Professional Documents
Culture Documents
This case discusses the bribery scandals that were unearthed at Siemens AG
(Siemens) in 2006 and 2007. These scandals involved some of the company‟s
employees bribing foreign officials to gain contracts and creating slush funds for this
purpose. In another case, the company was accused of bribing labor representatives
on the supervisory board in order to gain their support for its policies. After the
German authorities conducted raids on Siemens‟ offices in Germany, investigations
were initiated on Siemens in several other countries like the US, Greece, Italy and
Switzerland for possible misconduct. As a fallout of this scandal, the CEO of the
company and the chairman of the supervisory board had to resign, even though they
were not directly implicated, as the scandals had occurred during their tenure.
With bribery scandals surfacing in Siemens and many other German companies like
Volkswagen, questions were also raised about the effectiveness of the co-
determination law in Germany, which advocated a system where in a supervisory
board governed the management board and at least half the supervisory board seats
had to be filled by labor representatives. Critics contented that in such a system, the
management always needed the labor representatives‟ support for company policies,
which could lead to a suspicious alliance between them. The case also highlights the
opinions of several analysts on the issues related to bribing by the German companies
and Siemens in particular and the challenges the new CEO is likely to face at
Siemens.
The Bribery Scandal at Siemens AG
“Based on our investigation so far, we have reason to suspect that Siemens ran
„black accounts‟ ... that allowed it to open new markets through secret payments to
potential and existing business partners.” 1
- Jeanette Balmer, a spokeswoman for the office of the Swiss federal prosecutor,
in 2006.
“Many people within Siemens knew about the method of payment. Getting a contract
isn‟t easy.”2
- Horst Vigener, former Siemens employee convicted in a bribery case, in 2007.
“What hopefully will come out of the Siemens affair ... is that senior business leaders,
when they see what happens to Siemens in terms of fines and the lost reputation of
individuals like von Pierer or Kleinfeld, is that they will say „OK, we need to start
taking this seriously‟.”3
- Jermyn Brooks, director of private sector programs at Transparency
International,
in 2007.
Introduction
On May 14, 2007, a German court convicted two former managers of Siemens AG
(Siemens) for diverting the company‟s money to bribe employees of Enel SpA 4
(Enel), an Italian energy company. 5 Both the former managers admitted that they had
bribed employees at Enel who had demanded money in return for contracts. They also
said that they had not done anything wrong as they did it for the benefit of the
company and not for any personal gain. Moreover, there was no other way to win
contracts in several countries abroad where bribing for contracts was a common
practice, they said.
Earlier, in late 2006, another scandal had surfaced in the telecommunications division
of Siemens involving slush funds6 created to bribe foreign officials to secure contracts
abroad. In still another case, Siemens was accused by IG Metall 7, a dominant labor
1
Michael Pohl, “Siemens Investigation Yields 5 Arrests,” www.boston.com, November 16,
2006.
2
“Former Siemens Managers Admit to Paying Bribes for Contracts,” www.dw-world.de,
March 13, 2007.
3
The Associated Press, “Questions Linger after Bribery Scandal Claims Pair of Siemens
Executives,” www.iht.com, May 03, 2007.
4
Enel SpA (Enel) was Italy‟s largest power company. Enel produced and sold electricity
mostly in Europe, North, and Latin America. Enel was one of the largest distributors and
vendors of natural gas in Italy, with a 12% market share. The company‟s revenues stood at
38.5 billion euros for the year 2006. (Source: www.enel.it).
5
“Former Siemens Managers Convicted of Paying Bribes,” www.dw-world.de, May 14,
2007.
6
A slush fund is an auxiliary monetary account or a reserve fund. The term is commonly
used in the context of corrupt dealings (such as bribery or graft) by governments, large
corporations or other bodies and individuals.
7
IG Metall is one of the dominant metalworkers‟ unions in Germany. It has nearly 2.4
million members in Germany. IG Metall represents both blue-collar and white-collar
workers. (Source: www.wikipedia.org).
321
Enterprise Performance Management
union in Germany, of having tried to bribe a small union called AUB to gain support
for its policies. Siemens was also being probed in several other countries like Italy,
Switzerland, Greece, and the US for possible misconduct. Analysts said that the
bribery scandals at Siemens reflected the ethical costs of intense competition in global
markets. Companies were resorting to underhand payments to win contracts. In
several developing countries it was common practice to take money from companies
in return for contracts, it was said. The companies themselves considered it as a
business cost.
