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The Bribery Scandal at Siemens AG Case Study

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Updated: May 11th, 2022

Background

Siemens AG is a German company with a long history of success and a good reputation in the technology industry (Ma 2012). It is also one of Europe’s largest technology firms with a revenue base of over $77 billion according to Fernando, Purkayastha, and Bellamkonda (2010, p.2). In addition, the company has over 430,000 employees. However, the reputation that Siemens has built for several years was brought into question in 2006 after being caught engaged in a series of corruption scandals (Biegelman and Biegelman 2010, p.59). In the first incidence, Siemens was caught having bribed foreign officials in a bid to win contracts and create a slush fund (Ma 2012). In another case, Siemens was alleged to have bribed the officials of the labor representatives of the supervisory board in a bid to win their support over the policies that Siemens intended to implement (Brooks and Dunn 2009, p.15). Immediately after the whistle had been blown on the scandal, a team of investigators was appointed which immediately raided Siemens’ offices in Germany and other countries in the world, such as the U.S., Italy Greece, and Switzerland in a bid to unearth the alleged corruption scandal (Neelankavil and Rai 2009, p.56). The raid led to the arrest of five Siemens workers, who were then taken to custody for involving in corruption. The forensic audit conducted on Siemens financial statements found that about €420M payment could not be accounted for, which investigation later revealed that the money had been paid to foreign purchasing officials in different countries such as the U.S., Italy, Greece, and Puete Rico (Phillips and Gully 2011, p.32). It was at the time that Siemens acknowledged that some of its employees were indeed involved in the alleged fraud.

Twomey and Jennings (2010, p.16) reveal that the scandal led to the prosecution of Siemens’ chief executive Kutschenreuter after being found guilty of involvement in the corruption scandal. In this regard, “apart from being placed on probation for two years, he was also fined €160,000 for admitting to cover up the bribes and slush fund payments” (Fronz 2011, p.41). Other officials found guilty of the scandal included Hans-Werner Hartmann, the manager in charge of accounting of the telecommunication department of the company (Lawler 2012, p.92). Apart from being suspended for 18 months, Hartmann was also fined €40,000 according to Lawler (2012, p.92). The report indicates that Siemens used these funds to bribe government supervisory board officials in a bid to win lucrative contracts in Nigeria and Russia as noted by Hoskisson, Hitt, and Ireland (2008, p.17).

Impacts of the scandal

Mele (2009, p.34) reveals that German law prohibits any official or citizen in the country from engaging in a corruption scandal. This is the general law in most countries, Australia being not an exception, according to Schaffer, Agusti, and Earle (2008, p.44). Therefore, it was against the law for Siemens to engage in a corruption scandal a position, which was justified by the jury who handled the case. In this regard, the first immediate impact is that Siemens was fined €30 million for its engagement in the corruption scandal (Guffey and Loewy 2010, p.84). However, this fine can be considered a drop in the ocean because it only accounted for just 7% of the €420 that the company paid out in the form of a bribe (Lasher 2011, p.109). Nonetheless, when the bribe is combined with the fine it paid for the scandal, it totals €450 million, which is significant according to Newswatch Communications Limited (2007, p.15).

Siemens’ engagement in the corruption scandal also scared away investors from the company who were afraid of losing their money because of the scandal (Brand Support Services 2007, p.74). In this regard, Siemens is reported to have lost a majority of its market share in the international business in 2006. Jeffrey (2012, p.83) reveals that the operation of the business was also affected as managers, and some employees were engaged in a court tassel. Firestein (2009, p.65) also indicates that the company’s overall profits also declined significantly in the global market, something that the company attributed to the corruption scandal, which befell the company in 2006 and 2007.

As earlier indicated, Siemens has been one of the most respected technology in the world, the reputation which took it several years to build. However, the unethical behavior of involving in the corruption scandal did ruin this reputation, something that will take the company several years to rebuild, according to Nicholls, Nicholls, and Daniel (2011, p.41). This is because the scandal made customers, investors and other stakeholders lose faith in the company for fear of other unethical acts even if it is not corruption (Jennings 2010, p.56). Siemens has experienced a decline in customer base since the scandal was unearthed probably for fear of the same (OECD 2005, 87). In addition, the scandal has also brought into question the effectiveness of the German Co-determination law after failing to prevent the corruption scandal in Siemens.

Steps were taken by Siemens to prevent such incidents in future

After the discovery of the corruption scandal in Siemens, the company has employed a raft of programs and strategies aimed at preventing such unethical behavior from happening in the company in the future (Schorsch 2009, p.102). Most of these programs are geared towards strengthening compliance controls and its corporate governance structures (Hitt, Ireland, and Hoskisson 2010, p.19). In this regard, Siemens has established its business conduct principles, which states how its employees are supposed to deal with government officials in what it terms “Anti-public corruption compliance” (Loughman and Sibery, 2011, p.38). The company hopes that this guideline will help bar its employees from engaging in corruption in the future as the document defines the periphery of their conduct in dealing with government officials.

The company has also instituted a strong internal control system in which all government contracts are audited both by the internal and external auditors to ensure that no employee or company manager engages in another corruption scandal that might ruin the company’s corporate image (Griffin 2012, p.33). The strong internal controls have indeed proved effective since they have made employees fear when engaging in corruption knowing that their corrupt deals may be discovered by the audit team in a matter of hours or days (Deresky 2011, p.61).

