Paper 11: Lessons from Siemens for South African companies caught up in corruption

The manner in which German engineering firm, Siemens, changed its profits-at-all-cost corporate culture, cleaned up its ethics and held employees found guilty of wrongdoing accountable following a giant corruption scandal, has valuable lessons for South African firms that have been caught up in corruption. Siemens, established in 1847, with 475, ooo employees, was one of the German companies trusted for reliable, integrity and efficiency, until a corruption scandal in 2006 severely damaged its squeaky-clean reputation. The German company manufactures a range of products from nuclear power stations, trains to hearing aids in 190 countries. In 2007, Siemens notched around 70billion euros in sales.

In 2006, Siemens was revealed to have spent at least 1.3billion euros on suspect payments, used to pay bribes to secure contracts around the world, but accounted for as “fees” (Reuters 2008). In 1992, following a previous, corruption, the company had tightened its corporate governance. It became mandatory for all managers to sign compliance, ethics, and governance guidelines every year. After the 1992 corruption scandal, the company joined Transparency International as a corporate member. It also joined the Extractive Industries Transparency Initiative (EITI), an organisation working to ensure transparency in financial dealings between the extractive industries and developing countries. Siemens six years before the 2006 corruption scandal erupted had introduced a policy that made it compulsory for its companies to include anti-corruption clauses in supplier contracts. The company had 900 compliance officers in 10 departments to enforce compliance with ethnical guidelines.

In 2007, the company introduced ethical “guidelines”, which stated: “No employee may directly or indirectly offer or grant unjustified advantages to others in connection with business dealings, neither in monetary form nor as some other advantage” (Siemens 2007). Court papers by prosecutors in the US and Germany showed that the Siemens ethic, anticorruption, and good governance policies were a “paper program”, for show, to mislead shareholders, regulators, and customers, and that its internal compliance systems were “toothless,” not holding wrongdoers effectively accountable (Schubert and Miller 2008).

Causes of corporate corruption
In some company’s, corruption becomes normalised. Blake Ashforth and Vikas Anand (2003) makes a case for three mutually reinforcing behaviours that normalise corruption in companies. These are: “institutionalization, where an initial corrupt decision or act becomes embedded in structures and processes and thereby routinized; rationalization, where self-serving ideologies develop to justify and perhaps even valorise corruption; and (3) socialization, where naive newcomers are induced to view corruption as permissible if not desirable” (Ashforth and Anand 2003). In the socialisation process the “embedded systems and norms induce new employees to tolerate corruption and view it as permissible” (Taylor 2016: 2).

In companies where corruption is normalised “corrupt individuals tend not to view themselves as corrupt” (Ashforth and Anand 2003). Many employees “self-rationalised” a “denial of responsibility, denial of injury, denial of the victim, and an appeal to higher loyalties (such as loyalty to co-workers)” (Taylor 2006: 3; Heffernan 2011). Because of such “self-rationalised” behaviour within corporate environments when corruption has become normalisations “individuals engage in corruption that would otherwise violate their internal moral framework” (Taylor 2006: 4).

Often metaphors are used for incidents of corruption or it is given acceptable sounding line item names. At the Canadian company SNC-Lavalin Construction, who in 2019 pleaded guilty to fraud after the company between 2001 and 2011 paid US$47.5m in bribes to Al-Saadi Gaddafi and Libyan officials, to secure contracts, bribes were called Project Consultancy Cost or PCC (Seglins 2013).

Japan’s Marubeni Corporation which admitted to paying close to US$200m to bribe Nigerian government officials between 1995 and 2004, to secure US$6 billion in contracts, bribes were referred to as “cultural arrangements” (Chudi Offodile 2009). Research focusing on organisational behaviour point out corruption in firms could either be carried by employees to benefit the company, to benefit themselves or to benefit both the employee and the company (Pinto 2008). Corporate culture which puts profits above everything else, no matter how it is achieved, gives ample incentives for corruption. Similar high incentives schemes, which demands overly high targets also incentives employees to engage in corrupt practices to achieve targets (Taylor 2006).