In the light of the number of scandals that rocked Siemens in a short span of time,
questions were raised as to how the top management had failed to notice such a deep
network of embezzlement involving huge amounts of money. The crisis ultimately led
to the exit of the chairman of Siemens‟ supervisory board, Heinrich von Pierer (von
Pierer) and it‟s CEO, Klaus Kleinfeld (Kleinfeld). Though they were not directly
implicated in the scandals, the new board chairman said that the leadership change
had been made to give the company a clean break from the past.
Critics felt that Kleinfeld should not have been replaced since he had been
instrumental in bringing back Siemens into profit. Kleinfeld had often been dubbed as
the Jack Welch of Germany, and his exit raised questions about the role of supervisory
boards in the management of German companies. According to the Co-determination
law or Mitbestimmung in Germany (Refer to Exhibit I for a note on Germany’s
Co-determination law or Mitbestimmung), every company had to have a two-tier
system of management, in which the supervisory board consisting of labor
representatives oversaw the management board. This system often led to collusion
between management and labor representatives, and some critics felt it needed a
thorough overhauling.
Exhibit I
A Note on the Co-Determination Law or Mitbestimmung
In Europe, participation of workers in management decision making was an
established idea that gained momentum after World War II. The idea evolved into
laws in several European countries. On similar lines, the Co-determination law or
Mitbestimmung (a German word with literal meaning „a voice in‟) was enacted in
Germany in 1976 to provide a greater role for employees in the management of
companies.8 The law advocated a two-tier system of management i.e. a supervisory
board above the management board in every registered company. The supervisory
board normally consisted of 20 non-executive directors, and was meant to oversee
the management board in the two-tier system. The law required the representation
of employees on the supervisory board. Any company with more than 2,000
employees was required to reserve half the seats of its supervisory board for labor
representatives.9
This system was praised across the world in the initial years for the stability it
brought to German companies. Those who supported the law said that it created a
consensus-driven culture in corporate Germany that helped the country recover
strongly from the devastating effects of the two world wars and hyperinflation to
emerge as an economic power. Even critics who faulted the law on the grounds that
it led to corruption and bribery agreed that the two levels helped demarcate and
8
Benjamin Weinthal, “Where Is the German Trade Union Movement and Where Is It
Going?” http://mrzine.monthlyreview.org, February 21, 2007.
9
Richard Milne, “Germany‟s Two-Tier Governance System Comes under Fire,”
http://us.ft.com, May 08, 2007.
322
The Bribery Scandal at Siemens AG
define corporate responsibilities more clearly than the single company board.
However, in the opinion of many experts, the law had become irrelevant and
needed a thorough overhauling. With managements needing to get the supervisory
boards‟ approval for their new plans and strategies, they often simply bribed labor
representatives to get their way. Therefore, rather representing labor interests
fairly, the labor representatives just lined their own pockets. Nowhere else in
Europe was the labor and management hand in glove like this, and the Co-
determination law was seen as the cause.
Compiled from various sources.
Background Note
323
Enterprise Performance Management
with manufacturing programs focusing on public services and utilities like rail
network, postal service, power generation, etc. Due the political uncertainty prevailing
in Berlin, Siemens & Halske relocated its headquarters to Munich in 1949.
Though the company recovered its domestic business fast, businesses outside
Germany took a long time to recover. In 1966, Siemens & Halske, Siemens-
Schuckertwerke AG and Siemens-Reiniger-Werke AG merged to form Siemens AG;
this was prompted by the growing convergence of the power engineering and
communications engineering sectors. The move helped to build a stronger position for
Siemens in the global market in later years. In 1969, the entire company‟s business
was reorganized into 6 operating groups and this structure remained in place until
1990, when Siemens was comprehensively reorganized again. The primary objective
of the new round of restructuring was to divide the company‟s large business units
into smaller entities that would be better equipped to operate successfully in an
increasingly complex global market.
