This report focuses on the bribery scandal at Siemens AG, a German company based in Munich. It analyzes a case study that demonstrates how senior managers were held accountable for widespread corruption across various divisions worldwide. Siemens AG specializes in constructing locomotives, traffic control systems, and infrastructure. The company was accused of violating the FCPA by engaging in bribery of government officials. Furthermore, this report will examine the corporate culture in Germany that played a significant role in promoting rampant corruption within their business operations.
The document will also include my recommendation on how I would have managed the foreign subsidiary as a manager. The case “Are Top Managers Responsible When Corruption is Afoot?” talks about the level of responsibility that senior managers carry in corrupt activities at a German company called Siemens Aktiengesellschaft. There are two opposing views in this debate – one claiming that the company culture and senior managers are to blame, and the other arguing that senior managers should not be held responsible for divisional accounting activities.
The purpose of the case study is to analyze and answer important questions regarding each item. Additionally, it aims to reconcile local expectations of questionable payments with the United States Foreign Corrupt Practices Act (FCPA) by providing a recommendation. Part of this recommendation includes suggesting what Reinhardt Siekaczek should have done to explain the situation. The arguments for and against also delve into the cultural climate and key individuals who could be accountable for the conditions at Siemens.
“Siemens operated through a complex array of business groups and regional companies” before a recent reorganization (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 4). Before 1999, German Law allowed tax deductions for the cost of doing business and did not prohibit foreign bribery (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 5). Prior to being listed on the NYSE, foreign bribery was considered a normal business activity and special accounting practices were implemented to facilitate bribery payments, including the use of cash and off-books accounts.
Before 1999, participating in this activity was a regular aspect of conducting business. Senior managers were fully cognizant and actively engaged. The overall culture fostered these transactions to enhance the chances of securing substantial contracts. However, upon being listed on the NYSE on March 12th, 2001, managers and directors had limited authority to modify this deeply entrenched cultural environment that had become the accepted method of doing business. Consequently, Siemens could not adhere to the stringent regulations mandated by U.S. regulatory and anti-bribery demands.
Despite being informed about off-book accounts, the board of directors (known as the Vorstand) neglected to address violations and often hindered efforts to eliminate bribery within the company (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 7). The company’s culture and its managers are responsible for the illicit activities that took place during the 2000s. The act of conducting business by offering bribes in a strategic manner was deeply embedded within the company. This behavior was passed down from one generation of managers to the next, and without proper internal controls, it became an accepted practice.
As the managing partner in the firm, I would have taken several actions to eradicate practices that violated regulatory and ethical guidelines. These measures would include:
- Increasing the authority of the accounting team to thoroughly scrutinize every transaction for legitimacy.
- Implementing an internal audit division that would reassert and compel adherence to any regulatory rules.
- Conducting management training classes aimed at reinforcing sound business ethics.
- Enforcing policies rigorously, with a zero-tolerance clause applicable to all employees.
The cultural climate in this organization cannot be reversed without implementing these four actions. Bad ethical habits were ingrained and actively promoted to enhance the company’s competitiveness. Senior managers acknowledged that corruption was widespread and ingrained in the business culture. When faced with stricter regulations due to NYSE registration, they chose not to enforce basic rules, making it challenging for external auditors to assess the firm’s activities.
Management in Siemens AG allowed the corporate culture of bribery to exist by implementing weak policies, giving their approval for business as usual. I believe they should be held responsible for this. To combat this issue, strict and unbiased policies should have been established within the company. As a large conglomerate, Siemens AG’s management should provide clear guidelines and adequate funding to ensure the detection and elimination of bribery payments.
According to Daniels, Radebaugh, and Sullivan (2011), an effective internal code of conduct requires meeting four criteria. Firstly, global policies must have consistency throughout the company and be followed by all employees. Secondly, the code should communicate these policies to both employees and external business partners. Thirdly, it should clearly state the policies and consequences for non-compliance while enforcing them effectively. Lastly, it should report the results to external stakeholders.
