Case 4 The Bribery Scandal at Siemens

The Bribery Scandal at Siemens AG
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.
“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
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
Siemens was initially started as Telegraphen-Bauanstalt von Siemens & Halske

(Siemens & Halske) in 1847 by Werner von Siemens (Werner) and a mechanical
engineer, Johann Georg Halske (Halske). In 1853, the company won its first
international contract to build a telegraph network that stretched around 10,000
kilometers and provide maintenance services for it, in Russia. In 1855, Werner set up
subsidiaries in Russia and Britain to serve the growing opportunities for the company
outside Germany and entrusted their responsibility to his brothers. In 1865, the British
subsidiary was renamed Siemens Brothers.
In 1866, Werner discovered the dynamo-electric principle and got the necessary
patents in Germany and Britain to enable the company to cash in on the invention. In
the late 1870s, power engineering began to develop rapidly in Germany with the
advent of electric railways, electric street lighting, electric elevators, electric
tramways, etc. In order to prepare the company to meet these growing business
opportunities, Siemens & Halske concentrated on retaining qualified and reliable
employees. The company shared its profits with its employees through stock options.
A pension fund was created for the benefit of employees and their families. The
company introduced the concept of fixed working hours per day. It also started
focusing on training its employees for specific jobs and career progression.
Siemens & Halske was successful in setting up foreign branches in all the key markets
during the 1870s. Werner retired from active management of the company in 1890
and was succeeded by his sons who looked after the management of the company
together with Werner‟s brother. The company progressed strongly especially in the
area of rail transport. In Budapest, it built Europe‟s first underground rail line, opened
in 1896. In 1903, Siemens & Halske acquired Elektrizitats-Aktiengesellschaft vorm
Schuckert & Co. and merged it with its own power engineering unit to form Siemens-
Schuckertwerke GmbH, which oversaw all areas of electrical engineering.
By 1914, Siemens & Halske was one of the largest companies of Germany with a
workforce of 82,000 employees. However, World War I had a devastating impact on
the company‟s businesses. It lost most of its foreign assets and its patent rights were
expropriated. The company was forced to reorganize its manufacturing operations and
foreign businesses. Carl von Siemens, one of Werner‟s sons, undertook several
initiatives to reorganize all the businesses of Siemens & Halske in such a way that
individual areas of business were assigned to specialized subsidiaries and related
companies, while maintaining a consistent corporate identity across the subsidiaries.
Again in 1945, Germany‟s political, military and economic collapse during the World
War II led to the closure of many plants of Siemens & Halske in Germany. By the
time the war came to an end, the greater part of the company‟s buildings and
industrial installations had been destroyed and the company had suffered huge losses.
Siemens & Halske started reconstructing its businesses in 1946 after the war was over,
323
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).
A Series of Scandals Rocks Siemens
Slush funds to win contracts abroad
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
to Siemens.13 Siemens acknowledged that certain company employees were engaged

in fraud and the damage to the company because of this fraud could be around 10-30
million euros.14 As the probe continued, the scandal deepened and the estimate of the
total cash used in suspect payments increased to 200 million euros from 10-30 million
euros, and finally the figure touched 420 million euros. 15
Exhibit II
Major Business Activities of Siemens (as of July 2007)
# Business Area Sub-area
1 Information and Communications -
2 Automation and Control Automation and Devices
Industrial Solutions and
Services
Siemens Building
Technologies
3 Power Power generation
Power Transmission and
Distribution
4 Transportation Transportation Systems
Siemens VDO
Automotive
5 Medical Solutions -
6 Lighting -
7 Financing and Real Estate Siemens Financial
Services
Siemens Real Estate
Source: www.siemens.com.
The 420 million euros of illegal payments dated back to 1999 and were made over a
period of about seven years. Siemens said that it was working with the investigators to
trace whether there was a valid business purpose and to ascertain the exact recipients
of the payments. Apart from damaging the reputation of the company, the fraud also
impacted the financials of Siemens. The company announced on December 11, 2006
that because of the fraud it was burdened with additional income tax charges of 168
million euros since 1999 from when the payments were suspected to be made. As a
result, in the financial results it released in November 2006, Siemens was forced to
restate the net profit of the company for the 2006 fiscal year, which ended on
September 30, 2006, down to 3.033 billion euros from 3.106 billion euros. 16
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
Exhibit III
Income Statement of Siemens
(All figures in billions of Euros except per share amounts)
September September September

