Siemens Scandal

September 21, 2015

Rebecca Ray
DeVon Toler
Monica Canales
Matthew Nyfeler
Table of Contents
Siemens Case Summary..............................................................2
Case Questions ...........................................................................3
Siemens Now ..............................................................................8
Take-Away Value ........................................................................9
References................................................................................ 10

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Siemens Case Summary
In late 2008 Siemens AG was accused by the United States and German

governments of bribery in different countries in order to win multibillion dollar contracts.

In the early 90’s bribery was a big part of business around the world and Siemens was

no stranger to this practice. When Germany finally passed a law in 1999 abolishing this

act, Siemens saw itself hiding their wrongdoings from the government and hiring over

2,700 “consultants” who would deliver the money to government officials, or people in a

position high enough to get the contract accepted. These bribes were as early as 1999,

where Siemens supposedly paid over 1.4 billion USD in bribes in countries such as

Bangladesh, Nigeria, Israel, Argentina and among other countries.

In 2006, Siemens started to feel closed out. Several of their executives had

gotten arrested for their illegal practices and finally in 2008 they paid a total of 2.6 billion

USD in fines and improvements to their compliance process.

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Case Questions

(1) What explains the high level of corruption at Siemens? How did managers engaged

in corruption rationalize it?

Bribes and other corrupt practices were the standard operating procedures for

Siemens’ corporate executives. World War II left the company in such a bad position

that they turned to markets in less developed countries in order to compete. Since then,

bribes have been considered a reliable sales technique in order to maintain business.

Also, until 1999, paying bribes abroad was a legal practice in Germany to the extent that

corporations could file these payments as tax deductions (LICHTBLAU, 2008). These

payments were commonly known as “nützliche Aufwendungen” or “useful money.”

Former mid-level accountant, Reinhard Siekaczek was responsible for

overseeing an annual bribery budget of about $40-$50 million for Siemens. After

keeping detailed records of the company’s questionable transactions, he stated to law

enforcement that these payments were ritual to maintaining the competitiveness of

Siemens overseas (Miller, 2008). Siekaczek rationalized the situation by arguing that “it

was about keeping the business unit alive and not jeopardizing thousands of jobs

overnight. (Miller, 2008)” With this rational, he infers that he was only a middle-man who

was doing the honorable thing by organizing accounts for the good of the company. He

contributed hugely to the telecommunications unit which paid over $800 million of the

total $1.4 billion worth of bribes issued by the company (Miller, 2008).

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(2) What would happen to a manager at Siemens if he/she took a stand against corrupt

practices? Provide an example. Since the case was written, has Siemens implemented

any type of “code of conduct” to guide managers engaged in international business

deals?

In order to fundamentally change the way the company did business, CEO Peter

Löscher offered his workers a deal in which he promised that anyone who admitted guilt

for their involvement in corrupt practices would get full amnesty (Watson, 2013). They

also wouldn’t get fired, as well as maintaining the company’s assistance with any legal

issues incurred from their admittance (Watson, 2013). On the contrary, those who were

involved but didn’t admit guilt, would be penalized and terminated.

Peter Solmssen, general counsel for Siemens, was brought in to spearhead this

anti-corruption campaign. He expressed that it was essential to gain the commitment

from the internal leadership to comply better ethical standards in order for the company

to better organize collective action towards social responsibility and proper business

practices (Watson, 2013). This led to a significant change in the Siemens’ Code of

Conduct where the “Prohibition of Corruption and Bribery” is now a focal point. This new

element states that Siemens is a company that works against corruption, establishing a

Zero Tolerance policy for any form of such including bribes, whether they’re monetary or

other benefits, issued in order to gain influence. The policy extends to include both

compliance with the governmental laws and compliance with Siemens’ internal rules

and regulations. Any violations of Siemens’ rules are met with an internal investigation,

which could be handled either independently or centrally in the company, and

punishment, both of which will depend on the severity of the violation. The

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investigations are then reviewed to determine the cause of the violation and if it can be

prevented in the future (Mgmt., 2015). The increased Code of Conduct regulations

ended up costing Siemens quite a bit of time and money, but it is a price that they are

willing to pay to avoid further company corruption. These changes were created in

attempt to emphasis that Siemens is a company than can still operate successfully on a

global scale through transparency and trust.

(3) How does the type of corruption engaged in by Siemens distort competition in target

markets? Be specific.

The bribes issued by Siemens negatively affected many competitors, whether

they were acquired or shut out completely via contract negotiations. In order to “equal

the playing field” and maintain its position in emerging markets, Siemens issued more

than $1 billion over various industries, with the majority being invested into countries

such as China, Russia, Argentina, Israel, and Venezuela (Miller, 2008). The textbook

mentions the corrupt practices involved with that of Argentina where Siemens paid

millions of dollars in bribes to secure a $1 billion contract (Hill, 2014). In obtaining this

contract, the company shut out all competition in the production of national identity

cards for each of the country’s citizens. After this contract had been suspended and

then cancelled, the company paid additional bribes to revive the negotiations (Scarboro,

2008). After this failed attempt, Siemens later instituted an arbitration proceeding to

recover the cost incurred as well as expected profits lost, and paid even more bribes to

suppress evidence that the original contract had been obtained through corrupt

practices (Scarboro, 2008). The majority of Siemens competitors were smaller firms that

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could not equal the final offer Siemens had promised the officials, this shows the extent

that the company was willing to go to maintain a competitive, (unfair) advantage.

(4) What is the impact of corrupt behavior, by Siemens or other multinational firms, on

countries where they do business? Be specific.

