Siemens Scandal

September 21, 2015

Rebecca Ray
DeVon Toler
Monica Canales
Matthew Nyfeler

Table of Contents
Siemens Case Summary..............................................................2
Case Questions ...........................................................................3
Siemens Now ..............................................................................8
Take-Away Value ........................................................................9
References................................................................................ 10

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Siemens Case Summary

In late 2008 Siemens AG was accused by the United States and German
governments of bribery in different countries in order to win multibillion dollar contracts.
In the early 90s bribery was a big part of business around the world and Siemens was
no stranger to this practice. When Germany finally passed a law in 1999 abolishing this
act, Siemens saw itself hiding their wrongdoings from the government and hiring over
2,700 consultants who would deliver the money to government officials, or people in a
position high enough to get the contract accepted. These bribes were as early as 1999,
where Siemens supposedly paid over 1.4 billion USD in bribes in countries such as
Bangladesh, Nigeria, Israel, Argentina and among other countries.
In 2006, Siemens started to feel closed out. Several of their executives had
gotten arrested for their illegal practices and finally in 2008 they paid a total of 2.6 billion
USD in fines and improvements to their compliance process.

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Case Questions
(1) What explains the high level of corruption at Siemens? How did managers engaged
in corruption rationalize it?
Bribes and other corrupt practices were the standard operating procedures for
Siemens corporate executives. World War II left the company in such a bad position
that they turned to markets in less developed countries in order to compete. Since then,
bribes have been considered a reliable sales technique in order to maintain business.
Also, until 1999, paying bribes abroad was a legal practice in Germany to the extent that
corporations could file these payments as tax deductions (LICHTBLAU, 2008). These
payments were commonly known as ntzliche Aufwendungen or useful money.
Former mid-level accountant,

Reinhard Siekaczek was responsible for

overseeing an annual bribery budget of about $40-$50 million for Siemens. After
keeping detailed records of the companys questionable transactions, he stated to law
enforcement that these payments were ritual to maintaining the competitiveness of
Siemens overseas (Miller, 2008). Siekaczek rationalized the situation by arguing that it
was about keeping the business unit alive and not jeopardizing thousands of jobs
overnight. (Miller, 2008) With this rational, he infers that he was only a middle-man who
was doing the honorable thing by organizing accounts for the good of the company. He
contributed hugely to the telecommunications unit which paid over $800 million of the
total $1.4 billion worth of bribes issued by the company (Miller, 2008).

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(2) What would happen to a manager at Siemens if he/she took a stand against corrupt
practices? Provide an example. Since the case was written, has Siemens implemented
any type of code of conduct to guide managers engaged in international business
deals?
In order to fundamentally change the way the company did business, CEO Peter
Lscher offered his workers a deal in which he promised that anyone who admitted guilt
for their involvement in corrupt practices would get full amnesty (Watson, 2013). They
also wouldnt get fired, as well as maintaining the companys assistance with any legal
issues incurred from their admittance (Watson, 2013). On the contrary, those who were
involved but didnt admit guilt, would be penalized and terminated.
Peter Solmssen, general counsel for Siemens, was brought in to spearhead this
anti-corruption campaign. He expressed that it was essential to gain the commitment
from the internal leadership to comply better ethical standards in order for the company
to better organize collective action towards social responsibility and proper business
practices (Watson, 2013). This led to a significant change in the Siemens Code of
Conduct where the Prohibition of Corruption and Bribery is now a focal point. This new
element states that Siemens is a company that works against corruption, establishing a
Zero Tolerance policy for any form of such including bribes, whether theyre monetary or
other benefits, issued in order to gain influence. The policy extends to include both
compliance with the governmental laws and compliance with Siemens internal rules
and regulations. Any violations of Siemens rules are met with an internal investigation,
which could be handled either independently or centrally in the company, and
punishment, both of which will depend on the severity of the violation. The
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investigations are then reviewed to determine the cause of the violation and if it can be
prevented in the future (Mgmt., 2015). The increased Code of Conduct regulations
ended up costing Siemens quite a bit of time and money, but it is a price that they are
willing to pay to avoid further company corruption. These changes were created in
attempt to emphasis that Siemens is a company than can still operate successfully on a
global scale through transparency and trust.

(3) How does the type of corruption engaged in by Siemens distort competition in target
markets? Be specific.
The bribes issued by Siemens negatively affected many competitors, whether
they were acquired or shut out completely via contract negotiations. In order to equal
the playing field and maintain its position in emerging markets, Siemens issued more
than $1 billion over various industries, with the majority being invested into countries
such as China, Russia, Argentina, Israel, and Venezuela (Miller, 2008). The textbook
mentions the corrupt practices involved with that of Argentina where Siemens paid
millions of dollars in bribes to secure a $1 billion contract (Hill, 2014). In obtaining this
contract, the company shut out all competition in the production of national identity
cards for each of the countrys citizens. After this contract had been suspended and
then cancelled, the company paid additional bribes to revive the negotiations (Scarboro,
2008). After this failed attempt, Siemens later instituted an arbitration proceeding to
recover the cost incurred as well as expected profits lost, and paid even more bribes to
suppress evidence that the original contract had been obtained through corrupt
practices (Scarboro, 2008). The majority of Siemens competitors were smaller firms that
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could not equal the final offer Siemens had promised the officials, this shows the extent
that the company was willing to go to maintain a competitive, (unfair) advantage.