Firm leaders “who set unrealistic targets based on opaque considerations yet keep themselves personally disengaged with frontline operational concerns may implicitly encourage corrupt activities while maintaining plausible deniability” (Taylor 2006: 5). Alison Taylor (2006:4) in her research in firms found that “corruption seems most likely in organizations where growth is a fetish, insecurity is rampant, and high performance goes unquestioned.” Typically, in such firms, those who reach the excessive targets with little regard for ethics, are often hero-worshipped. In such firms “rules and processes put in place to promote integrity may be selectively enforced and easily evaded” (Taylor 2006: 4). An organisational culture that where the “the ends justify the means” is acceptable often see high incidents of corruption. “Employees may face sales targets higher than industry peers, justified by the need for market dominance at any cost” (Taylor 2006: 5).

The kind of leadership at a firm also determines whether corruption will proliferate. Unethical, rule-breaking, and secret corporate leaders are likely to encourage employees to behave the same also – and organisational cultures will take roots which accepts corruption as the way things are done (Ashforth and Anand 2003; Schein 2004; Pinto 2008).

Weak corporate governance – with ineffective boards, which do not hold executives accountable; or some cases weak boards, combined with strong CEOs, who are rule-breaking, growth at all costs focused and who do not tolerate alternative views, are fertile corporate environments for corruption, unethical behaviour, and moral lapses.Where accountability is dispersed in governance arrangements,responsibility is devolved, combined with weak oversight, corruption is also likely to flourish (Taylor 2006). Leaders who manage in such a way to foster “plausible deniability” and in environments where no one is solely responsible for actions, also encourages corruption.

The country political, business and market culture also determine whether companies may be tempted to engage in corruption. In country that are systemically corruption, it is likely that public and private sector companies will be more inclined to behave corruptly. In such countries behaving corruptly may be the norm. Companies may fear that if they do not pay bribes for example, they lose their competitive advantage, and will not get contracts. This is the so-called “prisoner’s dilemma,” in which the company that does not do bribery, will lose out on contracts if every other company bribes in return for contracts (Poundstone 1992; Alexander and Plotkin 2013). It is crucial therefore that in countries that are systemically corrupt that private companies come together to make collective agreements not to act corruptly – and for companies to stick to such agreements (Ostrom 1990; UNODC 2013b; Van den Assem 2012).


Siemens 2006 corruption: “Organised Irresponsibility”

However, in 2006, Siemens, despite all these internal anti-corruption policies, regulations, and guidelines, were accused of corruption to the tune of US$1.4bn, in which bribes were paid for contracts across the world. Siemens bribed public and private officials to secure contracts. Witness statements revealed that the company’s culture of paying bribes was “common and highly organized” (Crawford and Esterl 2007a).Linda Thomsen, the director of the US Securities and Exchange Commission (SEC) at the time said the corruption was “unprecedented in scale and geographic reach” (SEC 2008).
Joseph Persichini Jr., the head of the Washington office of the Federal Bureau of Investigation (FBI) said: “Their actions were not an anomaly. They were standard operating procedures for corporate executives who viewed bribery as a business strategy” (National Public Radio 2008).

The behaviour of Siemens was described by the judge presiding over the company’s corruption trial as “a system of organised irresponsibility that was implicitly condoned,” by the management and the board (Reuters 2008). Corruption had become part of the business culture – accepted by many as the norm. It was disguised under euphemisms, accounted for through manipulation of laws in the countries they operated in and through accounting sophistry. Such unscrupulous behaviour was at best tolerated by senior management and the board, and at worse condoned by them; and ordinary employees taking their lead from senior management and the board seeing such unethical behaviour as acceptable. Employees partook in corruption because everyone else was doing so. One of the company’s managers, Reinhard Siekaczek, the former sales manager at Siemens’ telecoms division, in the first trial arising from the corruption was found guilty in 2008 in a Munich court of 49 counts of breach of trust over the corruption (Reuters 2008).

Siekaczek admitted to the German court that he established a slush fund and bogus companies used for bribery. He said when he tried to end the bribery, his superiors failed to act. The presiding judge Peter Noll said: “One can assume that Mr Siekazcek was part of a system of organised irresponsibility that was implicitly condoned and that he had acted at the behest of his superiors” (Reuters 2008). Judge Noll added: “It was evident that the company’s organisation encouraged slush funds and corruption. Basically, all control systems and the entire organisation was geared to make such behaviour possible” (Reuters 2008). Judge Noll also slammed former Siemens’ former head of compliance, Albrecht Schaefer, saying his duties were too narrowly defined. “It’s as if you were to equip the fire department with a toothbrush cup to extinguish fires,” Judge Noll said (Reuters 2008). Schaefer had earlier testified that the company’s senior management had ignored repeated warnings about bribery.

