Reference no: EM13859571

Case Study

Siemens: lust breaking the eleventh commandment?

This case examines the circumstances that led to the highest ever fine paid by a firm in a bribery settlement. It looks closely at accusations of a long-standing, ingrained system of corruption at Germany's biggest conglomerate, the engineering firm Siemens. The case is an illustration of many of the individual and situational factors of ethical decision-making discussed in Chapter 4.

Founded In 1847. Siemens Is not only one of the oldest and largest conglomerates in Ger. many, but counts among the top 30 companies worldwide In the Fortune 500 Index In terms of sales. The engineering giant produces a wide range of goods and services, from light bulbs to power stations, and has a leading position in many of its markets, which include white goods, rail transportation systems. Healthcare technology, IT and financial services, to name lust a few. It is a large, decentralized conglomerate operating in 190 countries globally.
One area where Siemens can claim to be a record holder is rather less prestigious. In December 2008, after a long-running bribery scandal the company settled out of court with the US authorities and was landed with a record fine of US5800m-a figure far in excess of any previous penalty imposed under the US Foreign Corrupt Practices Act. Along with fines levied In Germany of around €600m, this brought the total paid by the company to more than US$1.6bn, roughly 35 times larger than any previous anticorruption settlement. However, including lawyers' and accountants' fees charged to the company during the case, the full cost was ultimately even higher, at some US$2.5bn in total, not counting the various other smaller fines likely to result from Investigations in other countries around the world.
The company had been investigated on multiple counts of bribery, adding up to more than $2.3bn in alleged payments during the 1990s and 2000s. This included allegations of $5m paid to the son of the Bangladeshi prime minister for a mobile phone contract. $22m to Chinese officials for a metro trains deal, and $40m worth of payments in Argentina for a $ 1bn contact to produce identity cards-lust to name a few examples.

The scandal unfolds

The settlement was the final episode of a scandal which had been simmering for more than five years at the troubled engineering Ann. The company's tribulations really began in the early 2000s when prosecutors in Germany and the US Ant started to investigate bribery allegations at the company. The fin and its leadership initially denied any knowledge of the payments. But with more incidents coming to light, the magnitude of the payments becoming ever higher, and trials of former company managers suggesting that bribery was common practice in the firm, this position became increasingly tenuous. As the scandal unfolded, it became clear that this was not simply a case of a few rogue managers acting alone and breaking the company rules to secure lucrative overseas contracts. Corruption looked to be endemic at Siemens, or, as one prosecutor put it, 'bribery was Siemens' business model'.

Facing increasing pressure from within, the CEO and nearly the entire board resigned In 2007, including long-time former CEO and then supervisory board chairman Heinrich von Pieter, a prominent and vocal member of the Christian Democratic Party In Germany. The firm decided to co-operate with the US authorities in its Investigations and initiated an amnesty for any whistleblowers with knowledge of bribery In the company.

The various trials and Investigations brought to the surface a murky picture of the payments made to public officials in a bid to win large overseas contracts for the company. Part of the problem Is that many of Siemens products, such as railway systems, mobile phone networks, or complex hospital equipment, are sold to governments. These protect are often of a very high value and are subject to complex decision-making processes in the respective countries. Moreover, given that many of these projects are located In developing countries with poor governance and a high prevalence of corruption, Siemens managers often found themselves in a competitive market, where other players were apparently willing to bribe, with 'customers' often willing to accept.

According to various witness statements, Siemens employees often simply thought that bribery Is how the game was played and that they had to engage in corruption in order to win business, keep lobs secure, and their company strong. As an organization dominated by employees with an engineering background, these things tended to be perceived as another technical exercise to get the job done, another trick of the trade to move the product. It would appear that corruption at Siemens was seen in rather amoral terms and as a victimless crime-if a crime at all. Furthermore, it did not exactly help that the German corporate tax code only nude bribery technically illegal in the late 199th. Until then, bribes paid in foreign countries were even tax deductible and were declared under the notorious label 'useful expenses'.
Another important factor Is that German multinationals like Siemens are typically very decentralized and compartmentalized. Compared with American or Japanese multinationals which often centralize key functions and use foreign subsidiaries lust for a limited set of tasks, German multinationals tend to leave a lot of autonomy to local executives-the argument being that they usually sell complex technical products with a need for a high level of customer specific local adaptation. The downside from an ethical perspective, however, appeared to be twofold. First, decisions about payments may be taken locally. Without any real oversight or understanding from the headquarters. Second, once the leadership back home does become aware, the decentralized structure can make it difficult to implement effective ethics management across the firm's span of operations. For Siemens, when the first signs of the bribery allegations surfaced in 2005, the then newly appointed CEO announced that fighting corruption would be his top priority. However he was forced to resign within two years because of the ongoing stream of bribery allegations that continued to plague the company.

