The report will analyze the case study discussing the bribery scandal at Siemens AG. The case study raised the question of accountability of senior managers to the rampant corruption occurring in global divisions. Siemens AG is a German based company with executive offices in Munich. Siemens builds locomotives, traffic control systems and infrastructure. The company was brought up on charges of violation to the FCPA as a result of bribes of government officials. Outlining the corporate culture in Germany and how it led to wide-spread corruption in their business practice.
The document will also provide a recommendation of how I would have conducted business as a manager of the foreign subsidiary. Introduction The case “Are Top Managers Responsible When Corruption is Afoot? ” discusses the degree of liability that senior managers have in corruption activities at a German company named Siemens Aktiengesellschaft. The debate presents two sides of the argument, one stating that culture of the company and senior managers are at fault and the other stating that senior managers cannot be held accountable for divisional accounting activities.
The case study will address key questions and provide a thorough analysis of the each item. Finally a recommendation would be offered on how to reconcile local expectations of questionable payments with the United States Foreign Corrupt Practices Act (FCPA) with a recommendation of what I suggest Reinhardt Siekaczek should have done to explain the situation. Main Individuals and Situational Factors The arguments for and against provide details about the cultural climate and key individuals that could be held responsible for the state of the conditions at Siemens.
Prior to a recent reorganization, “Siemens operated through a complex array of business groups and regional companies” (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 4). Prior to 1999, German Law did not prohibit foreign bribery and allowed tax deductions as allowances for the cost of doing business (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 5). Prior to being listed on the NYSE, foreign bribery was categorized as a normal business activity. Special accounting practices were added to accomplish bribery payments such as cash and off-books accounts.
As stated, this activity prior to 1999 was normal business activity. Senior managers were well aware and actively participated. The cultural climate encouraged these transactions to increase the chances of winning important bids. With the listing on the NYSE on March 12th 2001, managers and directors had very little control over changing this cultural climate that had become so ingrained in the normal business practices. Siemens could not honor the strict regulations that were mandated by the U. S. regulatory and anti-bribery requirements.
Even when notified about off-book accounts, the board of directors (the Vorstand) failed to address violations and frequently presented road blocks to ridding the company of bribery (Scarboro, Muoio, Price, Hansberry, & Dodge, 2008, p. 7). The culture of the company and its managers are at fault for the illicit activities of the 2000’s. The practice of conducting business through strategically executed bribes was too ingrained into the company. The action was taught from one generation of managers to the next and without the proper internal controls it became an accepted practice.
As a managing partner in the firm, I would have done the following to eliminate practices that violated regulatory and ethical guidelines: •Increased the authority of the accounting team to be able to thoroughly examine each transaction for legitimacy. •Create an internal audit division that would reiterate and enforce any regulatory rules that needed to be followed. •Establish management training classes to reteach good business ethics. •Strictly enforce policy with a zero tolerance clause to all employees.
Without implementing these four actions, there may be little that could be done to reverse the cultural climate that existed in this organization. Bad ethical habits were the way of life and were strictly encouraged to improve the company’s competitive edge. Role of Senior Managers Top managers understood and knew that corruption was prevalent and part of the business culture. Being faced with stricter guidelines that come along with NYSE registration, they chose not to enforce the basic rules and made it very difficult for external auditors from assessing the activities of the firm.
Through weak policies, management provided the “rubber stamp of approval” to conduct business as usual. In my opinion they are responsible for allowing the corporate culture of bribery to exist. To reverse this activity, strict policies should have been instituted in the company with non-prejudicial enforcement. In a large conglomerate like Siemens AG, management must provide the appropriate guidelines and funding to ensure that detecting and eliminating bribery payments is possible.
According to Daniels, Radebaugh and Sullivan the four criteria for an effective internal code of conduct is the following: •Global policies are homogeneous throughout the company. Anyone working throughout the company must comply with the policy (Daniels, Radebaugh, & Sullivan, 2011, p. 205). •It communicates company policy not only to all employees but to anyone who does business with the company (p. 205). •It states policies and consequences of not adhering to the policies. To be effective policies must enforced and violators punished (p. 205). •It reports the results to external stakeholders (p. 05). Aside from creating an effective code of conduct, management must provide the necessary support structure to monitor activities for violations. The internal or external audit division must be provided with the correct funding in order to properly police the organization or divisions that it oversees. There must not be any conflict of interest formed by the corporate structure. In order for the department to be effective, it must not have any fear of reporting illicit activities and have the full support of senior management. Initiatives to Address Bribery
Siemens did not begin to address bribery concerns until after the decision to list on the NYSE. Albeit corruption was still prevalent the company started making management decisions to address the practice of bribery. With growing fines, it was essential to make a change. Peter Loscher took the helm of the $102 billion (sales) enterprise (Raghavan, 2009). He was committed to work in the guidelines of the US Foreign Corrupt Practices Act (FCPA). To subsidize the fines being levied on Siemens AG, he requested that ex-CEOs Klaus Kleinfeld and Heinrich von Pierer should pay more than $2. 9 million (Bartiromo, 2009) or face legal action.
