Visit the online resources for further key reading suggestions. CASE 5 Siemens: engineering change in anti-corruption FCPA FOREIGN CORRUPT PRACTICES ACT 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 Siemenssubsequently 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 sta- tions, and has a leading position in many of its markets, which include white goods, rail transportation systems, healthcare technology, IT, and financial services, to name just a few. It is a large, decentral- ized conglomerate operating in more than 190 countries, and employing more than 370,000 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 Decem ber 2008, after a long-running bribery scandal, the company settled out of court with the US authori- ties and was landed with a record-breaking fine of $800 million-at the time a figure far in excess of any previous penalty imposed under the US Foreign Corrupt Practices Act. While in recent years firms such as Rolls Royce, French transport company Alstom, and Brazilian engineering company Odebrecht have paid a whopping $880 million, $1 billion, and $2.6 billion in fines for bribery-related crimes, respectively, Siemens' settlement, along with fines levied in Germany and other countries, as well as a World Bank settlement in 2009, brought the total paid by the company to more than $1.7 billion. This was 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. as the exec 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 water who could paid to the son of the Bangladeshi prime minister for a mobile phone contract, $22 million to Chi- nese 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 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 corrupt tion in order to win business, and keep jobs secure and their company stro by 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: nutzliche Aufwendungen).tives-the argumen ith 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 supervi- sory board chairman had both been forced to resign because of the ongoing stream of bribery alle- gations that engulfed the company. The firm then made its first appointment of an outsider as CEO, Peter Loscher, who was tasked with getting the firm back on its feet again. Beginning the ethical turnaround Loscher, 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, Loscher had made wholesale changes, including replace ing 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 Coun- sel, 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 investiga- tions. The firm also initiated an amnesty for any whistle-blowers 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 Loscher 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 compli- ance 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 sys- tematic training for Siemens employees. 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 pro- vided to over half of the workforce by the time the fine was handed down. By September 2008, Siemens' senior leadership had also visited 54 of the firm's highest-risk countries as part of a 'compliance roadshow' to explain to country managers and employees the importanceCHAPTER 5 Managing Business Ethics 229 QUESTIONS 1. What were the main causes of the Siemens corruption scandal? Which, in your opinion, would be the most difficult to resolve? 2. Critically evaluate the initiatives that Siemens has implemented to address bribery problems across its operations. Are these sufficient to tackle the causes of the problems or would you suggest further action? 3. What kind of balance has Siemens struck between values and compliance-based approaches to ethics management? Do you think this is the most effective approach to corruption problems? 4. What is the relationship between corruption and business performance? Can ethics manage- ment be organized to achieve business success and high ethical integrity simultaneously, or are they contradictory goals? 5. To what extent is a fine-however high-an adequate response to Siemens' misconduct? Are settlements like that of the World Bank more or less effective in developing cleaner business? Visit the online resources for web links to useful sources of further information on this Case. s and there SOURCES 5 OnewayDietz, G. and Gillespie, N. 2012. Rebuilding trust: how Siemens atoned for its sins. Guardian, 26 which go under March: http://www.theguardian.com/sustainable-business/recovering-business-trust-siemens. mens also seat Dougherty, C. 2007. Chief of Siemens pledges to streamline operations. New York Times, 6 July: http://www.nytimes.com/2007/07/06/business/06siemens.html?fta=y&_r=0. ket conditons 109 followingh Koehler, M. 2012. Revisiting a Foreign Corrupt Practices Act compliance defence. Wisconsin Law Review, 609: http://wisconsinlawreview.org/wp-content/files/13-Koehler.pdf. the awarding? Reguly, R. 2013. Siemens' Peter Loescher: The cleanup man who was swept aside. Globe and Mail, 0 million over 11 October: http://www.theglobeandmail.com/report-on-business/careers/careers-leadership/sie- mens-peter-loescher-the-cleanup-man-who-was-swept-aside/article 14848291. Schubert, S. and Christian Miller, T. 2008. At Siemens, bribery was just a line item. New York Times, 20 December: http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html. Siemens. 2013. The Siemens Compliance System, Munich: Siemens AG: http://www.siemens.com/ about/sustainability/en/core-topics/compliance/system/index.php. Siemens. 2016. Responsible Behaviour: Compliance at Siemens, Munich: Siemens AG: https://www. siemens.com/content/dam/internet/siemens-com/global/company/sustainability/downloads/respon sible-business-behavior-compliance-at-siemens.pdf. Siemens. 2018. Compliance Included, online game, Munich: Siemens AG: https://co-app.siemens.com. NOTES For more information, see https://www.ikea.com/ms/ar_AE/about_ikea/our_responsibility/iway/index.html. Ethics.aspx. For more information, see https:/archive.ama.org/archive/AboutAMA/Pages/Statement%20of%20 Compliance with the Financial Conduct Authority (FCA) is mandatory for certain finance professionals the UK, with breaches resulting in disciplinary action and/or dismissal. For more information, see https:// www.fca.org.uk/publication/corporate/code-of-conduct.pdf.228 PART A Understanding Business Ethics 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 Siemens 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 Loscher, said: We regret what happened in the past but we have learned from it and taken appropriate measures. Siemens is now a stronger company.' 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. One of the biggest challenges facing Siemens is ensuring that its ethics management does not 5 conflict with its business success. According to Loscher, '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, which go under the banner 'Collective Action'. That is, in addition to internal company changes, Siemens also started to engage its exter- nal stakeholders in anti-corruption efforts to create fairer market conditions. This began as part of a ground-breaking 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 to work with the World Bank to fight corruption. To comply with the settlement, Siemens launched the 'Integrity Initiative', with a budget of $100 mil- lion, 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 f energy transmission. In Brazil, Siemens 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 it also attempts to inspire its customers and engage in external advocacy arour y around integrity and comply ance. In 2018 Siemens launched a 'Compliance Included' online game that encouraged players to become 'compliance champions' across topics including anti-trust, human rights, and anti-corruption As a result of these developments, Siemens has been widely recognized as having 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 neent sary to drive business opportunities. As CEO Peter Loscher said at the time of his appointment instilling an ethical corporate culture 'is a marathon for us, not a sprint' Indeed. while Loscheri widely credited with turning around the Siemens corruption scandal and pulling the company of its crisis, concerns over the firm's performance and its failure to meet the CEO's own aggressies swept aside. growth targets led to his ousting in 2013. 'The clean-up man; one newspaper ruefully observed, 'was