Siemens: engineering change in anti-corruption This case

examines the Siemens bribery scandal and its

repercussions for the firm’s approach to the management
of ethics and compliance. The case examines the
circumstances that led to the firm paying the highest ever
fine for a bribery settlement, and the actions Siemens
subsequently took to institute an industry-leading
management system to help eradicate the root causes of
bribery at the firm and to guard against future violations.
Founded in Germany in 1847, Siemens is not only
Europe’s largest engineering company, but it also
regularly counts among the top 50 companies in terms of
revenue among the global Fortune 500. The engineering
giant produces a wide range of goods and services, from
light bulbs to power stations, and has a leading position in
many of its markets, which include white goods, rail
transportation systems, health-care technology, IT and
financial services, to name just a few. It is a large,
decentralized conglomerate operating in more than 190
countries, and employing more than 360,000 people
across the globe. Despite its impressive commercial track
record, and a regular place high on various lists of most
respected companies, Siemens also has one record that it
is no doubt rather less proud of. In December 2008, after a
long-running bribery scandal, the company settled out of
court with the US authorities and was landed with a
record-breaking fine of $800 million—a figure far in excess
of any previous penalty imposed under the US Foreign
Corrupt Practices Act. Along with fines levied in Germany
and other countries, as well as a World Bank settlement in
2009, the total paid by the company rose to more than
$1.7 billion, roughly 35 times larger than any previous anti-
corruption settlement. However, including lawyers’ and
accountants’ fees charged to the company during the
cases, the full cost was ultimately even higher, at well
above $2.5 billion in total. The company had been
investigated on multiple counts of bribery, adding up to
more than $2.3 billion in alleged payments during the
1990s and early 2000s. This included allegations of $5
million paid to the son of the Bangladeshi prime minister
for a mobile phone contract, $22 million to Chinese
officials for a metro trains deal, and $40 million worth of
payments in Argentina for a $1 billion contract to produce
identity cards—just to name a few examples. The scandal
unfolds The Siemens case started coming to light in the
early 2000s when prosecutors in Germany and the US first
began investigating allegations of bribery at the company.
The firm and its leadership initially denied any knowledge
of the payments. But with more incidents coming to light,
the magnitude of the payments becoming ever higher, and
trials of former company managers suggesting that bribery
was common practice in the firm, this position became
increasingly tenuous. As the scandal unfolded, it became
clear that bribery at Siemens was not simply a case of a
few rogue managers acting alone and breaking the
company rules to secure lucrative overseas contracts.
Corruption looked to be endemic in the company, or, as
one prosecutor put it, ‘bribery was Siemens’ business
model’. The various investigations and subsequent trials
brought to the surface a murky picture of the payments
made to public officials in a bid to win large overseas
contracts for the company. Given that much of Siemens’
business relies on large government contracts, often in
developing countries with poor governance and a high
prevalence of corruption, Siemens’ managers had often
found themselves in a competitive market where they and
their rivals were frequently expected to bribe to secure
business. According to various witness statements,
Siemens’ employees often simply thought that bribery was
how the game was played and that they had to engage in
corruption in order to win business, keep jobs secure and
their company strong. Corruption appeared to be seen in
rather amoral terms and as a victimless crime—if a crime
at all. Furthermore, it did not exactly help that the German
corporate tax code only made bribery technically illegal in
the late 1990s. Until then, bribes paid in foreign countries
were even tax deductible and were declared under the
notorious label ‘useful expenses’ (in German: nützliche
Aufwendungen). Siemens, like most German
multinationals, also tended to grant a lot of autonomy to
local executives—the argument being that they dealt with
complex technical products with a need for a high level of
customer-specific local adaptation. The downside from an
ethical perspective, however, appeared to be twofold.
First, decisions about payments could be taken locally,
without any real oversight or understanding from the
headquarters. Second, if the leadership back home did
become aware, the decentralized structure could make it
difficult to implement effective ethics management across
the firm’s span of operations. When the first signs of the
bribery allegations surfaced in 2005, the then newly
appointed CEO announced that fighting corruption would
be his top priority. However, by 2007, he and the
supervisory board chairman had both been forced to
resign because of the ongoing stream of bribery
allegations that engulfed the company. The firm then
made its first appointment of an outsider as CEO, Peter
Löscher, who was tasked with getting the firm back on its
feet again. Beginning the ethical turnaround Löscher, the
new CEO, needed to act fast to head off the bribery
scandal, but he also faced a company with corruption
apparently deeply engrained in its culture, making it
particularly hard to initiate a major change in attitudes.
Many Siemens employees had been with the company for
their entire career, leading to densely woven webs of
contacts, informal relationships, and networks, in which
problems like corruption (and its cover-up) could thrive. As
the trial hearings revealed, the maintenance of corruption
on the scale alleged at Siemens had actually required a
deep degree of loyalty from employees. One executive
testified to the court that he was chosen to become the co-
ordinator of the ‘useful expenses’ payments because his
superiors trusted him and because he was a loyal worker
who could be relied on not to simply direct some of the
bribe money into his own pockets. Within the first few
months of his tenure, Löscher had made wholesale
changes, including replacing 80% of the firm’s top-tier
executives, 70% of its second tier and 40% of its third tier.