On the face of it, managers such as Siekazcek and Schaefer did not appear to see themselves as behaving corruptly because corruption was embedded in the systems and norms of the company. Although corruption may have violated their own moral framework, they have self-rationalised that they were serving the interests of the company by securing contracts for the company through bribery. Graham Dietz and Nicole Gillespie (2012) commented in The Guardian that Siemens’ “aggressive growth strategy that, arguably, compelled managers to see bribes as a tempting short-cut to hitting tough performance targets; a complex, matrix-like structure that allowed divisions to effectively run themselves, and poor accounting processes”, contributed significantly to the collapse in ethics.

After several international and internal investigations into the allegations, it became clear that Siemens had over the years secured global market dominance through bribery. Until then, Siemens was seen as a responsible corporate citizen, producing quality products, and spending significantly on corporate social responsibility programmes. Because of its perceived reputation for good corporate citizenship, the company in 1998 was invited by Transparency International’s German branch to become a corporate member. Typically, the first response by Siemens at the time when the corruption scandal erupted was to deny any corruption. Anonymous whistle-blowers first raised the alarm about widespread corruption at the firm to German, Swiss and Italian police. After extensive investigations, German police then moved to arrest employees and collaborators alleged to have been involved in the corruption.

Other governments also launched investigations into the Siemens corruption, including the US, Switzerland, Italy, and Lichtenstein. The US government started its own probe into the corruption scandal. Siemens in 2001 listed on the New York Stock Exchange. This meant it could be investigated under the US Foreign Corrupt Practices Act. It also had to adhere to the Sarbanes-Oxley Act, which required US-based companies to be behaved honestly. Siemens after the official investigations launched their own internal investigation led by US law firm Debevoise & Plimpton and by Deloitte Touché. Shareholders after they discovered the corruption then acted against the company board and management. The firm’s CEO Klaus Kleinfeld and Chairman Heinrich von Pierer resigned.

New CEO Peter Löscher then proclaimed a month-long amnesty for staff whistle-blowers. The amnesty did not include directors. Staff whistle-blowers came forward with damning evidence implicating board and executive members also. In 2008, Siemens pleaded to corruption under the 1977 US Foreign Corrupt Practices Act and paid the US Securities and Exchange Commission and the Justice Department US$8oom in fines. Siemens paid the German government another US$800m in fines for corruption.


Impact of the Siemens corruption

Private sector corruption is costly. “Private corruption affects the entire supply chain, as it distorts markets, undermines competition, and increases costs to firms. It prevents a fair and efficient private sector, reduces the quality of products and services, and leads to missed business opportunities” (UNODC 2013b).

Often one company pay bribes and get away with it, other companies in the industry may follow, creating a culture of paying bribes. “As companies use corrupt practices to gain a competitive advantage, they create a snowball effect throughout their industries, prompting other companies to engage in similar practices to remain competitive in the market” (UNODC 2013b).
Siemens’ corruption payment of bribes for contracts undermined competitors in the countries they operated in. Competitors unwilling to give bribes lose out on business. In developing countries many local businesses may run out of business and close – causing job losses, when large global companies pay bribes.If competitors have been squeezed out of the market because a firm paid bribes to win contracts, the corrupt firm can set inflated prices. It can provide mediocre quality services, products, and customer care (Lee-Jones 2018). “A company already paying bribes to sell its products may consider it unnecessary to invest in innovations, modern technologies, training of personnel and other activities that could improve its productivity and quality of services or products” (UNODC 2019).

In the many developing countries in which Siemens secured contracts through bribery, costs for services were often inflated – and countries and ordinary citizens from the deals secured corruptly.
Trust in Siemens were severely damaged – whether from customers, suppliers, and regulators. “Even if we adopt the position that the primary goal of business is to increase wealth or profits, using corruption to maximise profit will generate negative effects for the company, such as decreased employee morale, reduced productivity, loss of shareholder and investor confidence, and damaged reputation and business relations” (UNODC 2019).