In 1990, the largest European company in the computer industry, Siemens-Nixdorf
Informationssysteme AG (SNI), was created. In 1998, Siemens acquired
Westinghouse‟s fossil power plant activities in the US so as to boost its earnings in the
power generation sector through increased business volume and extensive synergy
benefits. In an effort to build a stronger position in the US, the world‟s largest market
for electrical and electronic products, Siemens obtained a listing on the New York
Stock Exchange in 2001. In 2006, Siemens purchased Bayer Diagnostics which was
added to its Medical Solutions Diagnostics division officially on January 1, 2007. In
April 2007, the Fixed Networks, Mobile Networks and Carrier Services divisions of
Siemens merged with Nokia‟s Network Business Group in a 50:50 joint venture,
creating a fixed and mobile network company called Nokia Siemens Networks.
As of 2007, the operations of Siemens could be divided into six major business areas
namely Information and Communications, Automation and Control, Power,
Transportation, Medical, Lighting. In addition, the company also had a presence in the
areas of Financing and Real Estate. (Refer to Exhibit II for more information on
various business activities of Siemens). In spite of huge setbacks for the company
during the world wars, Siemens grew to become one of the largest electrical
engineering companies in the world, with operations in nearly 190 countries and
474,900 employees around the world, as of 2006.10 During the fiscal year 2006 (ended
on September 30), the revenues of the company stood at 87.32 billion euros. 11 (Refer
to Exhibit III for more details on the financials of Siemens).
On November 15, 2006, around 30 offices and private homes related to Siemens and
its employees were raided by some 200 police officers, tax inspectors and prosecutors
in Munich, and other cities of Germany, to probe suspicions of bribery, embezzlement
of company funds and tax evasion. 12 Five Siemens employees were taken into custody
in connection with the case. Swiss prosecutors were also involved in the raids, as part
of their independent investigations launched in 2005, against three people connected
10
www.siemens.com.
11
www.hoovers.com.
12
“Siemens‟ Munich Offices Raided by Police, Prosecutors,” www.iht.com, November 15,
2006.
324
The Bribery Scandal at Siemens AG
13
Michael Pohl, “Siemens Investigation Yields 5 Arrests,” www.boston.com, November 16,
2006.
14
“Siemens‟ Munich Offices Raided by Police, Prosecutors,” www.iht.com, November 15,
2006.
15
Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.techworld.com, December
13, 2006.
16
“Siemens Slush-Fund Scandal Deepens, Former Exec in Custody,” www.dw-world.de,
December 13, 2006.
325
Enterprise Performance Management
Exhibit III
Income Statement of Siemens
(All figures in billions of Euros except per share amounts)
17
“Siemens Crisis Deepens as Corruption Scandal Widens,” www.neurope.eu, December 16,
2006.
326
The Bribery Scandal at Siemens AG
18
The US Securities and Exchange Commission (SEC) is a regulatory body with a mandate
to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital
formation. (Source: www.sec.gov).
19
The US Department of Justice (DOJ) enforces the law and defends the interests of USA
according to the law. It ensures public safety against foreign and domestic threats, helps to
prevent and control crime and seeks punishment for those guilty of unlawful behavior.
(Source: www.usdoj.gov).
20
“SEC launches full-scale probe into Siemens,” http://business.timesonline.co.uk, April 26,
2007.
21
Liechtenstein (The Principality of Liechtenstein) is a tiny, landlocked country situated
between Switzerland and Austria. Much of its wealth is based on its status as a low tax
haven. (Source: http://news.bbc.co.uk/2/hi/europe/ country_profiles/1066002.stm).
22
Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.techworld.com, December
13, 2006.
23
Escrow account is a separate account into which the borrower makes monthly payments
for obligations such as taxes, insurance, etc. The funds are held by the lender who pays
out the amount as they become due.
24
Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.techworld.com, December
13, 2006.
25
Carter Dougherty, “Bribery Trial Deepens Siemens Woes,” www.iht.com, March 13,
2007.
26
Carter Dougherty, “Bribery Trial Deepens Siemens Woes,” www.iht.com, March 13,
2007.
327
Enterprise Performance Management
The case was brought up by IG Metall, the dominant labor union which held nearly
half of the board seats in Siemens. IG Metall accused Siemens of bribing labor
representatives to try to influence them. In its case, it accused Siemens of showing
favoritism to AUB. It alleged that Siemens had illegally financed AUB, a small union
which had one seat in Siemens board, hoping to elevate AUB as a counterweight to IG
Metall. “We have the suspicion and indications that AUB was financed by Siemens in
order to build it up into a sort of counter union to IG Metall,” said Jurgen Peters, chief
of IG Metall.27 IG Metall expressed its suspicions that AUB had received money for
not bargaining strongly on the pay rates and other benefits that are negotiated for
industrial workers. IG Metall said that AUB was not a proper labor union as it was
unusually friendly with the management, something which was not in the best
interests of the labor. There was also a general perception in Germany that AUB was
soft on employers when compared to IG Metall.