Despite their success, Siemens created a damaging impact on both the residents

and governments of various foreign regions, in particularly poor/third-world countries,

who are forced to over pay for necessities like roads, power plants, and hospitals which

decreases the country’s capital productivity as a whole (Miller, 2008). For example,

Siemens’ most recent focus has been on the telecommunications industry, leading this

Germany-based company to enter into a joint venture with Finland’s Nokia, despite a

history of unethical business practices between the two nations. The subsidiary formed:

Nokia Siemens Network (NSN) gained rapid success through securing various contracts

along with the mergers/acquisitions of other companies that have also undergone

various legal issues. These companies would include Cisco/Scientific Atlanta,

Alcatel/Lucent with their use of outside consultants who secured foreign deals, and

Ericsson/Marcon who was found to be involved in child labor litigations (Landes, 2008).

These four entities alone would make up 75% of the total global sales for wireless

telecom equipment (Weisberg, 2013). Alone, NSN facilitated its own acquisitions

through Israeli’s Atrica and the UK’s Apertio, which allowed the company to gain

customers in regional areas covered by other telecom competitors such as Orange, T-

Mobile, O2, Vodafone, and Hutchinson 3G (Weisberg, 2013). Finally after the

acquisition of the wireless equipment division of Motorola, along with their 6,900

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employees, this Siemens-subsidiary restructured and terminated around 17,000

employees within less than a year of the deal (Weisberg, 2013). Despite already being

involved in legal issues at the time, the business practices initiated by this company not

only eliminated its competition but also negatively impacted the lives of thousands of

people, both former employees and the residents of these foreign nations.

Besides the fact that Siemens had to pay not only their fine, but also 1 billion

USD to improve their own internal compliance process, the past practices they engaged

in did not only damaged the business culture in the countries mentioned in the case, but

also the country’s actual culture. Venezuela is currently ranked 161/175 on the

corruption perception index, Argentina 107/175, Israel 37/175, China 100/175, Siemens

did not only encouraged this practice but they also hired specific people to do it for their

company and were able to do it successfully for a long period of time, which only

demonstrated the efficacy this practice had.

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Siemens Now

Because of its corporate revisions after the corruption scandal came to light,

Siemens is now a changed company. In light of their corruption charges, Siemens hired

Peter Löscher as its new CEO, a drastic change seeing as how Siemens had never

before in its history hired an outside CEO. In Löscher’s first month as CEO he

drastically restructured the organization: firing a lot of executives and managers and

further streamlining the operations of the company. Löscher increased efficiency by

condensing different branches of Siemens, and getting rid of many of its smaller

acquisitions that had been acting independently of the corporation up until this point.

The changes that Löscher made successfully reduced bureaucracy within the

organization, and made it easier for Siemens to keep up with the rapidly changing world

(Löscher, 2012).

Despite all of his positive changes, Löscher was forced to resign as CEO of

Siemens in July of 2013 due to missed profit marks for multiple periods. Löscher was

replaced by Joe Kaeser, who continued Löscher’s policy of streamlining the company

by cutting jobs (You're fired! 2013). Mr. Kaeser increased Net Income, helping to restore

Siemens to its former glory (Bryant, 2014).

Overall, Siemens still currently ranks as one of the most valuable brands in the

world, showing that while its corruption scandal may have temporarily slowed the

company, it did not defeat them.

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Take-Away Value

Discussing this case within our team, we came to the conclusion that even

though bribe might not be the best way to do business, certain countries function with

this practice best. Third-world countries tend to function slowly in terms of business, and

giving a small incentive to someone might work to speed things up, but over doing it can

be counterproductive and detrimental to both the country and the organization.

Siemens had the opportunity to build a powerful firm with multibillion dollar

contracts, but when this practice became illegal in the countries they were practicing it,

they decided to continue their practices in a less obvious way. This did not only harm

the company, but it had collateral damage in the form of smaller firms competing

against Siemens and the population of countries of operation also being affected.

Businessmen and government employees got so comfortable with receiving money to

make a deal happen or to hurry a document out, that even nowadays they have not

stopped and it is still expected in some countries.

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References
Bryant, Chris (2014, Jan 28). Siemens net income beats expectations as Joe Kaeser steers recovery. Retrieved 9 17,

2015, from ft.com.

Hill, C. (2014). Ethics in International Business. In C. Hill, Global Business Today (8th ed., p. 129). New York:

McGraw-Hill.

Landes, D. (2008, May 14). Ericsson in child labour scandal. Retrieved from The Local: thelocal.se

LICHTBLAU, E. (2008, Dec 15). Siemens to Pay $1.34 Billion in Fines. Retrieved 9 10, 2015, from New York Times.

Löscher, Peter (2012, Nov). The CEO of Siemens on Using a Scandal to Drive Change. Retrieved 9 17, 2015, from

hbr.org.

Miller, T. C. (2008, Dec 20). At Siemens, Bribery Was Just a Line Item. Retrieved 9 10, 2015, from Propublica.org

Mgmt., S. S. (2015, July 1). Basic Principles of Code of Conduct . Retrieved 9 10, 2015, from Siemens.

Scarboro, C. J. (2008, Dec 15). SEC Charges Siemens AG for Engaging in Worldwide Bribery. Retrieved from

Securities Exchange Commission: SEC.GOV

Watson, B. (2013, Sept 18). Siemens and the Battle Against Bribery and Corruption. Retrieved 9 10, 2015, from The

Guardian.

Weisberg, R. (2013, Apr 23). Ethical Challenges in Developing Markets. Retrieved from Nokia Siemens Network.

The World's Most Valuable Brands (2014, Jan 28). Retrieved 9 17, 2015, from forbes.com

You're fired! Siemens replaces Loescher as CEO. (2013, July 31). Retrieved 9 17, 2015, from cnbc.com.

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