Corruption when discovered is also costly. Corrupt companies are likely to pay fines, banned from doing businesses in some areas, and customers and suppliers may leave them. Employees found guilty of corruption may fail jail time. Staff may lose their jobs, as companies as companies lose market share, and may have to lay off staff. A company can go out of business. After the corruption scandal, Siemens was forced to restructure the company following the market losses. In June 2008, the company announced it plans to cut 17200 jobs (Deutsche Welle 2008). The company then said it needed to make savings of around US$1.9billion dollars by 2010 to remain competitive (Deutsche Welle 2008). The jobs cuts were the largest in its than 160-year history.

Siemens’ anti-corruption strategy
Under the 2008 agreement with the US Securities and Exchange Commission, Siemens had to appoint an independent governance monitor to oversee the company’s behaviour for four years, to see that it implements internal governance, compliance, and anti-corruption changes.
Siemens unveiled a new strategy to change the company’s organisational culture, from one that tolerates wrongdoing in the pursuit of profit, for a more honest one, called “Fit for 2010”. It set a target of three years to make an ethical turnaround.

In April 2007, Siemens CEO Klaus Kleinfeld resigned. He was replaced by Peter Löscher, an outsider. Heinrich von Pierer, the chairperson of Siemens advisory board was replaced by Gerhard Cromme, the former chairperson of the company’s audit committee. The company also restructured its executive structure reporting structure. It reduced the power of national executives in country subsidiaries to negotiate large local contracts. Such contracts were to be signed only at divisional level. Siemens appointed a new compliance director Peter Solmsen. In 2007, following cases brought to court by the German prosecuting authorities, two former midlevel managers were convicted of bribery and given suspended sentences. It hired US law firm, Debevoise and Plimpton, to lead an internal investigation into corruption, ethical and governance breaches. The firm reported to the supervisory board.
Siemens disciplined, including firing many, more than 900 staff. Siemens worked a partnership with the World Bank to fund anti-corruption activities for 15 years through setting up a US$100m fund, called the Siemens Integrity Initiative.

Siemens hired Michael Hershman, co-founder of Transparency to become its governance advisor, stress testing the effectiveness of the company’s overhaul of its governance practices. Siemens established an internal investigation unit. It also appointed an independent Ombudsman who staff, clients and the public can approach to report suspect behaviour, transactions, and ethical breaches.
Siemens internal audit function was exposed to be weak. Following the corruption scandal, the company reviewed its internal auditing function and procedures and strengthened it (Deutsche Well 2008).
Investigators into the Siemens corruption also flagged the fact that the company’s long-time external auditor, KPMG Germany, did not enough to point out wrongdoing in the years during which the corruption took place (Crawford and Esterl 2007b).

It set up compliance hotlines for employees. Siemens retrained all staff in anti-corruption practices. It introduced new strict internal compliance, risk, and client-supplier interaction rules. It introduces a new whistle-blowing channel that would be more protective to whistle-blowers as well more responsive. It prohibited retaliation against whistle-blowers. It centralised bank payments to control cashflow more effectively to prevent unauthorised payments. It also introduces stricter rules, monitoring and transparency for consultancy contracts. Consultancy contracts could only be approved if signed off by more than one person. The company trained all its staff on anticorruption, ethics, and good corporate governance. Siemens withdrew from certain countries where are governments are perceived to be systemically corrupt.

Conclusion: Corporate ethics lessons from Siemens
There are several key lessons from how the Siemens corruption scandal has been tackled.
Changing the organisational culture into one that supports ethical behaviour is crucial. This will mean going beyond the “traditional “bad apple” approach to wrongdoing, whereby effort is focused on identifying and sanctioning individuals with unethical intent” (Taylor 2017: 8).
Changing the corporate culture of an organisation – from the focus on profits at all costs to more sustainable goals are crucial. Siemens had a growth at cost culture, with many employees believing paying bribes were acceptable by the company to secure contracts to meet growth targets (Taylor 2006). “We thought we had to do it. Otherwise we’d ruin the company” (Schubert 2008).
Where the organisational culture was best on a growth at all costs, whatever the means, and no matter the consequences, “requires an active emphasis on values and behaviours that consider how growth is achieved, not just whether it is achieved” (Taylor 2006: 4). In such cases, company success criteria will have to be redefined, to include ethics, environment, sustainability, and corporate democratic citizen. Such a redefinition of corporate success must be done with all stakeholders, from employees, customers, shareholders, and investors (Taylor 2006).