In March 2007, a member of Siemens‟ central management board, Johannes
Feldmayer (Feldmayer), who oversaw the company‟s information technology services
division, was taken into custody for interrogation over his alleged involvement in this
case.28 It was the first time an acting management board member had been arrested in
a corruption scandal at Siemens. In the same case, the role of Siemens‟ former finance
chief, Karl-Hermann Baumann (Baumann), was also investigated. Both Feldmayer
and Baumann were charged with giving 15-20 million euros in bogus consultancy fees
to Schelsky.29
Former Siemens managers convicted of bribing foreign officials
On May 14, 2007, a German court convicted two former managers of Siemens,
Andreas Kley (Kley) and Horst Vigener (Vigener), for embezzling the company funds
to bribe employees of an Italian energy company, Enel. 30 Though they were not
accused of corruption intended for personal enrichment, both the former employees
admitted to having paid 6 million euros of Siemens funds to managers of Enel in order
to win orders for gas turbines between 1999 and 2002.31 The bribes were meant to
secure gas turbine contracts valued at 450 million euros for Siemens. The payments
were allegedly made to executives in Dubai, Abu Dhabi, and Monaco 32 through a web
of bank accounts in Switzerland and Liechtenstein. Kley, a former finance head of the
Siemens power plant unit, received a two-year suspended sentence, and Vigener, a
consultant engineer, received a nine-month suspended sentence in the case. The court
also ordered Siemens to pay 38 million euros for benefiting from the deal secured
through bribing.33
27
“German Trade Union Sues Siemens over Bribe Allegations,” www.dw-world.de, April
02, 2007.
28
“Siemens Board Member Johannes Feldmayer Arrested for Paying off Labor
Organization,” www.cio.com, March 29, 2007.
29
“German Trade Union Sues Siemens over Bribe Allegations,” www.dw-world.de, April
02, 2007.
30
“Former Siemens Managers Convicted of Paying Bribes,” www.dw-world.de, May 14,
2007.
31
“Siemens Fined $51 Mn in Bribery Case,” http://economictimes.indiatimes.com, May 15,
2007.
32
Monaco (The Principality of Monaco) is the second-smallest independent state in the
world, located between the Mediterranean Sea and France. It is an attractive tourist
destination owing to its climate and the beauty of its setting. It is also a tax haven for the
wealthy due to its advantageous tax regime.
(Source: http://news.bbc.co.uk).
33
G. Thomas Sims, “2 Former Siemens Officials Convicted for Bribery,” www.nytimes.com,
May 15, 2007.
328
The Bribery Scandal at Siemens AG
Both the former managers of Siemens said that the payments were made to two Enel
managers who demanded money in the bidding process. They defended themselves
arguing that they had done it for the benefit of the company, to enable Siemens to
establish itself in the power generation equipment market of Italy. “The alternative
would have been to turn down the project, which would have denied Siemens not only
that business but also a foot in the door in the Italian market,” Kley said during the
court proceedings.34
The employees also argued that the payments did not harm Siemens or break any
German law at that time. The German law under which they were prosecuted
prohibited bribery of public officials abroad, but Enel was a private entity during the
time they transacted with it, the employees said. However the charges on the former
employees sustained as the Italian state owned a controlling 68% stake in Enel when
the bribes were paid. Also in 2002, another law was passed in Germany, which
prohibited bribing any employee whether at a public or a private company. 35 Siemens
officially stated that it would appeal against the fine in the Enel case. In a statement,
the company said, “We maintain that the court‟s order to forfeit the profits from two
orders placed by Enel with Siemens‟ power generation division for the supply of
power plant equipment in 2000 and 2001 is illegal. The court‟s decision has no basis
in law or in fact.”36
34
Carter Dougherty, “Bribery Trial Deepens Siemens Woes,” www.iht.com, March 13,
2007.
