company that also makes hardware, or do we stay the course and risk being disrupted? Lucas: And that's where the board's role becomes fascinating. In 2014, they appointed Joe Kaeser as CEO, and he came in with a clear thesis: Siemens needed to focus on electrification, automation, and digitalization. But the board didn't just rubber-stamp that — they pushed back, they refined it, and they demanded concrete milestones. Luna: What kind of milestones? Because a board can't just say 'go be digital' — they need to see something measurable. Lucas: Exactly. So Kaeser rolled out the 'Vision 2020' plan, which was essentially a portfolio overhaul. The board approved spinning off or selling a bunch of non-core businesses — think hearing aids, which became a separate listed company, and later the gas and power business, which became Siemens Energy. But the key metric the board focused on was what they called 'digital revenue' — the share of revenue coming from software, data analytics, and connected services. Luna: And did that number actually move? Or was it just a presentation slide? Lucas: Oh, it moved. By 2020, digital revenue was around 15 percent of total sales, and the board had set a target to push that to over 25 percent by 2025. And they actually hit it — the software and digital services business grew at a compound annual growth rate of roughly 12 percent over that period, while the traditional hardware businesses grew at maybe 2 or 3 percent. Luna: So the board basically forced a shift in capital allocation. But that must have created a lot of internal tension, right? You've got engineers who've spent their careers building turbines, and suddenly the company is hiring coders and buying software startups. Lucas: Absolutely. And this is where the board's role in managing culture gets interesting. One of the smartest moves the board supported was the creation of a separate business unit called Digital Industries, which gave the software people their own P&L and a mandate to move fast, independent of the legacy divisions. That shielded them from the bureaucracy that often kills innovation in big companies. Luna: That's a classic 'ambidextrous organization' move — creating a separate unit so you don't contaminate the new with the old. But didn't that also create a two-class system? Like, the software folks got the fancy offices and the big bonuses? Lucas: Potentially, but the board was careful about that. They made sure that leaders from the legacy businesses were rotated into Digital Industries and vice versa. The current CEO, Roland Busch, actually came from the rail division and the energy business — not from software. And that's a deliberate signal that you can be a 'digital leader' without being a Silicon Valley type. Luna: So the board was managing succession with an eye on bridging the old and the new. That's a nice segue into the Healthineers spinoff — which I think is one of the most underrated board decisions of the last decade. Lucas: It really is. In 2018, the board decided to list Siemens Healthineers, the medical technology arm, as a separate company. Siemens kept a majority stake, but the move unlocked value and gave Healthineers the agility to make its own acquisitions — like the 16.4 billion dollar purchase of Varian, the cancer treatment company, in 2021. That deal would have been much harder to execute if Healthineers were still buried inside the parent company. Luna: And that's a board-level decision with massive implications. They had to weigh the synergy arguments against the equity story. And they chose the equity story. Lucas: Right, and the market rewarded it. The spinoff allowed investors to value the healthcare business on its own merits, which were better than the conglomerate as a whole. Since its listing, Healthineers' share price has outperformed the parent by a wide margin. Luna: But let's not forget the other big spinoff — Siemens Energy. That one was messier, wasn't it? Lucas: Yeah, that's the counterpoint. In 2020, the board spun off the gas and power business into Siemens Energy, again keeping a minority stake. But almost immediately, the wind turbine subsidiary, Gamesa, ran into quality problems and cost overruns. By 2023, Siemens Energy required a massive government-backed guarantee just to keep its order book alive. The board had to watch from the sidelines as the stock collapsed. Luna: So the same board that made the smart Healthineers call also made this one that looked really bad for a while. What's the lesson there? Lucas: I think the lesson is that boards have to be willing to take big bets, but they also need to stress-test the downside. In the case of Healthineers, the board had a clear picture of the market and the technology. With Siemens Energy, they may have underestimated the operational complexity of integrating a struggling wind business with a traditional gas turbine business. It's a cautionary tale about how even a disciplined board can get caught out. Luna: And that brings us to the bigger question — how does a board actually decide when to do a spinoff? Is there a checklist or a framework? Lucas: There are several frameworks, but one that I find useful is the 'better