Last Updated 07 Jul 2020

Case Analysis: the Bribery Scandal at Siemens AG

Category Bribery, Contract, Siemens
Essay type Analysis
Words 1683 (6 pages)
Views 561

The Siemens bribery scandal brought to light a strategic dilemma facing multi-national firms attempting to gain a competitive edge by operating abroad; specifically, how can they balance adherence to their own ethical and legal standards with the customs required to do business efficiently, or perhaps at all, in foreign markets? Germany’s Co-Determination law has since drawn intense criticism as hampering competitiveness and creating untenable situations for management, rife with conflict-of-interest issues, not only because of Siemens, but also because of the number of other German-based companies accused of bribing labor union representatives.

The forced resignation of CEO, Klaus Kleinfeld, despite the resulting success during his tenure, illustrates the predicament international managers face with regard to conflicting operational methods, and leads us to larger questions about accountability within an organization. As the case study author states, the Siemens scandal is representative of what many firms believe is the inevitable “ethical cost of intense competition in global markets”, particularly emerging markets, where payments for contracts are described as common place and perhaps even required. ?Perhaps the most glaringly problematic observation remains that the Siemens AG top management claims that they failed to notice rampant, and arguably conspicuous embezzlement leading to lucrative foreign contracts.

Are there flaws in the German System of Corporate Governance? The 2007 scandal resulting in charges against Siemens’ Chief of Information Technology, Johannes Feldmayer, and Chief of Finance, Karl-Hermann Baumann, was rooted in illegal payments designed to work around German corporate governance laws. In this instance, IG Metall complained that Siemens was illegally funding smaller, rival union, AUB, in an attempt to grow and cultivate it as an ally against IG Metall in the bargaining process.

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This scandal marked the beginning of the unearthing of unethical behaviors in other German-based firms that have since lead to criticism that the Co-Determination law is antiquated and hampers competitiveness. The Co-Determination law was designed to provide a mechanism for worker participation in management decision-making via a two-tiered system with a supervisory board having oversight of the management board. Critics, however, argue that the law, in fact, limits the management board’s ability to make strategic decisions due to the control exerted by labor holding 50% of the seats on the supervisory board.

I agree with the author’s statement that this creates, “a suspicious alliance between the management and the labor representatives”. The end result was often agreements made prior to the official meetings to facilitate outcomes favorable to management. Although the law was meant to bring balance to the corporate governance structure, I would argue that the potential for corruption of the labor representatives, or on the other end of the spectrum, obstruction of the management board, has a destabilizing effect likely to manifest in questionable and dysfunctional partnerships, such as was the case with Siemens.

Another component of the Co-Determination law prevents selection of supervisory board members who are non-German, regardless of the expertise or perspective they could bring to the table. Naturally, the result is a limited, often recurring, and potentially like-minded pool of candidates, which the author points out, may have contributed to the ousting of Kleinfeld. The facts presented indicate that the lion’s share of the bribery scandal took place under Heinrich von Pierer, who was the CEO from 1992 until 2005, and the supervisory board chairman from 2005 to 2007.

Kleinfeld took over in 2005 and, within a period of only two years, had accomplished a remarkable and profitable restructuring, as evidenced by a 26% increase in the stock price. This was not without growing pains, however, as it is speculated that Kleinfeld’s aggressive management style, often described as “American”, did not meet with the approval of the more conservative supervisory board. As such, analysts opined that the bribery scandal was used as an opportunity to remove Kleinfeld, citing the need for a “new beginning”.

I agree that this is likely the case. The growth under Kleinfeld was impressive, particularly given the timeframe. Furthermore, the timing of the actual instances of bribery put them squarely during von Pierer’s tenure as CEO; and he had already stepped down from the supervisory board. Nevertheless, under the power granted by the Co-Determination law, the supervisory board opted to bring in a new CEO, Peter Loescher, indicating, in my opinion, that its issue with Kleinfeld was not performance based.