35
Karin Matussek, Simon Thiel, “Ex-Siemens Managers Convicted of Bribing Enel Units,”
www.bloomberg.com, May 14, 2007.
36
“Former Siemens Managers Convicted of Paying Bribes,” www.dw-world.de, May 14,
2007.
37
Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.techworld.com, December
13, 2006.
38
Simon Thiel, “Siemens Names Merck & Co.'s Peter Loescher New Chief,”
www.bloomberg.com, May 20, 2007.
329
Enterprise Performance Management
in 2005 from von Pierer, who held the job from 1992 till 2005. Both of them were not
directly implicated in the bribery scandals, but they were widely criticized for failing
to trace the embezzlement of large company funds and payments made over several
years.
Siemens announced in April 2006 that Peter Loescher (Loescher) would take over as
CEO in July 2007. Loescher was president of the Global Human Health unit of Merck
& Co., Inc.39 and was responsible for its worldwide sales and marketing. It was for the
first time in Siemens that a CEO was being appointed from outside the company.
Siemens said that it wanted to infuse new leadership in view of the several scandals
that had rocked the company. The head of Siemens‟ supervisory board, Gerhard
Cromme said of Loescher, “His upright character, his global background, his
outstanding international reputation and his wide-ranging experience in business
development and strategy, the financial markets and technology-related issues were
the key factors in our decision.”40 He added, “I am convinced that Mr. Loescher has
what it takes to steer Siemens through its current difficulties and into a better
future.”41
However, some analysts felt that Loescher might face some resistance as he was
considered an outsider in the German corporate circles as well as in Siemens. His
immediate challenge would be to work towards being accepted by everyone in
Siemens. “The question is how quickly Loescher can learn the ropes of Siemens as it‟s
a very complex and huge company in the middle of a major restructuring and
tarnished by a corruption affair,” said Morgan Stanley analyst Ben Uglow.42
The exit of Kleinfeld met with mixed reactions. Some were admiring of him as
Kleinfeld had managed a major restructuring at Siemens in just two years. The stock
price of the company rose by 26% during his two year tenure 43 (Refer to Exhibit IV
for the stock price movement of Siemens). He pushed Siemens‟ employees to make
decisions faster and focus as much on customers as on technology. He sold off the
unprofitable mobile phone production to BenQ, and fostered a joint venture between
Siemens and Nokia to merge their mobile and fixed-line phone network equipment
businesses to create one of the world‟s biggest network firms. He had also spent US$
8.6 billion in 2006 on acquisitions in growing areas such as medical diagnostics and
wind power.44 But Kleinfield‟s aggressive style of management was disliked by older
conservatives in the company. Some analysts speculated that Kleinfeld‟s working
style could have been an additional reason for his ouster from the job.
39
Merck & Co., Inc. (Merck) is one of the top pharmaceutical companies in the world. It was
founded in 1891. Merck discovers, develops, manufactures and markets vaccines and
medicines. (Source: www.merck.com).
40
“Siemens Names First Outsider as CEO,” www.politicalgateway.com, May 21, 2007.
41
“Siemens Names First Outsider as CEO,” www.politicalgateway.com, May 21, 2007.
42
Simon Thiel, “Siemens Names Merck & Co.'s Peter Loescher New Chief,”
www.bloomberg.com, May 20, 2007.
43
Jack Ewing, “Siemens' Culture Clash,” www.businessweek.com, January 18, 2007.
44
Jack Ewing, “Siemens' Culture Clash,” www.businessweek.com, January 18, 2007.
330
The Bribery Scandal at Siemens AG
Exhibit IV
Stock Price Movement of Siemens
Source: www.bigcarts.com.
Initiatives at Siemens
After the bribery scandals were unearthed at Siemens, the company started many
initiatives to strengthen its corporate governance and compliance controls. A law firm
Debevoise & Plimpton LLP45 (Debevoise & Plimpton) was appointed to conduct an
independent and comprehensive investigation into the company‟s compliance and
control system with the help of the independent auditor for Siemens, KPMG 46.47
Debevoise & Plimpton worked with companies in the area of internal corporate
investigations and supported them in managing investigations by authorities. Siemens
also appointed Michael Hershman, co-founder of Transparency International 48 (TI), as
its compliance adviser. TI had earlier threatened to terminate Siemens‟ membership in
light of the fraud allegations. Siemens set up an internal Compliance Task Force, led
by Corporate Executive Committee member Jurgen Radomski. An external legal
expert was appointed as the head of the Siemens Compliance Office.