He also made some significant management decisions. He altered the management hierarchy by mandated that senior executives that sit on the management board should only supervise at most 10 divisions (Milne, 2008). Loscher stated the following: “We have to make sure we align responsibility and accountability in the company from the top down. We will lead operationally from the management board. Leaders will be responsible. Leaders will have ethical standards” (Milne, 2008). He acted by eliminating most of the senior management and replacing them with individuals that were thoroughly vetted by legal.
Evolution vs. Revolution The management decisions made by Loscher were a good start to show the stockholders and the stock regulators that good change was happening. The new CEO recognized the importance of satisfying the stock holder by improving the reputation of the company, the profitability of the newly formed divisions and the stock price. Value of Ethical Behavior According to the case, ethical behavior was not carefully watched. Management was more concerned about the profitability of the divisions. Kleinfeld’s management style was fix, sell or close.
He set high profit targets and quickly spun off divisions that did not meet expectations. The culture of bribery was so ingrained into normal business practices that there was no strategic desire to alter the path of the company under the leadership of Klaus Kleinfeld. What’s to Gain by Introducing Controls to Minimize Corruption There are several advantages for applying controls to minimize corruption. •Unethical and irresponsible behaviors could result in legal actions. This is evident by the record settlement that was decided against Siemens AG as a result of corruption hearings. Consumer actions such as company boycotts. •Unethical behavior could affect employee morale. •Unethical behavior could have a negative effect on Company profitability. It was also noted that although they won many contracts that the profitability of division ultimately suffered. “Siemens’ earnings before interest and taxes will be 7%, compared with 13% for ABB and 12% for General Electric” (Raghavan, 2009). (Daniels, Radebaugh, & Sullivan, 2011) Fines as a Deterrent to Bribery Management determined that bribery was necessary to improve the competitive edge of the company. As a result, there were corporate gains made.
Those corporate gains must be countered with fines that would make such action unprofitable. The fines totaled approximately $1. 6 billion dollars (Deffree, 2008). Along with fines, the FCPA also provides stipulations where violators could be sentenced to up to five years in jail, potential sanctions from U. S Government procurement and civil actions (The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China, 2008). Was Siemens penalized enough? During the complaint by United States Securities Exchange Commission, there were several incidences of corruption noted.
There were payments to government officials that totaled approximately $1. 4 billion dollars and allowing the company to achieve profits of over $1. 1 billion. The fines have negated the profit and made getting caught for violations of the FCPA highly unprofitable. Was Siemens really at fault? Blame is a difficult claim to make. Being a German company, there is a history of using bribery of government official as a normal course of business. Although times were changing and bribery was no longer considered good practice there was a management style in the corporation that accepted it.
As noted, there were several incidences of bribery that were claimed by the United States Securities Exchange Committee of those the countries involved were Venezuela, China, Israel, Bangladesh, Nigeria, Argentina, Vietnam, Russia, Mexico and several other countries in the Oil for Food program. “The FCPA prohibits all companies listed in the United States, as well as their subsidiaries, from making or promising to make payments to foreign government officials” (Birk, 2010). None of the activities occurred on United States soil or directly with companies in the United States.
The company was in violation because it was listed on the NYSE and used United States means for conducting financial transactions. If the company was not listed on the NYSE, conducting business in many of these countries may have required corrupt activities in order to compete. According to the Index of Economic Freedom, each company listed has some degree of corruption in the government. There is a significant chance that any business project conducted in these countries may require some sort of payment or extraneous fee to ease the execution of activities.
Any company conducting business in these countries would know that bribery is expected. The competitive advantage in these countries would be very difficult to maintain. In my opinion, you have to be conscious of where the company is choosing to do business. Conducting business in China or Iraq where the government actively participates in corrupt activity requires that bribes are made as the cost of doing business. If it is normal business practice to offer bribes, it may be difficult to win bids without conforming and participating in illicit activities. I do recognize the value of having homogeneous policies but at what cost?
Companies conducting business internationally may see value investing in Countries that have economic booms although they may have lagging legal policies and regulations. Using grid analysis templates, the pros and cons could be properly laid out to assess the risks and rewards. FCPA policies should have allowances for this situation or the policies themselves need to be enforceable globally. Relativism vs. Normativism When conducting business on foreign soil, companies must evaluate whether they should take a position of relativism or normativism as it pertains to corporate governance.
Relativism states that ethical truths depend on the values of a particular society and may vary from one society or country to another” (Daniels, Radebaugh, & Sullivan, 2011). This also implies that it would not be correct to interject the culture or ethics of an outsider on the presiding occupants. Normativism implies that there is a universal set of rules that everyone should follow. The individual ethics of the individual corporation or the inhabitants of the foreign country are irrelevant to ethical practices that are expected. People conduct business with universal concepts.
