SIEMENS SCANDAL ANALYSIS 1

Siemens Scandal Analysis

By Name

Course

Professor

University

City/State

Date
 SIEMENS SCANDAL ANALYSIS 2

Executive Summary

The main objective of many companies is gain recognition due to its responsible

management and ethical performance. The society, on the other hand tends to demand more

social responsibility from these companies. Information globalization, supported on the

development of new communication methods helps to know quickly without any geographical

limit. Achieving a responsible management is thus understood as more of a process than the

result. Integrating Corporate Social Responsibility into a business strategy requires a continuous

process of improvement, understanding and monitoring. Most companies often fail in

accomplishing this process. Hence, this report analyzes the failure of responsible management by

Siemens’ a German engineering company.

In 2006, Siemens was accused of bribery; the company had to change its leadership,

culture, structures and processes. The event happened when bribery was a common practice in

Germany, but Siemens scandal was the greatest in German history, causing damages of about 1.6

billion Euros. In order to win contracts, the company’s managers gave bribes to their business

partners and to some government officials. Employees who left the company were given good

payoffs in order to keep the illegal affairs of the company private. In 2006, the company illegal

acts were revealed, and Siemens was determined to face the truth easing its recovery path. The

scandal, however, ashamed the company’s employees and managers, since they had to undergo a

thorough public scrutiny. The investors were angry since they had been relying on inaccurate

financial statements.

Upon discovery of the alleged scandal by the German authorities, Siemens were initially

defensive since the top managers denied being aware of the scandal. The company’s

shareholders were unhappy since the scandal was developing prematurely. The senior executives
 SIEMENS SCANDAL ANALYSIS 3

however pledged to restore the restore the lost reputation. The company employed an adviser

who would set rules to ensure managers were not tempted by easy and illegal methods of

achieving their targets. The employees were also trained on anticorruption and ethical practices,

and by the end of 2008, the company culture had changed to one that followed ethical standards.

The report reveals that behaviours that are unethical can turn to be very expensive, and it is

essential for the management to be responsible for avoiding such scandals.

 SIEMENS SCANDAL ANALYSIS 4

Introduction

The expectation of corporate managers is to maximize the returns of investors and at the

same time comply with the regulatory standards. In addition, it should avoid conflict of interest

and enhance the company’s reputational capital. Currently, there are arrests of top managers,

indicating increasing failure of responsible management and corporate irresponsibility that has

eroded the global and domestic trust of markets in U.S and all over the world. For example, the

employees of Siemens a German engineer giant had been using millions’ of Euros through false

bills to make bribes in order to win contracts. According to Georgiev, (2009, 108), senior

managers were using removable notes to allow documents that were potentially incriminating.

Siemens’ Scandal

In November 2006, the German authorities revealed Siemens’ massive corruption

scandal. For about 7 years, the company had used illegal funds to pay bribes of about 1.3 billion

Euros in provisions form. The bribes were paid to lower level governments’ offices, business

partners and to also to the whole governments; the bribes were paid by around 300 employees. In

order to keep things private, the people involved in these transactions were awarded generous

payoffs when leaving the firm. The Siemens bribery scandal is the greatest in German history

and it caused damages of about 1.6 billion Euros (Stephen & Greyser. 2009, p.56).

The company paid some employees to spy on the trade union representatives. Members

of the AUB were also given payoffs for about 20 years, which were in the form of luxury

excursions and direct bribes among others. AUB is an organization of employer-friendly labour

representatives which are opposed to the labour union representatives (Onkvisit & Shaw, 2009,

89). In 2006, the former AUB chairman faced allegation on tax dodging, breach of trust and
 SIEMENS SCANDAL ANALYSIS 5

influencing the elections of the representatives of workers (Bribery, Corruption, and the Foreign

Corrupt Practices Act. 2011, 14).

Social Impacts of Siemens Scandal

Siemens was ashamed by the scandal, not just before the angry investors and

shareholders but also the citizens of Germany. In addition, most employees felt humiliated. The

company’s’ trustworthiness was greatly scrutinized; its integrity was questioned and also the act

of the management to tolerate the said practices. The basic competence of the board was

questioned by a leading shareholders group for how it handled the affair (Bribery, Corruption,

and the Foreign Corrupt Practices Act 2011, 15).

The top managers of Siemens had their business, and personal reputation destroyed and

also their social standing due to the scandals. They all risked civil and criminal prosecution

which could lead to imprisonment or bankruptcy (Stephen & Greyser, 2009, 90). The board

members were also negligent since they failed to provide sufficient oversight, thus harming the

interests of investors and the public in general. Institutional and individual investors lost huge

amounts of their money the statements of financial performance were misleading through

inappropriate accounting practices. The government also suffered since there was a violation of

the political tradition of Germany of chartering corporations that serve the public. The managers

of Siemens abused their power to benefit some wealthy elites harming the public in a place

where there was no economic-democratic protection.