In addition to establishing an effective code of conduct, management needs to provide a support structure for monitoring violations. This involves ensuring appropriate funding for the internal or external audit division responsible for overseeing the organization or divisions. Furthermore, it is crucial to avoid any conflicts of interest within the corporate structure. To enable effective reporting of illicit activities, the department must feel secure with full support from senior management.
Initiatives must also be implemented to address bribery.
Siemens only started addressing concerns about bribery after deciding to list on the NYSE. However, corruption was still widespread, and the company began making management decisions in an effort to combat bribery. Due to increasing fines, it was crucial to implement change. Peter Loscher became the leader of the $102 billion enterprise and was dedicated to adhering to the guidelines of the US Foreign Corrupt Practices Act (FCPA). In order to help cover the fines imposed on Siemens AG, Loscher demanded that former CEOs Klaus Kleinfeld and Heinrich von Pierer pay over $2.9 million or face legal consequences.
According to Milne (2008), in addition to making significant management decisions, Loscher altered the management hierarchy by mandating that senior executives on the management board should oversee a maximum of 10 divisions. Loscher emphasized the need to align responsibility and accountability throughout the company, with operational leadership coming from the management board. He also emphasized the importance of ethical standards for leaders. As part of his actions, Loscher eliminated most of the senior management and replaced them with individuals who underwent thorough legal vetting.
Evolution vs. Revolution: Loscher’s management decisions were initially positive in demonstrating to stockholders and regulators that positive change was occurring. The newly appointed CEO understood the significance of satisfying stockholders through enhancing the company’s reputation, the profitability of its newly established divisions, and the stock price. Understanding the Value of Ethical Behavior: The case indicates that ethical behavior was not closely monitored, as management was primarily focused on the divisions’ profitability. Kleinfeld’s management approach involved fixing, selling, or closing.
He set ambitious profit targets and quickly divested divisions that failed to meet expectations. The company’s culture of bribery had become deeply rooted in its normal business practices, and there was no strategic motivation to change course under Klaus Kleinfeld’s leadership. The introduction of controls to minimize corruption offers several benefits. Unethical and irresponsible behaviors could lead to legal actions, as demonstrated by the significant settlement that Siemens AG had to pay as a result of corruption investigations. Such behaviors may also trigger consumer actions, including boycotting the company. Furthermore, unethical behavior can negatively affect employee morale and overall company profitability. Despite winning numerous contracts, Siemens’ divisional profitability ultimately suffered, with their earnings before interest and taxes standing at 7%, compared to 13% for ABB and 12% for General Electric (Raghavan, 2009) (Daniels, Radebaugh, & Sullivan, 2011). In an attempt to deter bribery, fines were imposed, highlighting the management’s belief in the necessity of bribery to enhance the company’s competitive advantage.
In order to counter the gains made by corporations, it is necessary to impose fines that would make such actions unprofitable. The fines imposed on Siemens amounted to approximately $1.6 billion dollars (Deffree, 2008). Furthermore, the FCPA includes provisions that allow for potential prison sentences of up to five years, along with possible sanctions from U.S Government procurement and civil actions (The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China, 2008). The question arises as to whether Siemens faced adequate penalties. The complaint filed by the United States Securities Exchange Commission identified multiple instances of corruption throughout.
The company’s profits surpassed $1.1 billion, primarily due to total payments of approximately $1.4 billion made to government officials. Nonetheless, these penalties have annulled the company’s profit and rendered it unprofitable if caught violating the FCPA. It is difficult to solely fault Siemens as German companies have a track record of considering bribery of government officials as a customary business practice. Despite evolving perspectives on bribery and its declining acceptance, there existed a management style within the corporation that tolerated it.
