Deutsche Telekom CEO Is Forced Out of Office

Deutsche Telekom chief Ron Sommer resigned Tuesday, driven out of one of Germany’s top executive posts by election-year politics and angry shareholders who have watched the stock fall 90% from its peak.

The telecommunications giant’s supervisory board named former Chairman Helmut Sihler interim chief executive. The 72-year-old confirmed that his chief task would be to find a long-term solution to the leadership problem.

Pressure for Sommer’s departure had been mounting for the last week, after Chancellor Gerhard Schroeder’s ill-concealed lobbying for a replacement who could halt the virtual free fall of Germany’s most widely held stock and Europe’s biggest telecommunications network.

But the government’s preferred successor to Sommer, technology and networks chief Gerd Tenzer, failed to win the board’s approval despite leaked reports last weekend that the 58-year-old would take over.

The succession battle could deal another blow to the electoral fortunes of the incumbent chancellor, whose intervention in Telekom’s affairs has neither fulfilled the government’s will nor silenced those who accuse Schroeder of inaction.

The German government is Telekom’s largest shareholder, with a 43% stake, after several share offerings transformed the former state-owned post and communications monopoly into what was at its prime the most highly capitalized company in the country.

Telekom was worth more than $300 billion in 2000, but massive spending to acquire U.S. mobile provider VoiceStream and third-generation mobile phone licenses has pushed the company so deeply into debt--$67 billion--that the bills now outweigh net worth.

Telekom shares have plummeted from their March 2000 zenith of 103.50 euros to as low as 8.14 euros last month.

News reports of Tenzer’s impending appointment further upset investors, who saw him as a status quo candidate unlikely to impose the necessary belt tightening.

The stock lost 15% of its value Monday, after rallying in previous days on rumors that Sommer’s head was about to roll. Telekom shares rose 6% after Sommer’s departure to close Tuesday on the Frankfurt DAX stock exchange at 10.93 euros. One euro is worth about $1.

Sihler, who made his name in the corporate world as head of the Henkel chemical empire, told journalists he would emphasize continuity and maintain Sommer’s strategy to make Telekom a global player, saying the company already is “on a good track.”

The public squabble about whether to fire Sommer made it clear that the German government continues to wield considerable influence--labor reform champions call it meddling--in the management of privatized companies in which the state still holds a sizable number of shares.

That interventionist tradition and the prominent voice accorded labor in German companies have perpetuated what analysts call “Germany Inc.,” or excessive state control over what should be the private sector.

At Telekom, as at all firms, unions and employee representatives occupy at least half of the supervisory board positions and thus are able to block efficiency moves when they threaten jobs.

Sommer, 52, said he decided to step down to put a stop to the damaging public debate over Telekom’s future.

“If a CEO in such a situation lacks the full confidence of the board, resignation is the only possible step,” a calm and businesslike Sommer told a news conference at Telekom headquarters in Bonn. “With this decision, I hope to make a contribution to avoiding further damage to the company.”

Sommer will continue to draw his reported 2.5-million-euro annual salary until his contract expires in 2005, but will depart without any additional severance, Finance Minister Hans Eichel said.

Politics so clearly intruded into the Telekom boardroom that the company had a hard time finding someone to replace Sommer who could win endorsement from the labor representatives on the board. Economics Minister Werner Mueller, Volkswagen board Chairman Ferdinand Piech and Klaus Mangold of DaimlerChrysler all turned down the job, German newspapers have reported.

Eichel, whose ministry is responsible for overseeing the government’s stock portfolio, at a late-night news conference here denied that the closely contested federal election campaign had anything to do with the push for Sommer’s ouster. Telekom needed a new direction after “the dramatic fall in share value and a very bad credit rating,” Eichel said.

Schroeder and his labor-friendly Social Democrats are trailing conservative challenger Edmund Stoiber in the polls ahead of the Sept. 22 vote, mainly because of the incumbent chancellor’s failure to deliver on a 1998 campaign promise to drastically reduce double-digit unemployment.

More than 4 million Germans are out of work--about the same as four years ago when Schroeder said the number would fall to 3.5 million once his tax and pension reforms were enacted.

Stoiber and his conservative colleagues have lambasted Schroeder and Eichel for doing nothing to halt the losses suffered by 3 million Telekom shareholders, many of them small and first-time investors drawn to the telecom giant by a glitzy initial public offering choreographed by Sommer in 1996.

Until the former state post monopoly was privatized, few Germans risked their savings in the stock market, preferring instead to earn meager but secure returns on passbook savings.

The fate of Telekom shareholders and those holding other tech stocks caught in a global slide has dealt a blow to efforts to make Germans more responsible for planning for their retirement.

Telekom last year posted its first annual loss since privatization--3.5 billion euros in red ink. The tumble accelerated in the first quarter of this year, with a 1.8-billion-euro loss. Sommer still insisted the company would post at least 10% growth this year and slash the debt by 20% by the end of 2003.