To ensure that auditing personnel throughout the company
were competent, every member of the firm’s 450 audit
function was required to reapply for their jobs. Siemens
also brought in a new General Counsel, appointed the co-
founder of Transparency International (an international
anti-corruption NGO) to serve as its compliance adviser,
and agreed to co-operate with the US authorities in its
investigations. The firm also initiated an amnesty for any
whistleblowers with knowledge of bribery in the company
(which was taken up by more than 100 staff) and spent
millions on an internal investigation conducted by a US
law firm. The new leadership team began spreading the
message across the company that ‘only clean business is
Siemens business’. Siemens institutes a new compliance
infrastructure Central to the new approach instituted by
Löscher and his new management team was a much
enhanced and far-reaching compliance system. The firm
set up a compliance management system to oversee the
prevention, detection and response to legal and ethical
violations at the firm. From 86 compliance officers in 2006,
the firm soon expanded to more than 500. Siemens also
developed a series of anti-corruption compliance policies,
tools, and communication channels, including a
compliance audit department, web-based risk assessment
tools for employees, and 24/7 secure reporting channels
for employees and external stakeholders. The new
compliance system also involved systematic training for
Siemens employees. Between 2007 and 2013, the firm
completed over 300,000 compliance training sessions for
staff, about a third of which were classroom based over
four to eight hours, and the rest were online. The company
also instituted intensive and ongoing training for
compliance officers, regular training for ‘sensitive
functions’ such as sales, and a compliance module for
new employees. In 2012, compliance training was again
refreshed to focus on face-to-face ‘integrity dialogue’
among managers and their teams. To this end,
compliance officers train business unit managers, the
managers train the employees who report directly to them,
and they in turn train the employees that report to them.
Many of these changes were already implemented when
Siemens was finally sentenced by the Department of
Justice in 2008. For example, extensive compliance
training had been provided to over half of the workforce by
the time the fine was handed down. By September 2008,
Siemens’ senior leadership has also visited 54 of the firm’s
highest-risk countries as part of a ‘compliance roadshow’
to explain to country managers and employees the
importance of compliance. Indeed, Siemens’ impressive
efforts to institute the new compliance system along with
its willingness to conduct its own independent
investigation and co-operate with the Department of
Justice investigators meant that the huge $800 million fine
it received was actually far less than it would otherwise
have been. As the Department of Justice stated, ‘the
reorganization and remediation efforts of Siemens have
been extraordinary and have set a high standard for multi-
national companies to follow.’ Although the nature of the
final settlement in the US did not actually require S iemens
to admit to bribery (it was only required to admit to having
inadequate controls and keeping improper accounts), the
firm acknowledges that it experienced ‘systematic
violations of anti-corruption laws and accounting
regulations … over many years’. The new Siemens’
leadership made it clear that the firm needed to continue
to change its ways. As the CEO, Peter Löscher, said: ‘We
regret what happened in the past but we have learned
from it and taken appropriate measures. Siemens is now a
stronger company.’ The US settlement in fact required the
company to further implement and continue its compliance
enhancements. This included that an independent
compliance monitor assist with the continuous
improvements and a review of the compliance systems
between 2009 and 2012. During this time, Siemens
continued to strengthen its compliance policies, tools, and
training. In 2009, the board signed off a revised version of
the firm’s Business Conduct Guidelines, which sets out the
firm’s principles and rules on ethical behaviour. Additional
compliance guidelines were also introduced to give more
specific advice on corruption. However, in general the firm
has looked to simplify essential compliance rules so as to
make them easily understood across the company and
more helpful to employees. This appears to be working to
the extent that inquiries to the firm’s ‘Ask Us’ compliance
help desk reduced year on year from around 3,000 in
2010 to about 400 in 2013. After the US ruling Siemens
also moved to integrate compliance measures into
personnel processes, such as hiring, promotions, and
management bonuses. In 2012, a new comprehensive
compliance risk assessment system was subsequently
instituted whereby compliance risks are systematically
identified, assessed, and mitigated by senior management
on an annual basis. As a result of these developments,
Siemens has been widely recognized as having developed
an outstanding ethics and compliance management
system. Even so, it remains a work in progress to achieve
a corruption-free company, especially when bribery might
still be seen by some as necessary to drive business
opportunities. As CEO Peter Löscher said at the time of
his appointment, instilling an ethical corporate culture ‘is a
marathon for us, not a sprint’. One of the biggest
challenges facing Siemens is ensuring that its ethics
management does not conflict with its business success.
According to Löscher, ‘performance with ethics— this is
not a contradiction, it is a must’, but if their clients still seek
bribes and their competitors are willing to pay them, then
Siemens may well be faced with a handicap. One way that
the firm has sought to tackle this is through its anti-
corruption outreach activities that go under the banner
‘Collective Action’. That is, in addition to internal company
changes, Siemens also started to engage its external
stakeholders in anti-corruption efforts to create fairer
market conditions. This began as part of a groundbreaking
settlement agreed with the World Bank in 2009 following
the firm’s acknowledged misconduct and the bank’s
investigations into corruption in the awarding of contracts
to Siemens subsidiaries. The settlement committed
Siemens to pay $100 million over 15 years to support anti-
corruption work, to co-operate to change industry
practices, and work with the World Bank to fight
corruption. To comply with the settlement, Siemens
launched the ‘Integrity Initiative’ with a budget of $100
million to support anti-corruption projects. It also took a
lead in initiating project-specific and industry-wide
compliance pacts to ensure fair bidding on public
contracts. For example, Siemens Argentina recently
concluded a compliance pact with several competitors in
the field of energy transmission. In Brazil, Siemens has
started to support a project aimed at creating transparency
when awarding infrastructure projects connected with the
soccer World Cup in 2014 and the Olympic Games in
2016. The company also seeks to increase the
compliance awareness of current and future business
leaders by conducting business round-table discussions
and presentations, and developing learning materials for
students. Löscher is widely credited with turning around
the Siemens corruption scandal and pulling the company
out of its crisis. However, concerns over the firm’s
performance and its failure to meet the CEO’s own
aggressive growth targets led to his ousting in 2013. ‘The
clean-up man,’ one newspaper ruefully observed, ‘was
swept aside’.