The United States Securities Exchange Committee has disclosed accusations of bribery in multiple countries, such as Venezuela, China, Israel, Bangladesh, Nigeria, Argentina, Vietnam, Russia, Mexico. These allegations also involve participants of the Oil for Food program. The Foreign Corrupt Practices Act (FCPA) is a regulation that forbids U.S.-listed companies or their subsidiaries from participating in bribery with foreign government officials. It is crucial to mention that these illicit actions took place outside of the United States and did not directly implicate U.S. companies.
The company’s breach was due to its presence on the NYSE and adoption of American financial transaction methods. Without being listed on the NYSE, conducting business in these countries would have required unethical practices for competitiveness. According to the Index of Economic Freedom, government corruption affects all listed companies to some extent. There is a high likelihood that any business undertaking in these countries would involve making additional payments or fees to facilitate activities.
Operating in countries where bribery is common knowledge poses significant challenges for any company. Maintaining a competitive edge becomes extremely difficult under such circumstances. Personally, I believe it is crucial to carefully consider the locations where a company conducts its business. In nations like China or Iraq, where the government actively participates in corrupt practices, offering bribes becomes unavoidable and necessary as a part of business expenses. If bribery is the standard practice, securing contracts without engaging in illicit activities can be challenging. While I acknowledge the significance of consistent policies, one must question the cost involved.
Companies conducting business internationally may find it beneficial to invest in countries experiencing economic booms, even if these countries have inadequate legal policies and regulations. Grid analysis templates can be used to evaluate the advantages and disadvantages in order to assess the potential risks and rewards. The Foreign Corrupt Practices Act (FCPA) should account for these circumstances, or alternatively, the policies should be globally enforceable. When conducting business in foreign countries, companies need to determine whether they should adopt a relativism or normativism approach to corporate governance.
Relativism, as explained by Daniels, Radebaugh, & Sullivan (2011), posits that ethical truths vary among societies and countries. It emphasizes the inappropriateness of imposing external cultural or ethical values on current inhabitants. In contrast, normativism argues for a universal set of rules applicable to all individuals. The personal ethics of corporations or individuals from foreign countries are deemed irrelevant to expected ethical standards. Instead, business transactions should adhere to universal concepts.
Siemens could have acted within foreign countries’ expectations through the use of relativism. However, I believe it is more beneficial to establish universal policies and procedures to guide business operations. This approach allows for a more organized company structure. Relativism, on the other hand, may result in senior management lacking accountability. In the absence of these standards, business divisions may prioritize their own self-gratification rather than adhering to ethical guidelines (West, 2009). Ultimately, they will adapt their practices based on what the hosting country permits.
The text suggests that autonomous behavior, exemplified by scandals like Enron, highlights the need for universal checks and balances in business operations to ensure alignment with senior managers’ intentions. The Sarbanes-Oxley Act of 2002, along with other U.S. policies, aims to address the agency problem resulting from unchecked management practices. Insufficient laws or lax enforcement contribute to complications in business operations when corruption exists in the host environment. Successful firms must recognize the crucial characteristics of corruption (Rodriquez, Uhlenbruck, & Eden, 2005).
Government decisions can be unpredictable, making it challenging to assess the level of corruption in your hosting country compared to your home country. This evaluation plays a crucial role in determining whether to enter or expand in a corrupt environment. The company’s response may vary depending on the extent and origin of corruption. According to Rodriquez, Uhlenbruck, and Eden (2005, p. 385), corruption can be classified into two dimensions: pervasiveness and arbitrariness.
The pervasiveness of corruption does not specifically describe the corruption itself, but rather the likelihood of encountering corruption when dealing with government officials. Meanwhile, arbitrariness refers to statistical uncertainty, which involves quantifiable risk over known outcomes (p. 386). The reactions to these concepts vary greatly. Arbitrariness can be further classified into two categories: highly arbitrary and hierarchical/stable. In cases of highly arbitrary corruption, the government may prioritize economic expansion without closely adhering to rules and regulations (Rodriquez, Uhlenbruck, & Eden, 2005).
