Siemens: Just 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 Germany, 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 just 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 US$800m—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 anti-
corruption 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 $lbn contract to produce identity cards—just 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 firm. The company's tribulations really
began in the early 2000s when prosecutors in Germany and the US first started to
investigate bribery allegations at the company. The firm 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 Pierer, 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 projects 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 jobs 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 B a victimless crime—if a crime at all. Furthermore, it did not exactly
help that the German corporate tax code only made bribery technically illegal in the late
1990s. Until then, bribes paid in foreign countries were even tax deductible and were
declared under the notorious label 'useful expenses' (in German: niitzliche
Aufwendungen (NA)).

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 just 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 €2m bonus for the head of the works council,
provision of prostitutes and mistresses to members of the council, and shopping trips to
Paris 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, Peter 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
US$800 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 Loscher, 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 to change the long-
standing culture within the company. As 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...