(4) What is the impact of corrupt behavior, by Siemens or other multinational firms, on
countries where they do business? Be specific.
Despite their success, Siemens created a damaging impact on both the residents
and governments of various foreign regions, in particularly poor/third-world countries,
who are forced to over pay for necessities like roads, power plants, and hospitals which
decreases the countrys capital productivity as a whole (Miller, 2008). For example,
Siemens most recent focus has been on the telecommunications industry, leading this
Germany-based company to enter into a joint venture with Finlands Nokia, despite a
history of unethical business practices between the two nations. The subsidiary formed:
Nokia Siemens Network (NSN) gained rapid success through securing various contracts
along with the mergers/acquisitions of other companies that have also undergone
various legal issues. These companies would include Cisco/Scientific Atlanta,
Alcatel/Lucent with their use of outside consultants who secured foreign deals, and
Ericsson/Marcon who was found to be involved in child labor litigations (Landes, 2008).
These four entities alone would make up 75% of the total global sales for wireless
telecom equipment (Weisberg, 2013). Alone, NSN facilitated its own acquisitions
through Israelis Atrica and the UKs Apertio, which allowed the company to gain
customers in regional areas covered by other telecom competitors such as Orange, TMobile, O2, Vodafone, and Hutchinson 3G (Weisberg, 2013).

Finally after the

acquisition of the wireless equipment division of Motorola, along with their 6,900
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employees, this Siemens-subsidiary restructured and terminated around 17,000

employees within less than a year of the deal (Weisberg, 2013). Despite already being
involved in legal issues at the time, the business practices initiated by this company not
only eliminated its competition but also negatively impacted the lives of thousands of
people, both former employees and the residents of these foreign nations.
Besides the fact that Siemens had to pay not only their fine, but also 1 billion
USD to improve their own internal compliance process, the past practices they engaged
in did not only damaged the business culture in the countries mentioned in the case, but
also the countrys actual culture. Venezuela is currently ranked 161/175 on the
corruption perception index, Argentina 107/175, Israel 37/175, China 100/175, Siemens
did not only encouraged this practice but they also hired specific people to do it for their
company and were able to do it successfully for a long period of time, which only
demonstrated the efficacy this practice had.

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Siemens Now
Because of its corporate revisions after the corruption scandal came to light,
Siemens is now a changed company. In light of their corruption charges, Siemens hired
Peter Lscher as its new CEO, a drastic change seeing as how Siemens had never
before in its history hired an outside CEO. In Lschers first month as CEO he
drastically restructured the organization: firing a lot of executives and managers and
further streamlining the operations of the company. Lscher increased efficiency by
condensing different branches of Siemens, and getting rid of many of its smaller
acquisitions that had been acting independently of the corporation up until this point.
The changes that Lscher made successfully reduced bureaucracy within the
organization, and made it easier for Siemens to keep up with the rapidly changing world
(Lscher, 2012).
Despite all of his positive changes, Lscher was forced to resign as CEO of
Siemens in July of 2013 due to missed profit marks for multiple periods. Lscher was
replaced by Joe Kaeser, who continued Lschers policy of streamlining the company
by cutting jobs (You're fired! 2013). Mr. Kaeser increased Net Income, helping to restore
Siemens to its former glory (Bryant, 2014).
Overall, Siemens still currently ranks as one of the most valuable brands in the
world, showing that while its corruption scandal may have temporarily slowed the
company, it did not defeat them.

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Take-Away Value
Discussing this case within our team, we came to the conclusion that even
though bribe might not be the best way to do business, certain countries function with
this practice best. Third-world countries tend to function slowly in terms of business, and
giving a small incentive to someone might work to speed things up, but over doing it can
be counterproductive and detrimental to both the country and the organization.
Siemens had the opportunity to build a powerful firm with multibillion dollar
contracts, but when this practice became illegal in the countries they were practicing it,
they decided to continue their practices in a less obvious way. This did not only harm
the company, but it had collateral damage in the form of smaller firms competing
against Siemens and the population of countries of operation also being affected.
Businessmen and government employees got so comfortable with receiving money to
make a deal happen or to hurry a document out, that even nowadays they have not
stopped and it is still expected in some countries.

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References
Bryant, Chris (2014, Jan 28). Siemens net income beats expectations as Joe Kaeser steers recovery. Retrieved 9 17,
2015, from ft.com.
Hill, C. (2014). Ethics in International Business. In C. Hill, Global Business Today (8th ed., p. 129). New York:
McGraw-Hill.
Landes, D. (2008, May 14). Ericsson in child labour scandal. Retrieved from The Local: thelocal.se
LICHTBLAU, E. (2008, Dec 15). Siemens to Pay $1.34 Billion in Fines. Retrieved 9 10, 2015, from New York Times.
Lscher, Peter (2012, Nov). The CEO of Siemens on Using a Scandal to Drive Change. Retrieved 9 17, 2015, from
hbr.org.
Miller, T. C. (2008, Dec 20). At Siemens, Bribery Was Just a Line Item. Retrieved 9 10, 2015, from Propublica.org
Mgmt., S. S. (2015, July 1). Basic Principles of Code of Conduct . Retrieved 9 10, 2015, from Siemens.
Scarboro, C. J. (2008, Dec 15). SEC Charges Siemens AG for Engaging in Worldwide Bribery. Retrieved from
Securities Exchange Commission: SEC.GOV
Watson, B. (2013, Sept 18). Siemens and the Battle Against Bribery and Corruption. Retrieved 9 10, 2015, from The
Guardian.
Weisberg, R. (2013, Apr 23). Ethical Challenges in Developing Markets. Retrieved from Nokia Siemens Network.
The World's Most Valuable Brands (2014, Jan 28). Retrieved 9 17, 2015, from forbes.com
You're fired! Siemens replaces Loescher as CEO. (2013, July 31). Retrieved 9 17, 2015, from cnbc.com.

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