In this society, powerful officials with questionable claims to authority, whether newly elected or corrupt, coexist with organized racketeering (p. 386). Corruption takes on two contrasting forms. On one end, there is arbitrary corruption, which breeds an uncertain business model and inconsistent processes for obtaining governmental approvals. On the other end, there is hierarchical and stable corruption, characterized by predictable and successful bribery (p. 386). Corruption permeates the entire structure, as a consortium of individuals operates within a unified and controlled system. Overall, corruption in this society follows a predictable and stable pattern.
As mentioned, the level of corruption has a significant impact on how business is conducted. Deciding to implement corrupt practices can greatly affect the overall success of the endeavor and must be carefully evaluated. It is the responsibility of governments to review their laws and regulations to ensure fairness in business operations. However, transitioning away from corruption is a challenging process that may take a considerable amount of time before fair trade can thrive. Establishing enforceable laws and regulations will help prevent corruption within the government and multinational enterprises (MNEs).
As the manager of a foreign subsidiary, it is crucial to address accusations of questionable payments by examining compliance with FCPA rules and regulations. This can be achieved through various measures, including conducting FCPA risk assessments to identify high-risk areas, evaluating management’s knowledge and compliance efforts, testing the effectiveness of policies and procedures, gathering electronic data and conducting interviews using automated controls and anomaly detection tools. Additionally, selecting samples of high-risk transactions for further analysis and testing can help determine the functionality of FCPA controls. Demonstrating compliance through internal audits and well-documented procedures is essential to ensure that payments adhere to restrictions. In the Siemens case, there was a lack of explanation for the payments, and the existence of slush funds for facilitating bribes left little room for interpretation.
The funds were not accounted for and should have been questioned. If I were Reinhardt Siekaczek, I would choose to break the cycle and follow ethical practices. When working in a corrupt company, there is a decision to be made about whether or not to continue doing business with them. If conducting business ethically means not achieving the profit targets mandated, then a choice must be made to either remove oneself from management or accept the division’s failure. If there is potential for someone else to ethically manage the division, stepping down could be a better option. Conclusion
In conclusion, it is crucial for a multinational enterprise (MNE) to carefully select their markets and have a clear understanding of the arena they are entering. The decision to prioritize company ethics over profits is significant and can result in job losses and disappointing market returns. Siemens serves as an example of how this can be achieved. The company has significantly improved its market position after reorganizing, while also experiencing a decrease in corruption. The appendix includes Figure 1, which shows bribery claims, and Figure 2, which presents the Economic Freedom Index in relation to corruption. The following sources are referenced in the bibliography: “The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China” (2008) by Venulex Legal Summaries; “Siemens CEO Loscher Looks to the Future” (2009) by Maria Bartiromo; “Prescription for FCPA Compliance” (2010) by M. Birk; “International Business” (2011) by J.D. Daniels, L.H. Radebaugh, and D.P. Sullivan; “Siemens pays $1.6B in bribery scandal fines” (2008) by S. Deffree; “Peter Loscher” (2008) by R. Milne; “No More Excuses” (2009) by A. Raghavan.
Rodriquez, P., Uhlenbruck, K., & Eden, L. (2005, April). Government Corruption and the Entry Strategies of Multinationals. Academy of Management Review, 30(2), 383-396. Scarboro, C. J., Muoio, R. A., Price, T. L., Hansberry, D., & Dodge, R. I. (2008, December 12). SEC Complaint Against Siemens for FCPA Violations. Retrieved July 21, 2011, from SEC v Siemens AG: http://www.jdsupra.com/post/documentViewer.aspx?fid=4945adf4-fe79-480d-8e51-29dff12c77f1 West, A. (2009, January). Corporate Governance Convergence and Moral Relativism. Corporate Governance: An International Review, 17(1), 107-119.
