Siemens AG is a German company started in the year 1847 and is now one of the leading companies in the telecommunications industry, providing electronics and engineering products and services globally. The company has always stated publicly its focus on good governance, strong corporate social responsibility (CSR) and moral principles. However, the prominent facade of efficient governance and ethical practices seem to have covered the realities of dishonest business conducts that have been ongoing in the company since the late 1990s. In November 2002, around 200 German security officers forced entry into the company headquarters searching for evidence related to widespread bribery cases. This followed wide investigations of Siemens activities that started off when bank records indicated evidences of money laundering among its staff. Amid growing suspicions, the company commenced its own internal investigations and spotted more than 420 million Euros in irregular transactions in its telecommunications department. The company then appointed a private law firm to carry out an internal investigation that led to the discovery of over 1.3 billion Euros in irregular payments since 1999 and unethical conduct of some of its top executives.
The aim of the paper is to take a critical look into business ethics using the bribery scandal at Siemens AG as the case-study.
Background to the Problem
Although German firms have had an excellent reputation for a long time, until recently there have been modest guidelines against unethical business practices. Examples of business malpractices that had been allowed under the German corporate laws include insider trading in stocks, only made illegal in 1995 due to demands from external investors. German corporations were also allowed to pay bribes in order to win contracts and the amount paid as bribe was deducted from the taxable amount; bribery was considered a cost of doing business and the decision was only reversed in 1996. Siemens implemented the US/UK regulations in 2001 when it applied for listing on the New York Stock Exchange (Verschoor, Curtis C., 2007 ). Information about the scandals at Siemens was made public in mid-2004 when German federal officials reported an investigation of bribery claims by former employees of the company to the tune of $7.3 million. This amount had been paid to previous employees of Italian company, Enel SpA in order to win gas-turbine contracts. The amount is thought to have been transferred through accounts located in Liechtenstein and the UAE. A grand jury in the US charged two of the company’s employees with a scam to win a $49 million contract. These employees arranged with a minority contractor that led to the award of a radiology equipment contract worth $500,000 without undertaking any actual service or sharing the risks with other firms.
Business ethics may be used in reference to any of the following definitions:
- Observing the criminal laws in a business-related activity;
- Avoiding conduct that may lead to institution of legal proceedings against a firm; and
- Avoiding conduct that may erode the company’s image.
The moral challenge of companies operating in domestic and foreign countries is to balance between business ethics and the profit motive. Multinational companies operating in foreign countries report that it is extremely difficult to win contracts in those countries without bribing officials from the host country. They refer to bribery as a cost of doing business and defend it for two reasons, first is the financial consideration. Bribes can lead to the award of million-dollar contracts or even reduce delays in the award of a contract to a company. This would lead to the continued operations of a company in the country. The second defense against bribery by these firms is that the practice has been universally accepted, the practice is so deeply rooted it is practically impossible to win contracts or even operate freely in foreign markets without paying bribes. Multinational company officials argue that in a genuinely capitalistic business field, there need be a level playing ground for all companies to operate. The failure to offer bribes while other companies are doing so therefore leads to competitive disadvantage and the companies eventually lose business to other firms. Unfair business practices are further enhanced by weak anti-bribery laws or even the total lack of it in the regions or countries of operation.
Referring back to the bribery accusations against Siemens, we observe that corrupt practices were promoted first by the weak laws targeting business practices in Germany. As has been observed, bribes were considered a cost of doing business under the German tax regulations and even bribing an official to facilitate a business contract was not considered a criminal offence before 1999. These weak anti-bribery laws promoted the malpractices inside Siemens Corporation where bribes were referred to as “NA”, meaning “useful money”. The company executives bribed their way into contracts not only in nations with questionable transparency like Nigeria, but also in countries where integrity was upheld, an example is Norway. The executives therefore played by the local rules abroad. The weak laws against corruption in the countries where Siemens offered bribes also acted to promote these practices. Such countries include Nigeria, ranked among the most corrupt countries in the world by Transparency International, where Siemens is accused of bribing officials in order to win a telecoms contract. Another country is Italy, ranked as one of the European countries where one is most likely to give a bribe.
Despite the belief that bribes are necessary to win contracts, other ways can be employed by a company to win contracts in domestic or foreign markets. One way is through contract negotiation, where a company negotiates the contract conditions with the company or body giving the contract. The negotiation is geared towards ensuring that both parties are contented and benefit from it. When negotiating a contract, a company must be aware of the other bids and must not give a high bid price, neither should it be extremely low. Apart from the bid price, the company can also offer to give additional services at a subsidized rate, besides giving a proven record of efficiently managing contracts, commissions can also be offered by the firm. Another strategy that can be employed is giving of gifts, this is however prone to be seen as a form of bribery since the expectations of the giver is not known. Such gifts can be in form of goods or services, a road construction contractor can offer to repair a road section or even re-carpet it. Gift giving creates a positive relation between the giver and the receiver, a factor that may lead to the award of a contract to the giver.
Bribery is ethically wrong and the costs of engaging in this practice can be very costly to the company if the cases are proved. This can be seen from the Siemens case; the company was fined a record $800 million by US authorities and $248 million by a Munich-based court. Apart from the costs, bribes also lead to the erosion of a company’s reputation; Siemens suffered a reputation as a well-governed and responsible firm after revelations of bribery claims that rocked it. The Nigerian government stopped the company’s operations in the country while Nokia Corporation halted its joint operations with Siemens because of the bribery allegations.
Klaus Kleinfeld became CEO of Siemens in January 2005 and prioritized the clearing of the company of unethical practices. Analysts noted that he had managed to restructure the company in just two years and during this period, Siemens’ stock prices rose by 26 percent. Besides, he pushed the staff to make decisions faster and to focus more on customer service as they did on technology (Verschoor, Curtis C., 2007 ).
He sold off the loss-making mobile phone unit to Taiwan-based BenQ and furthered cooperation with the Nokia Corporation. Kleinfeld was generally considered to have been successful during his two-year tenure at the helm of the company, however, reports indicate that his authority and control style of governing the company led to the dissatisfaction of many. The media referred to his management approach as aggressive.
Experts note that the over-powerful supervisory board expelled Kleinfeld from the CEO’s chair irrespective of his excellent performance at Siemens though he had not been directly incriminated in the bribery cases. It is generally believed that board had relied on the scandals to deny Kleinfeld another term since the conservative old generation at the board had not welcomed him (Vershoor, p. 2).
Despite his illustrious career at the helm of Siemens, Kleinfeld’s replacement is justified due to his failure to spot and act on the practices that had led to huge financial loses and erosion of the company’s image. A new leadership was necessary to address the several bribery practices that had gone on in the company unabated. In light of these scandals, questions arose as to how the management had failed to take note of the elaborate network of fraud in the company, thus the justification for Kleinfeld’s replacement. Kleinfeld’s departure from the departure was likely to have de-motivated other members of the management committee due to his accomplishments at the company. His exit also led to a change of strategy in handling of bribery and other malpractices that had been ongoing at the firm.
As earlier noted, a firm does not have to offer bribes to win bribes and Siemens was no exception. The fact that many companies engage in bribery to win contracts is no reason for doing the same, each firm has the moral obligation to uphold ethics in its corporate practices.
The repercussions of the unethical practices at Siemens reveal that a strong ethical culture is vital for efficient corporate management. A failure to embrace ethics in business practices can cause huge monetary loses and lead to loss of the company’s reputation. Company executives must have information of all that is going on within their organizations as a demonstration of their leadership and control skills.
Verschoor, Curtis C. Ethics. 2007.