In the short run, Siemens received numerous benefits but they unfortunately lost their

client base and professional credibility. However, the company was determined to face the truth

and this helped it to recover quickly. The damage faced by the company was as the result of lack

of management integrity and responsibility. Understanding these lapses gives a structured way of
 SIEMENS SCANDAL ANALYSIS 6

addressing the moral roots of the current remedies of stakeholders and reduces the future

likelihood of such scandals (Giroux, 2013, 100).

Although Siemens delayed to respond fully, many experts in anticorruption and ethics

departments like the ‘Organization for Economic Cooperation and Development’ (OECD), and

the U.S. Federal authorities, appreciated it. The response seemed to be instructive as it was able

to analyze the effect of every intervention on the employees’ external reputation and internal

trust.

Immediate Response

When the German authorities discovered the scandal, Siemens regarded the case as an

issue of just a few million Euros. Within one month, the damage caused was estimated by the

company to be 420 million Euros. Top managers claimed to be unaware of the scandal. The CEO

who was running the company on the period of investigation expressed deep distress to the

shareholders since for his inability to prevent the alleged scandal. Therefore, Siemens’ first

response was a defensive acknowledgement that attempted to downplay a scandal that was

developing prematurely. The act was self-serving, and it neither protected nor enhanced the

shareholders’ impressions of the integrity of Siemens. Many people considered it to be

incompetent. The senior executives made pledges publicly to restore the battered reputation of

the firm (Giroux, 2013, 87).

Siemens’ Solutions

Siemens started their internal inquiry when there were four international investigations,

Siemens began their internal inquiry. Their objective was to have a system that will detect and

prevent any illegal and unethical practices and be an example to other companies on how to

correctly manage a business. The company appointed Debevoise & Plimpton, a law firm based in
 SIEMENS SCANDAL ANALYSIS 7

New York to conduct an internal investigation (Ogunyemi, 2013, 200). Some managers were

alienated from the investigation; however, the rigorous investigations convinced most sceptics in

the firm of the reforms pressing urgency; its thoroughness was a tangible display of integrity and

ability. However, this diagnosis was restated internally until a year later when the most serious

revelations were known. The company appointed a new CEO who gave employees a one-month

amnesty to come forward, with the exception of former directors. As additional evidence was

corrected the previous management board was held responsible for the scandal.

One factor that contributed to the scandal was the company’s growth strategy which

made managers pay bribes, to reach the performance target easily. In addition, the company had

a structure which was complex and decentralized; this allowed divisions to run themselves

effectively, with the headquarter having minimal oversight. The set processes on balances,

checks and accountability made it ease for the payments to be done. Some people however

argued that the corporate culture of the firm appeared to tolerate the activities, making staff feel

that bribes were both encouraged and acceptable; this made them to be complicit in the deceit. At

the time of the scandal, giving and taking bribes was commonly practiced in Germany and could

also be deducted against tax. (Onkvisit & Shaw, 2009, 71).

Reforming Interventions

Ogunyemi, (2013, 190), suggest that Siemens was faced with the challenge of creating a

culture where managers will not be tempted by easy and illegal behaviours. In order to set new

processes and rules on anticorruption and compliance in the global business, an advisor was

appointed by the company to help in the set up. They were designed to affirm the elements that

constitute the trustworthy of a business and put in place constraints on the operating procedures.

The design included a global compliance programme aimed at preventing, detecting and
 SIEMENS SCANDAL ANALYSIS 8

responding. The company hired more than 500 compliance officers to control for the trustworthy

conduct.

Consultants’ requirements on relationships were strict, and Siemens introduced

compliance hotlines and help desks. A web portal was created in order for every employee to

evaluate the risk while interacting with clients and suppliers (Georgiev, 2009). The objective of

these interventions was to shape the integrity of employees through their ability improvements,

with a fair treatment of any potentially compromised employee who came forward.

The company enacted new processes, procedures and people, but according to Giroux,

(2013, 67), this does not bring any difference without a change of culture. Thus, Siemens’

employees underwent a training programme where they were educated on anti-corruption

practices. In 2008, the company had trained about half of its employees globally on

anticorruption issues, through the format of a classroom or web-based courses. Siemens also

stopped doing business with countries like Sudan which are known for unethical and corruption

practice. In addition, the company discontinued their World Bank funding application for 2

years. A fifteen-year programme agreement was created by the World Bank and Siemens which

bided Siemens to pay $100 million to any NGO that was fighting corruption. The company has

taken more than 900 internal disciplinary actions, which include dismals (Ogunyemi, 2013, 108).