Integral to an ethical organisational culture is what Patricia E. Dowden and Philip M. Nichols (2016) calls fostering the trust of stakeholders which include shareholders, customers, suppliers, employees, and civil society. Shareholders should hold boards and management better accountable. Senior management and board members implicated should be asked to leave. Siemens shareholders helped forced out the management and board. The compliance function was particularly weak at Siemens. German Judge Peter Noll presiding over the first court hearings into corruption at the company lamented the lack of power of the position of head of compliance within the company during the time of the corruption (Reuters 2008). Strengthening internal compliance, risk, and anti-corruption rules, which Siemens had done after the corruption, are important.The company’s internal audit function and processes were also exposed as brittle (Deutsche Well 2008). The company strengthened the internal audit function and processes.

Accountability in the Siemens executive structure at the time of the corruption scandal were dispersed, with weak assignment of responsibility, and subsidiaries could make crucial decisions without oversight. A culture of “plausible deniability” took hold where no one appeared to be able directly held responsible for actions, encouraging corruption.

Siemens had a three-tier executive structure, with an executive layer which oversees the divisions; then a divisional management structure; and then an executive of national subsidiaries. Executives of national subsidiaries could sign on important contracts at the national level.

Experience shows that the “complexities of doing business across time zones, markets, and product lines have led companies to implement organizational matrices and to diffuse responsibility” (Taylor 2006:5). The rationale is that such “shared responsibility may empower employees and improve information flow”, however, unless “complemented by clear lines of accountability” (Taylor 2006: 5) and responsibility, it creates the conditions for decisions to be taken, without any being held accountable, as it was clearly in the case of Siemens.

As part of the post-corruption restructuring, the company tightened up this dispersed accountability and responsibility management structure. It removed the executive layer which oversaw the divisions and replaced it with central executives who hold direct responsibility for units. It also reduced the power of national subsidiaries to enter large contracts without oversight – such contracts would henceforth be negotiated at divisional level. Whistle-blowers are crucial in uncovering corruption – and they needed to be protected. An amnesty and anonymity for whistle-blowers were crucial in getting employees to come forward with new information of corruption. International surveys show that 40% of corruption uncovered at corporate level are done through whistleblowing, whereas only around 10% of corruption is exposed by internal or external auditors (KPMG 2021).

Companies should not dismiss corruption allegations or sweep it under the carpet. There must be open acknowledgement of wrongdoing – and independent investigations must be urgently conducted, in addition to the criminal investigations by government agencies. Internal investigations must be done by independent outsiders. There must be the political will to investigate and prosecute those found to be corrupt. German and US prosecutors put considerable effort into bringing the corrupt to book. Those found guilty should be held accountable – they should serve jail time. As part of regaining a company’s reputation of a corruption scandal, companies must pay reparations in fines to taxpayers. But crucially, they must atone through giving money to social justice causes, civil society and communities, beyond the often narrow, ineffective, and discredited corporate social responsibility programmes.

Finally, the path to redemption for companies like Siemens involved in corruption, is long, and it needs consistent good corporate citizenship, the internal ethics change must be authentic, and believable to the public. It took Siemens 10 years to regain lost public trust.

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William Gumede is Associate Professor, School of Governance at the University of the Witwatersrand. He is Executive Chairperson of Democracy Works Foundation and former Deputy Editor of The Sowetan newspaper.

During the anti-apartheid struggle, Gumede held several leadership positions in South African student, civics and trade union movements. He was a political violence mediator and area coordinator for the National Peace Committee during the multiparty negotiations for a democratic South Africa and was seconded to South Africa’s Truth and Reconciliation Commission. He is the author of several number 1 bestsellers. His more recent books include: Restless Nation: Making Sense of Troubled Times (Tafelberg); and South Africa in BRICS – Salvation or Ruination (Tafelberg).

To read publications by William Gumede on our website please click here.

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