Particulars
2006 2005 2004
Revenue 87.32 75.44 75.17
Cost of Goods Sold 63.82 53.50 53.52
Gross Profit 23.51 21.94 21.64
Gross Profit Margin (%) 26.9 29.1 28.8
SG&A Expense 17.28 15.42 15.44
Depreciation & Amortization 3.01 3.42 3.34
Operating Income 3.22 3.09 2.86
Operating Margin (%) 3.7 4.1 3.8
Non-operating Income 1.18 1.12 1.37
Non-operating Expenses 0.03 0.03 –
Income Before Taxes 4.37 4.18 4.23
Income Taxes 1.07 0.97 0.66
Net Income After Taxes 11.56 10.52 9.08
Continuing Operations 3.29 3.20 3.57
Discontinued Operations (0.05) (0.81) –
Total Operations 3.03 2.24 3.40
Total Net Income 3.03 2.24 3.40
Net Profit Margin (%) 3.5 3.0 4.5
Diluted EPS from Total Net
3.26 2.42 –
Income ($)
Dividends per Share ($) 1.02 1.06 0.88
Source: www.hoovers.com.
In connection with this case a former board executive of Siemens, Thomas Ganswindt
(Ganswindt), who was allegedly aware of some of the suspect transactions, was also
arrested. According to some reports, the suspicious payments were shown to be made
to external consultants for Siemens, whereas they were actually made to secure
contracts in the fixed line telecommunications business in various international
markets. Bribes were suspected to have been paid to purchasing officials in Italy,
Puerto Rico, Greece, the US and several other countries. However the exact routing of
the embezzled money remained to be traced through the investigation process. The
bribery scandal raised concerns for the company under the legislations of several other
countries like the US, Italy, Greece, etc. For example, the late Sani Abacha, the
former Nigerian leader, and some intermediaries were suspected to be involved in
contracts for the security system for the 2004 Olympic Games in Athens, Greece. An
investigation into this was launched in Greece.17 In the US, the US Securities and
17
“Siemens Crisis Deepens as Corruption Scandal Widens,” www.neurope.eu, December 16,
2006.
326
Exchange Commission18 (SEC) and the US Department of Justice 19 (DOJ) had

launched an investigation to find out whether Siemens breached any American laws,
in April 2007.20
Analysts felt that Siemens ought to have woken up to the suspicious nature of the
transactions earlier, as there were several early warning signs that everything was not
above board. For instance, the bank accounts of some Siemens employees in
Liechtenstein21 were seized in 2004 on suspicion that they were used for fraudulent
payments.22 In August 2005, it came to the company‟s notice that some bank accounts
in Geneva, Switzerland, held by a former Siemens employee, had been seized. In June
2006, the company also became aware of the existence of an escrow account 23 in
Switzerland held by one of its employees. In July 2006, Siemens requested the trustee
of the account to provide documentation of the account and to transfer the funds to the
company.24 The 420 million euros bribery scandal itself came to light through an
anonymous complaint to the company and requests for judicial assistance from
Switzerland and Italy because of suspected fraud in Siemens‟ units there. Given this
background, Siemens could have mitigated the damage to its reputation internationally
by taking proactive measures to set things straight.
Siemens charged for bribing employee representatives