According to Albrecht, Thompson & Hoopes, (2011, 589), the company’s CEO ensured

great performance with highest ethical practices. He also changed the interventions that were

formerly used by replacing the complex matrix culture to a more streamlined structure which had

only three divisions. In order to ensure good communication between managers and direct

reports, he called for high transparency level, responsible management and maximum speed.

Evaluation
 SIEMENS SCANDAL ANALYSIS 9

In the year 2008, Siemens reviewed all of its bank account statements, documents and

transactions. The company has received praise due to its efforts to identify practices that are

unacceptable, and prevention of re-occurrence. Siemens scandal caused it 2.5 billion which

included fines, external advisers’ fees, xand cost of analyzing its financial transactions and

Executives bail payments. The company could also not deal with some clients in the future. Due

to the hostile and intense public scrutiny, the employees underwent shame for two years; it is

thus difficult to calculate this cost. The company’s CEO had an effective approach of ending

Siemens’ corruption, however, changing the culture of the company to one that follow the ethical

standards seemed to be a hard task (Albrecht, Thompson & Hoopes, 2011, 590).

Siemens was in June 2008 declared as the company that was most squeaky clean by the

Executives who were responsible for overseeing the company’s compliance and ethics (Siemens:

A New Commitment to a Culture of Compliance, 2011, 109).

Conclusion and Recommendations

A failure of responsible management takes several years to be resolved, and can be very

costly and debilitating. It implies that it is essential to invest proactively in implementing an

organizational system that support and encourage conducts that are trustworthy. A system like

this cannot rely on structures, procedures and rules alone, but should also consider the

company’s norms and cultural values that guide the managers’ behaviours and decision making

on a daily basis. Just like dealing with procedures or structures that are deficient, removing

cultural practices and values that are deviant is important for organizational resilience against

responsible management failures. To dismiss developing scandals is considered as incompetent

and self-serving, it also tend to violate further the trust compounding the previous problem. The
 SIEMENS SCANDAL ANALYSIS 10

best action is to acknowledge the alleged accusations and share the available facts and then the

company should then start an independent and urgent inquiry (Giroux, 2013, 46).

To repair the damages caused, Siemens required a deep overhaul of the culture of the

organization, this received resistant due to the threat coming from the trust repair response and

failure. Therefore, the objective of a company’s should be to embrace ethical values into the

company’s daily activities and also prevent management failures in the future. The case study of

Siemens demonstrates management failure and how it can strengthen the reputation of the

organization beyond its previous state of failure. An organization is often motivated by a crisis

which provides a necessary and strong impetus for major changes. It also unleashes resources

and other ways of thinking that are considered to be difficult to leverage in normal

circumstances.
 SIEMENS SCANDAL ANALYSIS 11

Bibliography

(2011). Bribery, Corruption, and the Foreign Corrupt Practices Act. 1-21.

(2011). Siemens: A New Commitment to a Culture of Compliance. 107-141.

Albrecht, C., Thompson, J., & Hoopes, J. (2011). Productivity and Prestige in Business Ethics

Research: A Report and Commentary On The State Of The Field. Business & Society. 50,

580-606.

Georgiev, P. 2009. Corruptive Patterns of Patronage in South East Europe. London: Springer

Science & Business Media.

Giroux, G. (2013). Business Scandals, Corruption, and Reform: An Encyclopedia. U.S.A: ABC-

CLIO.

Ogunyemi, K. (2013). Responsible Management Understanding Human Nature, Ethics, And

Sustainability. [New York, N.Y.] (222 East 46th Street, New York, Ny 10017), Business

Expert Press.

Onkvisit, S. & Shaw J. (2009). International Marketing: Strategy and Theory. New York:

Routledge.

Stephen A. & Greyser. (2009). Corporate brand reputation and brand crisis management.

Management Decision. 47, 590-602.

 SIEMENS SCANDAL ANALYSIS 12

Evidence Portfolio

The book “Responsible Management Understanding Human Nature, Ethics, And

Sustainability written by Ogunyemi was important since it describes and analyze Siemens

experience and response about their failure of responsible management. The author suggests that

managing and understanding trust. Organizations that take their commitments and ethical values

seriously consider supporting and building trust to be a critical competency. The book

demonstrates how companies like Siemens have repaired their lost reputation successfully and

gives insight into the process. The journal of “Corporate brand reputation and brand crisis

management. Management Decisions” explains how moral competence in the practice of

management is addressed by the management integrity, and how Siemens eroded the dimensions.

“Business scandals, corruption and Reform” a book written by Gary Giroux suggest that the

corruption has greatly impacted the economy in world since civilization. Due to the development

of technology companies are able to manipulate the market capitalism for their self gains.

The books used in the report provides information on how to understand how to address

behavioral and moral complexity through balancing management competing values and theories

of ethics to prevent responsible management failure in the future.