A particular issue with Siemens also appears to be a strong corporate culture, deeply rooted within the 160 year-old firm, which made It particularly hard to Initiate a major change in values and attitudes within the company. Many Siemens employees had been with the company for all their careers, leading to densely woven webs of contacts, informal relationships, and networks, in which problems like corruption (and its cover-up) can thrive. It is notable that it was only as a result of the crippling scandals engulfing the company that in 2007 Siemens made its first appointment of an outsider as CEO. Moreover, as the trial hearings revealed, the maintenance of corruption on the scale alleged at Siemens actually required a degree of loyalty from employees not always found in large multinationals. One of the more junior level executives in the telecoms section of the firm testified to the court that he was chosen to become the coordinator of the 'useful expenses' payments because his superiors trusted him and because he was a loyal worker who could be relied on not to simply direct some of the bribe money into his own pockets.

Corruption allegations at Volkswagen

The Siemens case occurred at a time when Germany had just gone through a number of corruption scandals, most notably at carmaker Volkswagen. There, the alleged bribery did not occur in bidding for contracts, but In relationships with the works council and trade union members. As with many German companies, works councils are very powerful and need to give their consent to all major strategic decisions of a company. In order to push through some painful cost-cutting measures, VW was alleged to have operated a slush fund to provide all sorts of perks to senior members of the works council. These included an illegal Cm bonus for the head of the works council, provision of prostitutes and mistresses to members of the council, and shopping trips to Pads for their wives.

The parallel with Siemens is that, according to the allegations, these were not one-off acts of corruption by lone individuals, but went on for a considerable length of time and were tolerated at all levels of the organization. At VW, the scandal led to the resignation of the most prominent member of the board, 'icier Hartz, who, as the former head of personnel was found guilty of endorsing the perks-and-prostitutes arrangement.

Siemens introduces anti-corruption initiatives

At Siemens, the corruption scandal has prompted a raft of new Initiatives In the company. After forcing the board and chairman to resign, the new CEO hired an American law firm and spent millions on the internal investigation and co-operated fully with the courts-the only reason why the US fine was not even higher than the USS800 ultimately levied on the firm. The new chairman of the supervisory board, Gerhard Cromme, otherwise known for the latest German corporate governance code, has also implemented new measures to enhance transparency and accountability within the organization. Among other things, Siemens agreed to appoint a former German Finance Minister as an in-house monitor to help ensure that the company remains corruption free.

Although the nature of the final settlement in the US did not actually require the firm to admit to bribery (It was only required to admit to having inadequate controls and keeping improper accounts), the new Siemens leadership has made it clear that the firm needs to change its ways. As the new CEO Peter torches, said: 'We regret what happened in the past but we have learned from it and taken appropriate measures- Siemens is now a stronger company. It will however be difficult in change the long-standing culture within the company. At one insider put it, many in the firm still secretly think that where Siemens went wrong in the scandal was not In Its payment of bribes, but in breaking what Germans colloquially allude to as the 'eleventh commandment': don't get caught.

Questions

1 What are the main individual and situational factors encouraging the alleged bribery at Siemens? Which, in your opinion, are the most important?

2 Explore the corruption scandals in terms of the issue-related factors discussed in Chapter 4, namely moral intensity and moral framing. To what extent did the firms featured experience corruption as a morally intense issue and what impact did the moral framing of the activities involved have on this?

3 Critically evaluate the initiatives Siemens has implemented to address bribery problems across its operations. Are these sufficient or would you suggest further action?

4 Thinking of bribery from the perspective of wider society, do you think that a fine-however high-is an adequate response? What penalties, for instance, could you suggest to foster more ethical values at the company or higher personal integrity on the part of its employees?