As earlier stated, Siemens also promote good ethical behaviors within the company by teaching its employees and management team of the dangers of engaging in unethical behaviors, such as corruption (Zagaris 2010, p13). At the same time, the company has become very strict in the way it handles unethical behaviors in the company (Stachowicz-Stanusch 2010, p.75). Unlike before when employees could be pardoned for misconduct, the company now punishes any person found engaged in unethical behavior through service termination, to prevent employees and managers from engaging in such acts while still working for the company.

The role of the co-determination law in the bribery scandals

Michel (2007, p.19) argues that the German Codetermination law confers upon workers the right to participate in management decision-making. The law also gives employees the right to be represented on the board of directors (Tarun 2010, p.26). This implies that any supervisory board must have a labor representative. However, following the scandals that have been witnessed in Germany over the past few years, Jennings notes that questions have been raised as to the effectiveness of the Codetermination law (2011, p.9). is so whereas it is meant to protect scandals from happening, it has only been promoting scandals in different companies. This has particularly been witnessed in Siemens and Volkswagen have been faced by a corruption scandal according to De Mestral, Lévesque, and Vesque (2013, p.94).

For instance, in the corruption scandal at Siemens, investigations revealed that the company bribes the labor representatives on the company supervisory board to gain their support in regards to the policies the company wanted to pursue (Twomey and Jennings 2010, p.94). As a result, instead of the labor representatives blowing the whistle over the scandal, they went ahead and concealed the scandal, which was only unearthed after investigation and audit. A similar scenario was also witnessed in Volkswagen when the labor representatives to the supervisory board accepted bribes to allow the company to pursue its policies as noted by Gorton and Schmid (2000, p17). These incidences point at a complete failure of the Codetermination law to fulfill its mandates.

Conclusion

As a result, an international governing body must be formed to regulate the behaviors of global corporations. As for Siemens, the company needs to eradicate corruption and any form of unethical behavior by instituting strong control measures capable of preventing such behaviors in the company, as this is the only way it will win back the confidence of its stakeholders in the market.

References

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Brand Support Services 2007, Brandfaces, Issue 42. Brand Support Services, Oxford.

Brooks, L.J., & Dunn, P 2009, Business & professional ethics: for directors, executives & accountants. Cengage Learning, Marson, OH.

De Mestral, A., Lévesque, C., Vesque, C.L.L. 2013, Improving international investment agreements. Routledge, London.

Deming, S.H 2010, The foreign corrupt practices act and the new international norms. American Bar Association, New York, NY.

Deresky, H 2011, International management: Managing across borders and cultures (7thEdition ed.). Prentice-Hall, Upper Saddle River, NJ.

Fernando, R., Purkayastha, D., & Bellamkonda, B. 2010. The bribery scandal at Siemens AG. IBS Center for Management Research, London.

Firestein, P 2009, The crisis of character: building corporate reputation in the age of skepticism. Sterling Publishing Company, Inc., New York, NY.

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Hoskisson, R.E., Hitt, M.A. & Ireland, R.D 2008, Competing for advantage, Cengage Learning, Mason, OH.

Jeffrey, C 2012, Research on professional responsibility and ethics in accounting. Emerald Group Publishing, Sidney.

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Jennings, M.M 2010, Business: Its legal, ethical, and global environment. Cengage Learning, London.

Lasher, W 2011, Practical financial management (book only). Cengage Learning, Manson, OH.

Lawler, D 2012, Frequently asked questions on anti-bribery and corruption. Upper Saddle River: John Wiley & Sons, NJ.

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Ma, L 2012, Web.

Mele, D 2009, Business ethics in action: seeking human excellence in organizations. Palgrave MacMillan, London.

Michel, H. 2007. Co-determination in Germany: the recent debate. Johann Wolfgang Goethe-Universität Frankfurt, pp. 3-24.

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Nicholls, C.A.A., Nicholls, C.C., & Daniel. T 2011, Corruption and misuse of public office. Oxford University Press, Oxford.

OECD 2005. Fighting corruption and promoting integrity in public procurement. OECD Publishing, Oxford.

Phillips, J.M., & Gully, S.M 2011, Organizational behavior: Tools for success, Cengage Learning, Oxford.

Tarun, R.W 2010, The foreign corrupt practices act handbook: a practical guide for multinational general counsel, transactional lawyers and white-collar criminal practitioners (2nd edn). American Bar Association, New York, NY.

Twomey, D.P., & Jennings, M.M, 2010, Anderson’s business law and the legal environment, standard volume. Oxford: Cengage Learning.

Twomey, P.D., & Jennings, M.M 2010, Business Law: Principles for today’s commercial environment: Principles volume. Cengage Learning, London.

Schaffer, R., Agusti, F., & Earle, B 2008, International business law and its environment. Cengage Learning, Manson, OH.

Schorsch, M 2009, Market entry strategies for Russia. Diplomica Verlag, New York, NY.

Stachowicz-Stanusch, 2010, Organizational immunity to corruption: building theoretical and research foundations. IAP, London.

Zagaris, B 2010, International white-collar crime: cases and materials. Cambridge University Press, Cambridge.

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