45
Debevoise & Plimpton LLP was a sophisticated legal services firm, committed to a
comprehensive, modern practice of law spanning the Americas, Europe and Asia. It had a
cross border focus due to its international approach to the practice of law.
(www.debevoise.com).
46
KPMG was a global network of professional firms providing Audit, Tax, and Advisory
services. It operated in 148 countries and had more than 113,000 professionals working in
member firms around the world. (Source: www.kpmg.org).
47
“Siemens Slush-Fund Scandal Deepens, Former Exec in Custody,” www.dw-world.de,
December 13, 2006.
48
Transparency International (TI) is an international non-governmental organization dealing
with issues related to corruption, including political corruption. It releases an annual
Corruptions Perceptions Index, a comparative listing of corruption worldwide. TI is
organized as a group of some 100 national chapters, with an international secretariat in
Berlin, Germany. It was founded in Germany in 1993. (Source: www.wikipedia.org).
331
Enterprise Performance Management
Siemens claimed that responsible corporate governance had always formed the basis
of all its decision-making and monitoring processes. As stated by the CFO of
Siemens, Joe Kaeser “Clearly structured and practiced corporate governance has
always had a priority at Siemens. It stands for a responsible and value creating
management and control of the company. Efficient cooperation between Executive
Board and Supervisory Board, respect for shareholder interests, transparency and
responsibility are key aspects of good Corporate Governance for us.” 49 Accordingly,
Siemens business practices worldwide were guided by a compliance program with
internal guidelines and international guidelines. The compliance program outlined
guidelines for conducting business and a large number of other rules and regulations
for their implementation and monitoring. The internal guidelines emphasized on
integrity in all dealings with business partners, employees, shareholders and the
general public. They included the recommendations of several national and
international organizations for Siemens to conduct itself as a true global company.
There was also an „Anti-public-corruption compliance‟ notice issued by the Corporate
Compliance Office of Siemens on May 02, 2007, which covered business conduct
guidelines in dealing with government officials (Refer to Exhibit V for a note on
Siemens’ Anti-public-corruption compliance).
Exhibit V
A Note on Siemens’ Anti-Public-Corruption Compliance
Siemens has laid down business conduct guidelines for its employees in dealing
with government officials in a document on “Anti-public corruption compliance”.
The main aspects of the document are:
1. Policy: It is the policy of Siemens not to offer government officials money or
anything of value to obtain an improper advantage. It is also the policy of the
company to keep accurate records that fairly reflect all transactions.
2. Scope: The policy applies to all the company employees globally, and to all
the company‟s agents, consultants and third parties.
3. Background: Apart from Germany, several countries have laws prohibiting
the bribery of government officials. Apart from cash payments, providing gifts,
travel or entertainment may also be unlawful depending on the circumstances.
Persons found guilty of bribery may face imprisonment and fines. It is the
responsibility of employees to exercise common sense in all dealings as it is
not possible to document each and every possible situation. When in doubt,
employees should consult their compliance officers.
4. Practices: A government official could be the employee of a state-owned
enterprise, local police officer, judge, prosecutor, court clerk, mayoral
candidate, customs official, military personnel, etc. The prohibition
encompasses not only cash but also gifts and gratuities of any kind;
inappropriate travel, meals or entertainment; contributions to charity specified
by the government official; offers of employment to the relatives of the
government official.
5. Reporting: If any company employee is suspected of engaging in conduct
inconsistent with company policy on anti-corruption, it may be reported to the
concerned supervisors or compliance officers or the Siemens Ombudsman may
be contacted.
49
www.siemens.com.
332
The Bribery Scandal at Siemens AG
Kleinfeld hoped that the investigations would lead to total exposure of the wrong
practices existing in the company and that proper measures would be taken to
eliminate the same. “Siemens tolerates absolutely no illegal or irregular conduct by
employees - and I really mean zero tolerance. We are employing the knowledge and
experience of external and independent experts to track down specific cases of
misconduct and gaps in Siemens‟ regulations, structures and processes and to make
our compliance system absolutely watertight,” Kleinfeld said.50
Questions Relating to Ethics in Corporate Germany
Around the same time as the Siemens cases came out, unethical practices surfaced in
other German companies including Volkswagen AG (Volkswagen), Deutsche
Telekom AG, Deutsche Bahn AG and Deutsche Post AG. At Volkswagen, a senior
executive was fined 576,000 euros and received a suspended prison sentence in
January 2007 for bribing labor representatives with money, foreign trips and
prostitutes.51 Since several of the corruption scandals involved the bribing of labor
representatives on the boards of German companies, some analysts felt that the Co-
determination law or Mitbestimmung in Germany was flawed.