On February 14, 2007, authorities in Nuremberg, Germany, raided several Siemens
offices following allegations that the company was involved in bribing employee
representatives to secure their support for its policies. 25 Wilhelm Schelsky (Schelsky),
chairman of a small German labor union, AUB, was taken into custody for
interrogation earlier in connection with the case. Prosecutors were examining whether
the money Schelsky received for consulting duties as claimed by the company might
have been aimed at persuading members of AUB to support Siemens policies.
However Schelsky denied any wrongdoing and said he had not breached any German
law. His lawyer, Jurgen Lubojanski said, “He disputes the notion that he was
supposed to create a tame and lame union for Siemens. More I cannot say.” 26
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
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
13, 2006.
25
Carter Dougherty, “Bribery Trial Deepens Siemens Woes,” www.iht.com, March 13,
2007.
26
2007.
327
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
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
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
Repercussions of the Scandals

The series of bribery allegations came in the aftermath of Siemens‟ sale of its loss-
making mobile handset unit in 2005, to a Taiwanese company, BenQ. Here too,
Siemens did not cover itself in glory as it was seen as having got rid of the unit
because it could not easily lay off its employees. With BenQ eventually filing for
insolvency, the ex-Siemens workers lost their jobs, and some people felt that Siemens
ought to have foreseen this and been more responsible towards its long-time
employees. Siemens was urged to take on the responsibility of compensating the
workers, and it was forced to delay its planned hefty pay hikes for its top management
and compensate the employees who lost jobs.
Even Siemens felt that it could take some time for the company to regain its reputation
internationally and come out of the legal battles it was facing in several countries.
“Siemens currently cannot exclude the possibility that criminal or civil sanctions may
be brought against the company itself or against certain of its employees in connection
with possible violations of law. The Company‟s operating activities may also be
negatively affected due to imposed penalties, compensatory damages or due to the
exclusion from public procurement contracts,” the Siemens board said.37
Following the wave of scandals at Siemens, the supervisory board head, von Pierer,
and CEO, Kleinfeld had to resign. While von Pierer quit as board chairman in April
2007, Kleinfeld would leave the company by June 2007.38 Though the bribery
scandals came to light during Kleinfeld‟s time, most of the payments were made when
von Pierer was the CEO of the company. Kleinfeld took over as the CEO of Siemens
34
2007.
35
Karin Matussek, Simon Thiel, “Ex-Siemens Managers Convicted of Bribing Enel Units,”
www.bloomberg.com, May 14, 2007.
36
2007.
37
13, 2006.
38
Simon Thiel, “Siemens Names Merck & Co.'s Peter Loescher New Chief,”
329
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,”
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
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
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.
Adapted from www.siemens.com.
49
www.siemens.com.
332
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
13, 2006.
51
“German Parliamentarian Resigns over Role in VW Scandal,” www.dw-world.de, May 30,
2007.
52
333
Analysts also pointed out to companies increasingly exploring ways to escape

compliance with Co-determination law. Some companies got themselves incorporated
outside Germany or changed their legal structure so as not to be within the purview of
the law. For example, under the Societas Europae (SE) legal structure, which was
created by the European Union in 2004, companies were allowed to shrink their
supervisory board members to 12 and include foreign workers. Companies like
Allianz SE53 and BASF AG54 opted for this route and many more were likely to join
them.55 Among the companies that shifted their base outside Germany was Air
Berlin56 which became a British Plc. when it was listed on the London Stock
Exchange in 2006. Commenting on the move, its chief executive, Joachim Hunold,
said, “[Co-determination law] is no longer competitive internationally. There are
always cases in which companies always must compromise, as was the case with
Volkswagen.”57
Analysts attributed the suspicious relationship between the management and labor
representatives in Germany to Co-determination law. Among the other members of
the European Union, only Austria and Luxembourg had such laws with mandatory
one-third representation and many had no such requirements at all. With widespread
resentment over the law and its effectiveness, the Confederation of German
Employers‟ Associations, the group that lobbied on the behalf of companies,
announced that it would take up the issue of modifying the Co-determination law to
suit to the present day business environment. “We will continue our fight to make
Germany more competitive,” said Thomas Prinz, a member of the group‟s legal
department.58 In view of the string of bribery scandals in several companies, the
German government was reported to be planning to curb corporate corruption by
modifying laws that had loopholes allowing companies to write off bribes as
expenses.
Outlook
Analysts opined that on account of increasing competition, companies were resorting
to illegal payments to win international contracts especially in some emerging
economies where the practice was common. Siemens along with many other
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
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,”
334
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.
335
Additional Readings & References:

1. “Siemens Proves Prudence Is a Virtue,” www.businessweek.com, November 11, 2002.
2. “All Eyes on the Corner Office,” www.businessweek.com, March 01, 2004.
3. “Siemens’ New Boss,” www.businessweek.com, January 24, 2005.
4. “The Real Scandal at Volkswagen,” www.businessweek.com, July 18, 2005.
5. “Corporate Scandals Plague Top German Firms,” www.msnbc.msn.com, August 08,
2005.
6. “Siemens the Fall Guy in BenQ Insolvency Scandal,” www.dw-world.de, October 02,
2006.
7. “Police Raid Siemens Offices over Fraud Allegations,” www.fiercewireless.com,
November 15, 2006.
8. “Siemens Sets up Anti-Corruption Task Force,” http://today.reuters.com, November
23, 2006.
9. “German Business Image Tarnished by Wave of Corruption Cases,” www.dw-
world.de, November 27, 2006.
10. “Siemens Forced to Battle Internal Corruption,” www.spiegel.de, November 28,
2006.
11. Benjamin Dierks, “Corruption Probe Reaches Ever Higher at Siemens,”
http://business.guardian.co.uk, December 13, 2006.
12. Chris Mellor, “Siemens Slush Fund Scandal Deepens,” www.itworld.com, December
13, 2006.
13. “Former Siemens Exec Arrested in Bribery Probe,” http://news.com.com, December
13, 2006.
14. Colleen Taylor, “In Siemens Scandal Fallout, Nokia Hesitates on Merger Plans,”
www.edn.com, December 15, 2006.
15. Richard Milne, “Siemens Bribery Scandal Raises Further Questions,” www.ft.com,
December 21, 2006.
16. Stephen Taub, “Ex-Siemens CFO Questioned in Probe,” www.cfo.com, January 15,
2007.
17. Simon Thiel, “Siemens Investors Grill Management on Bribery Charges,”
www.iht.com, January 25, 2007.
18. “Siemens Chief Promises Full Explanation of Bribery Scandal,” www.dw-world.de,
January 25, 2007.
19. “Vote Call by Siemens Shareholders,” http://news.bbc.co.uk, January 25, 2007.
20. Michael Woodhead, “Focus: Dirty Rotten Business,” http://business.timesonline.co.uk,
January 28, 2007.
21. “Future Nokia Siemens Networks Takes Shape with Unveiling of Portfolio Plan,”
www.siemens.com, February 12, 2007.
22. Benjamin Weinthal, “Where Is the German Trade Union Movement and Where Is It
Going?” http://mrzine.monthlyreview.org, February 21, 2007.
23. Carter Dougherty, “Bribery Trial Deepens Siemens Woes,” www.iht.com, March 13,
2007.
24. “Siemens Execs Admit Bribery Was Common,” www.businessweek.com, March 14,
2007.
25. “Siemens Board Member Detained in Bribery Probe,” www.dw-world.de, March 27,
2007.
26. G. Thomas Sims, “Siemens Scandal Threatens to Ensnare Leadership,” www.iht.com,
April 01, 2007.
336
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,”
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,”
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

Case 4 The Bribery Scandal at Siemens

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Case 4 The Bribery Scandal at Siemens

Uploaded by

Copyright:

Available Formats

The Bribery Scandal at Siemens AG

Siemens was initially started as Telegraphen-Bauanstalt von Siemens & Halske

A Series of Scandals Rocks Siemens

Slush funds to win contracts abroad

to Siemens.13 Siemens acknowledged that certain company employees were engaged

September September September

Exchange Commission18 (SEC) and the US Department of Justice 19 (DOJ) had

Siemens charged for bribing employee representatives

Repercussions of the Scandals

Adapted from www.siemens.com.

Analysts also pointed out to companies increasingly exploring ways to escape

Additional Readings & References:

You might also like