off test'. The board asks: is the business unit better off as a standalone company, or is it better off inside the parent? And often the answer isn't obvious. In Siemens' case, the board ran that test for each major division, and they concluded that healthcare and energy both met the threshold — though energy later proved to be borderline. Luna: So it's about portfolio management at the board level, not just growth. And that requires a lot of courage, because you're shrinking the company in the short term. Lucas: Exactly. And that's where the board's long-term mindset comes in. Siemens is a company with a 175-year history, and the board is deeply aware of that legacy. But they also know that staying relevant is the only way to survive another 175 years. They've been willing to make painful cuts and take on debt to fund digital acquisitions like Mentor Graphics and Altair Engineering — the latter for about 10 billion dollars, which closed in 2025. Luna: Altair was a big one. That acquisition really solidified Siemens' position in simulation software. But wasn't there a bit of a culture clash? Altair was a Detroit-based company with a founder-led culture. Lucas: There was definitely some friction, but the board handled it by keeping Altair as a mostly independent unit within Digital Industries, with its own branding and engineering autonomy. They also made sure the founder, James Scapa, stayed on in a leadership role for at least a couple of years to ease the transition. That's a classic approach — don't buy a company just for its technology; you also need to buy the people. Luna: And that's a board decision too, right? The structure of the acquisition and the retention plan. Lucas: Absolutely. The board approved the acquisition, but they also negotiated the retention terms. They had to balance the need for integration — because you don't want a separate fiefdom — with the need to preserve the innovative spark. It's a fine line. Luna: You know, this whole conversation reminds me of something I read about how Siemens uses digital twins — like, they can simulate an entire factory before it's built. Is that part of the digital revenue they're reporting? Lucas: That's a great point. Digital twins are a huge part of their software offering. They have something called the 'Industrial Copilot' — a generative AI tool that helps factory workers troubleshoot equipment. And they've been selling that as a subscription service. So yes, that's exactly the kind of recurring revenue the board wants to grow. Luna: And recurring revenue is the holy grail for investors — it smooths out the cyclicality of hardware sales. The board has essentially been pushing Siemens toward a Netflix-like model for factories. Lucas: That's a good way to put it. But it's a slow burn. You can't flip a switch and turn a 175-year-old industrial giant into a software company. The board has been very patient, and they've communicated that patience to the market. They've said, 'We're not going to hit our margin targets next quarter, but here's the five-year trajectory.' And that's a hard message for a board to deliver, especially when activist investors are circling. Luna: Have there been any activist campaigns against Siemens? Lucas: Not in the way you see at, say, a US company. The German governance structure with co-determination — where workers have seats on the supervisory board — actually provides a layer of protection against quick-hit activists. But that structure also means the board has to balance the interests of shareholders, employees, and other stakeholders. It's a more complex decision-making environment. Luna: So the board's role is as much about managing that stakeholder balance as it is about strategy. And that's something US boards don't always have to deal with. Lucas: Exactly. And that's why I find the Siemens story so instructive. It's a case study in how a board can drive transformation while honoring its broader responsibilities. They're not just maximizing shareholder value — they're thinking about the workforce, the environment, and the long-term viability of a national industrial champion. Luna: And speaking of long-term viability, where do you think Siemens is now? Are they 'there' yet? Lucas: I don't think you ever get 'there' — it's a continuous process. But as of this summer, Siemens has a market cap that's actually higher than its pre-transformation peak, and the digital revenue is growing at double digits. The company is in a much stronger position than it was in 2014. The real test will be the next CEO transition — and how the board handles that will tell us a lot about whether the digital DNA has truly stuck. Luna: That's a good note to end on. Thanks, Lucas — that was a great deep dive. Lucas: Thanks, Luna. And to our listeners — if this conversation made you think differently about how boards really work, maybe it was worth a coffee today. If so, you know where to find us: buy me a coffee dot com slash fexingo. That's the whole ask — just a small gesture that keeps these conversations going, ad-free. But no pressure. Now, next week, we're looking at how the Sony board handled the PlayStation 5 launch. You won't want to miss that.