According to the Co-determination law, the supervisory board of a company had to
have 20 members, of whom 10 were to be labor representatives. This led to a
suspicious alliance between the management and the labor representatives, which
could never set a stage for proper discussions during the board meetings. The presence
of workers on boards sometimes forced a situation wherein the main issues were
discussed and agreed on even before the meetings. Manuel Theisen, a professor at the
University of Munich, opined that when heads of a company‟s worker councils sat on
the supervisory boards, they could control the management decisions even before the
board meetings happened as they were very much insiders in the company.
The law was also criticized because it did not allow non-German directors of
multinational German companies to be members of the supervisory board. In
companies like Siemens and Volkswagen, a large part of their business came from
outside Germany but non-Germans who could bring in a wider dimension on the
board could not play a part.
Experts also pointed out that the two-tier system gave rise to an environment of
mistrust and a conflict of interests between the executives and the supervisory board.
For instance, in the case of Siemens, Kleinfeld was ousted by the over-powerful
supervisory board despite his good performance and not being directly implicated in
the bribery scandal. Many felt that the bribery scandals were used to get rid of
Kleinfeld, who was not received well by the conservative old generation at Siemens.
Because of his aggressive style of management, Kleinfeld‟s working style was often
described as an American style of management by the German media. However,
Siemens‟ supervisory board defended the decision saying that it was an effort to give
a new beginning to the company. Analysts and many top executives called for an
urgent need to have a re-look into the functioning of Co-determination law in
Germany. “Management boards have changed quite a bit. But supervisory boards are
an unreformed area,” said Hans Hirt, head of European corporate governance,
supporting the idea of reforming the Co-determination law.52
50
Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.techworld.com, December
13, 2006.
51
“German Parliamentarian Resigns over Role in VW Scandal,” www.dw-world.de, May 30,
2007.
52
Richard Milne, “Germany‟s Two-Tier Governance System Comes under Fire,”
http://us.ft.com, May 08, 2007.
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Enterprise Performance Management
53
Allianz SE, (formerly Allianz AG) was one of the largest financial service provider
headquartered in Munich, Germany. Its core and focus was s on the insurance business.
Allianz SE was the biggest insurance company in Germany and one of the largest in the
world. Allianz AG converted to Allianz SE in 2006. (Source: www.wikipedia.org).
54
BASF was a German chemical company and one of the largest chemical companies in the
world. The BASF Group comprised more than 160 subsidiaries and joint ventures and
operated in more than 150 production sites in Europe, Asia, North America, South
America and Africa. BASF had customers in over 200 countries and supplied products to a
wide variety of industries. It had businesses in the areas like Chemicals, Plastics,
Performance Products, Agricultural Products & Nutrition and Oil & Gas. (Source:
www.wikipedia.org). The company will be officially BASF SE officially from the
beginning of 2008. (Source: http://corporate.basf.com).
55
Richard Milne, “Germany‟s Two-Tier Governance System Comes under Fire,”
http://us.ft.com, May 08, 2007.
56
Air Berlin is Germany‟s second largest airline after Lufthansa. It is based in Berlin,
Germany, and operates extensive low-cost services.
57
G. Thomas Sims, “Germany Rethinks Board Structure after Corruption Scandals,”
http://www.iht.com, April 05, 2007.
58
G. Thomas Sims, “Germany Rethinks Board Structure after Corruption Scandals,”
http://www.iht.com, April 05, 2007.
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The Bribery Scandal at Siemens AG
companies was found guilty of paying bribes to secure contracts abroad. That the
company officials had resorted to bribing was not in question, but the remaining
questions were even more worrying - how deep were the scandals rooted in the
company and to what extent was the board aware of the fraud. As Manuel Theisen, a
professor of business and tax law at Ludwig-Maximilians-Universitat in Munich said,
“This individual case is of significance because it shows clearly that a system of
bribery was installed. The rest is now just a question of numbers and dimension. This
[unearthing the system of bribery] is certainly an important milestone.”59 There was
also mounting pressure on Siemens to explain how all these cases of bribery – both
within Germany and externally - went unchecked by the top management for so many
years.