Using relativism, Siemens would have been behaving within expectations of the foreign countries. Theoretically speaking, I think it is better to standardize on universal policies and procedures when conducting business. It creates a more manageable model for the company to follow. With relativism, there could a lack of accountability from senior management. Without these standards, divisions can conduct business merely for the pursuit of their own self-gratification (West, 2009). In essence, they will do whatever the hosting country will allow.
Autonomous behavior is what led to scandals like Enron. There must be universal checks and balances to ensure that all entities of your business are being conducted as senior managers intended. With U. S. policies such as the Sarbanes-Oxley Act of 2002, it corrects the agency problem that exists from unchecked management practices. Absence of adequate laws or weak enforcement practices Corruption in the host environment adds complications to conducting business. To be successful firms must understand the impact of the corruption’s essential characteristics (Rodriquez, Uhlenbruck, & Eden, 2005).
Government decisions can be unpredictable and it takes a great deal of understanding to evaluate the corruption from your hosting country from that of your home country. These analysis effects your decision to either enter or expand in a corrupt environment. Depending on the extent and origin of corruption there could varying responses that a company could take. According to Rodriquez, Uhlenbruck and Eden there are two dimensions of corruption: pervasiveness and arbitrary (Rodriquez, Uhlenbruck, & Eden, 2005, p. 385).
Pervasiveness does not specifically detail the corruption but the probability of experiencing corruption in dealing with government officials. While arbitrariness deals with statistical uncertainty which is characterized by quantifiable risk over known outcomes (p. 386). Reactions to each are vastly different. Arbitrariness breaks down further into highly arbitrary and hierarchical/stable. With highly arbitrary corruption, the government may seek to expand economically without paying close attention to rules and regulations (Rodriquez, Uhlenbruck, & Eden, 2005).
This society breeds powerful officials with dubious and conflicting claims to authority, newly elected or corrupt politicians and organized racketeering (p. 386). Highly arbitrary corruption creates an uncertain business model where there is a degree of inconsistency on obtaining governmental approvals. On the opposite extreme is hierarchical and stable corruption which is characterized by predictable and effective bribery (p. 386). In this society corruption is from the top down, so there is a consortium of individuals who are part of a unified and controlled system. Corruption is predictable and stable.
As stated the degree of corruption plays a considerable role in the process and procedures of conducting business. Choosing to adopt the practices is a choice that could substantially affect the bottom line of the engagement and needs to be thoroughly examined. Governments have an obligation to examine laws and regulations to ensure fair business practices. The evolution from corruption is however an arduous task that could take a considerable amount of time before fair trade could be allowed to flourish. Creating laws and regulations with actionable repercussions will help to stay off corruption both internally in the government and in MNEs.
Manager Recommendation As the manager of a foreign subsidiary, the key to answering accusations of questionable payments is ensure that you examine compliance with FCPA rules and regulations. •Conducting broad FCPA risk assessments and identifying potential high-risk areas based on analysis of quantitative and qualitative risk factors of businesses and international locations. •Assessing management’s FCPA knowledge and compliance activities. •Testing policies and procedures for awareness and effectiveness. •Accumulating electronic data and conducting interviews. Applying automated controls and proactive data anomaly detection tools. •Selecting samples of high-risk transactions for further analysis. •Testing transactions to determine whether FCPA controls are working as intended. (Birk, 2010) Demonstrating compliance through internal audits and adequate documentation will provide the necessary leverage to ensure that payments meet restrictions. In the Siemens case there was very little explanation that could be provided for the payments made. The existence of slush funds for facilitating bribes left very little to the imagination.
The funds were strictly unaccounted for and should have been questioned. If I were Reinhardt Siekaczek, my approach would be to break the cycle and to comply with ethical practice. Operating in a company with normal corrupt practices creates a choice to whether the company should do business there. If conducting business ethically entailed not meeting mandated profit targets than a decision must be made to remove you from management or allow the division to fail. Stepping down could be a better option if there is an opportunity that someone else could ethically run the division. Conclusion
In conclusion, a MNE must carefully pick their markets and clearly understand the arena that they are choosing to enter. The choice to forego profits in the sake of company ethics is an important decision that could result in lost jobs and disappointing market returns. Siemens is proof that it could be done; the company has shown great improvement in their market position since the reorganization while experiencing a reduction in corruption. ? Appendix Figure 1: Bribery Claims Figure 2: Economic Freedom Index: Corruption Bibliography The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China. 2008). Venulex Legal Summaries, 1-11. Bartiromo, M. (2009, October 19). Siemens CEO Loscher Looks to the Future. BusinessWeek(4151), pp. 17-18. Birk, M. (2010, February). Prescription for FCPA Compliance. Internal Auditor, 67(1), 53-57. Daniels, J. D. , Radebaugh, L. H. , & Sullivan, D. P. (2011). International Business. Boston: Pearsons Learning Solutions. Deffree, S. (2008, December 22). Siemens pays $1. 6B in bribery scandal fines. Electronic News, 54(51), 5. Milne, R. (2008). Peter Loscher. European Business Forum, 32, 54-57. Raghavan, A. (2009, April 27). No More Excuses. Forbes, pp. 120-122.
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.