Why Such Risky Business? The history of Siemens AG 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? The author recounts the opinions of analysts who believe the answer is simple; many firms view the types of payments at the heart of the Siemens scandal to be the necessary cost of doing business in the current global environment. At first glance, the facts of this case may seem to support this theory.

There were €420 million of questionable payments made over a seven year period from 1999 to 2006. Official Siemens records showed the payments as having gone to external consultants. It was determined, however, that they were actually paid to foreign purchasing officials and that the expenditures coincided with the procurement of “fixed line telecommunications business in various international markets”, including Italy, Puerto Rico, Greece, and the United States. By March of 2007, two former Siemens managers were convicted of embezzlement of company funds for the purpose of bribing foreign officials.

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.

As previously stated, these events may appear to support the case in favor of questionable payments and loose ethical boundaries as a necessary cost of business. It is my opinion, however, that these events illustrate a flawed management culture and strategy. They are evidence of a system where a focus on true technological innovation has given way to a focus on unfettered expansion, and the unnatural duplication of the monopolistic type control over infrastructure in developing countries that was enjoyed during previous decades in other parts of the now industrialized world.

If Siemens had bolstered their technologically competitive strength, they would not need to rely so heavily on their financial strength to gain entry into markets. Is this the New Cost of Doing Business? The fact that Siemens top management continue to take the official position that, despite the scope, depth, and intricacies of the bribery scandal, they had no knowledge of it remains difficult to explain. Further, they take no responsibility, save acknowledgement that they lacked adequate internal compliance systems.

I find the truthfulness of this position to be of remote possibility due to the conspicuousness and magnitude of the payments, as well as their direct correlation with the securing of highly lucrative contracts. Moreover, the idea that entire sections of Siemens’ managers were of the character that they would be comfortable blatantly committing criminal acts for the sole benefit of their employer, but not themselves, I find to be quite counter-intuitive.

The debate over whether events such as those unearthed at Siemens are part of the usual and customary cost of doing business abroad must be framed in terms of the complete denial of culpability by the top management. A legitimate, above-board expense is accounted for, tracked, and justified; this is the case even when it is outside the norms of the firm’s home country. It is not hidden from shareholders. A buffer of scapegoat-able employees need not lie between it and top management. If a light cannot be readily shown upon it, I believe it is without question, unethical.

Whether or not it is illegal, however, depends upon the laws in the countries the firm is operating in. I could conceive of a situation where a firm could distribute cash “incentive” payments openly, on the books, as well as legally. In addition, firms have other options. They could improve their offerings to increase the competitiveness of the bid, and/or structure them with above-board incentives. They could operate with a clear and unwavering zero-tolerance policy for bribery; recognizing that it will be necessary to educate those conducting bid processes in markets where it is believed to be common to expect questionable payments.

A firm could also exercise patience, and restraint, and be willing to walk away from markets requiring participation in corrupt processes. The Kleinfeld Conclusion. The Siemens AG supervisory board did provide adequate justification for the decision not to renew Kleinfeld’s contract, due to the scandals breaking during his time as CEO; yet, I believe that they were wrong in doing so in light of his track record of impressive and expedient accomplishments. Though his termination clearly pleased the board, unless Mr. Loescher is able to maintain the growth trajectory set by Kleinfeld, I believe his departure will not inspire confidence from management or shareholders. This is of concern because confidence has a direct impact on value, which could make it harder to move beyond the bribery scandal. Was it Worth It? One question still remains: was Siemens really at fault, given the apparent prevalence of these sorts of issues among other German companies; or was their only sin getting caught?

It is my opinion that the magnitude of the “bribing” which took place at Siemens made it highly unlikely that knowledge of it would stay buried. I believe Siemens had to have anticipated this, hence the buffer between top management and the “bribers”. I believe they made a calculated business decision that whatever the consequence may ultimately be, it was a greater benefit to get a foot hold in the infrastructure of those markets. In short, yes, Siemens is to blame, and yes, they are okay with it.

Case Analysis: the Bribery Scandal at Siemens AG essay

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Case Analysis: the Bribery Scandal at Siemens AG. (2017, May 12). Retrieved from

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