However, Siemens continued to officially maintain that individual employees were
responsible for illicit payments that were made without the approval of the top
management. Siemens acknowledged that its internal controls were insufficient and
that it would take sufficient steps to become a model of corporate governance and
transparency. The company hired outside legal experts and auditing firms to revamp
its internal accounting and control systems. Analysts opined that because of the vast
size of the company, with its businesses spread across several areas and countries,
establishing strict norms of corporate governance and transparency would be a great
challenge for Siemens. Also the growth of the company might slow down at least in
the short run owing to the bribery scandals resulting in investigations into its business
practices, a leadership change, and a dent in its image.
The bribery scandals aside, Kleinfeld left an illustrious legacy for the new CEO. The
main challenge for Loscher would be to bring the company out of the cloud of the
bribery scandals, sustain the growth momentum set by Kleinfeld and above all gain
the confidence of labor and management within Siemens, where outsiders were not
easily accepted.
59
G. Thomas Sims, “2 Former Siemens Officials Convicted for Bribery,” www.nytimes.com,
May 15, 2007.
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Enterprise Performance Management
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The Bribery Scandal at Siemens AG
27. “German Trade Union Sues Siemens over Bribe Allegations,” www.dw-world.de,
April 02, 2007.
28. G. Thomas Sims, “Germany Rethinks Board Structure after Corruption Scandals,”
http://www.iht.com, April 05, 2007.
29. “Siemens Shares Jump as Chairman Quits,” http://business.timesonline.co.uk, April
20, 2007.
30. John Blau, “Siemens CEO Could Be Next to Go,” www.infoworld.com, April 24, 2007.
31. “Siemens Post-Kleinfeld,” www.ft.com, April 26, 2007.
32. “Siemens CEO Undermined by Board,” www.spiegel.de, April 26, 2007.
33. Thomas Sims, “Siemens Struggles to Regain Equilibrium,” www.nytimes.com, April
27, 2007.
34. “Germany: The Siemens Syndrome,” http://globaltechforum.eiu.com, April 27, 2007.
35. Narayan Bhat, “Kleinfeld’s Resignation Leaves Power Vacuum,” www.tmcnet.com,
April 30, 2007.
36. Stefanie Marsh, “Sleazy Business,” www.timesonline.co.uk, May 02, 2007.
37. William Boston, “Siemens Goes Mega,” www.time.com, May 03, 2007.
38. Richard Milne, “Germany’s Two-Tier Governance System Comes under Fire,”
http://us.ft.com, May 08, 2007.
39. Dearbail Jordan, “Siemens Ordered to Pay for Bribery Gains,”
http://business.timesonline.co.uk, May 14, 2007.
40. “Siemens to Pay €38mn to Settle Bribery Case,” www.newratings.com, May 14, 2007.
41. “German Court Convicts Former Siemens Officials,” www.cnbc.com, May 14, 2007.
42. David Rising, “Munich-Based Siemens Names New CEO,” http://biz.yahoo.com, May
20, 2007.
43. Jack Ewing, “Siemens Taps Merck Exec as New CEO,” www.businessweek.com, May
20, 2007.
44. Nicola Leske, “Siemens Names Peter Loescher as New CEO,” www.reuters.com, May
20, 2007.
45. “Siemens Hopes Outsiders Will Rebuild Morale,” www.ft.com, May 20, 2007.
46. Simon Morgan, “Siemens’ New CEO Could Face Uphill Struggle,”
www.industryweek.com, May 21, 2007.
47. “Siemens Makes a Clean Break from Scandal at the Top,” www.dw-world.de, May
21, 2007.
48. “Siemens Names First Outsider as CEO,” www.themoneytimes.com, May 22, 2007.
49. “Siemens at The Crossroads,” www.e-health-insider.com, May 22, 2007.
50. “German Parliamentarian Resigns over Role in VW Scandal,” www.dw-world.de,
May 30, 2007.
51. www.hoovers.com.
52. www.siemens.com.
337