Bribery scandal

Overview

The report will analyze the case study and discuss the bribery scandal at Siemens AG. The author of the case study paints a picture of a successful and arguably dominant multi-national firm, with a reputation for a war chest of competencies and innovative products. The obvious question, then, is why would a firm with this resume and list of global achievements become involved with corruption and criminal behavior?

Therefore, the case study raised questions such as the accountability of senior managers to the rampant corruption occurring in global divisions.

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Summary

On November 15, 2006, 30 offices and private homes were raided by 200 police officers, tax inspectors, and prosecutors in Munch and other cities in Germany to investigate suspected bribery, embezzlement of company funds, and tax evasion. Five Siemens employees were taken into custody in connection with the case. Swiss prosecutors were also involved in the raids because they had an independent investigation on three people connected to Siemens, which launched in 2005.

As a result, there was €420M of questionable payments made over a sevenyear period from 1999 to 2006. Official Siemens records showed the payments as having gone to external consultants. It was determined, however, that the funds were actually paid to foreign purchasing officials and that the expenditures coincided with the procurement of “fixed-line line telecommunications business in various international markets," including Italy, Puerto Rico, Greece, and the United States. Siemens acknowledged that certain company employees were engaged in fraud, and the damage to the company could be around €10-30M.

Because of the fraud Siemen’s was burdened with an additional €168M in income tax charges since 1999. Their net profit was restated from €3. 106B to €3. 033B. By the spring of 2007, two former Siemens managers were convicted of embezzlement of company funds (€6M) for the purpose of bribing foreign officials to win a natural-gas turbine contract. The employees argued that their actions did not violate any laws, resulted in no personal gain, and were taken solely for the purpose of improving Siemens’ positioning.

They argued that they worked only to secure a lucrative deal in which the payments were required by Enel management as part of the standard bid process. In fact, Siemens AG argued that the court order requiring forfeiture of earnings from the contract, prior to 2002 when the German government instituted a law prohibiting bribes to private officials abroad, specifically, had no basis in law. Analysis It took approximately 200 government officials, made up of police officers, tax inspectors, and prosecutors to indite five Siemens employees.

The result was that the company was fined €30M, which was approximately 7% of the total €420M in bribes Siemens paid out. Combined, Siemens lost a total of €450M in 2006. Therefore, the company had to restate their net profits for 2006 from €3. 106B to €3. 033B. The adjustment was a mere 1. 4% of their total net profits in 2006. Two Siemens employees gave out bribes worth €6M in order to win contracts. The punishment for these briberies was a fine of €44M; however, the contract awarded to Siemens was worth €450M.

Therefore, the company’s gain was a profit of €406M. The penalties Siemens paid were roughly 10% of the overall profit made from the contract. So was it worth it for Siemens to engage in criminal behavior? The punishment they received of paying fines varying up to 10 percent were only a drop in the bucket compared to the profits they gained. So from the viewpoint of a Siemens employee who is willing to break the law in order to gain large profits, it was definitely worth it.

As a matter of fact, if a company anticipates the percentage of penalties that will be applied for breaking the law, they could actually build that figure into their contract award fee and then move on with the business as usual. Furthermore, in addition to the financial repercussions Siemens experienced, the case study also mentioned damages to their reputation. In the end, however, Siemens’ growing profits did not reveal any decreases due to a damaged reputation. By 2011, Siemens ended up making more money than they had in the last five years, since 2007. From 1999 to 2006, their combined net income was €26. 3B (over seven years), and from 2011 to 2007, their combined net income was €31. 95B (over five years).

Discussion questions

1. Is unethical behavior the cost of doing business? What exactly is the role of Senior Managers?
2. Was Siemens penalized enough? Should fines be used as a deterrent to bribery? Are these the effects of the absence of adequate laws or weak enforcement practices?
3. Relativism vs. Normativism (Co-Determination Law). Relativism is the idea that ethics and morals are based on the context of a situation; the people involved, and their beliefs.
4. Normativism is the idea of universal law based on what is good for everyone alike. So in this situation, would it be more appropriate to view Siemens’ actions in the context that they were simply trying to make profits? Conversely, would it be more appropriate to view the situation as what might be good for one company is not good for others, creating an unfair playing field? Would you apply relativism or Normativism to this case study when examining the Co-Determination Law?
5. Can you discuss in your own words, what is the difference between lobbying and bribery?

Recommendations

1. Executive Ethics Program – Mandate that anyone equal to or above a director level to undergo a specialized business ethics and regulations program for executives. We should hold the government responsible to provide this training. The program would be taught by people who enforce the law, such as litigation lawyers and prosecutors. Training the people in the company at the level where the bribes derive from is much more appropriate than mandating a company-wide training where only lower level employees will end up receiving this training.
2. Levy Stricter Fines – Any company caught giving bribes for any reason will not be allowed to keep the profits they made as a result from the contracts won. The fines the company will owe to the government will be the equivalent to the gains received or the potential value of the contract being awarded. If the company is found guilty, they must walk away from the contract, allowing other companies that did not break the law to rebid on the contract.
3. Two Years of Probation – companies that break the law will not be allowed to bid on any contracts in the industry in which the contract existed, i. . a contract with an Energy Company would prevent further bids on any contracts in the energy industry for two years.

Lessons Learned

A strong ethical culture is critical for effective corporate governance. Merely publicizing the need for integrity won’t bring it about. Senior executives need to know what is going on throughout the organization. Strong internal control is more important in a widely dispersed and decentralized company. A focus on “making the numbers” will never be successful in the long run.

Questions still needing to be answered:

1. How acceptable are bribes and kickbacks in industrialized countries?
2. Who will go to jail, and how much will the financial settlements cost Siemens?
3. What will be the effect of the scandal on Siemens’s strategic plans to acquire/dispose of business units?
4. Where were the internal and external auditors?
5. Can an outsider like new CEO Loscher really change an entrenched corporate culture?

References

1. Deresky, Helen. (2011). International Management: Managing Across Borders and Cultures (7th Edition ed. ). Upper Saddle River: Prentice Hall.

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