The Meaning of Ethical Governance: of Siemens - Case Study Example

Ethical issues in management - Siemens AG Siemens AG is a German based electronics major. They are headquartered in Munich, in the Federal Republic of Germany. Siemens has been in existence for over 150 years and is currently present in 190 countries. It is currently headed by the President and CEO, Klaus Kleinfeld, who was previously the head of its telecom division. Their active business lines include, Information and Communications, Automation and Control, Power, Transportation, Medical, and Lighting. Recently it has been engulfed in scandals related to creating slush funds, bribery, illegal union intervention and cartel formation. These charges questioning the ethics and corporate governance have left the German icon's image shattered. A brief analysis of each charge will help in the identification of unethical behavior and its proliferation in Siemens. The first of the charges to be filed in Nov, 2006 after the raid of Siemens offices, was creation of slush funds. These funds were created under the banner of fake consultation fees in tax havens. Later these were used to obtain contracts from foreign countries. After these raids Siemens acknowledged finding $544 million suspicious funds over a period ranging from a 6 years to more than a decade as per different reports (Oates, 2006; Wharton, 2007). Since 1990's Siemens employee has confirmed paying the Nigerian dictator Sani Abacha's regime 75 - 100 million euros every year as sweeteners to secure contracts (Taipei Times, 2006). Specific allegations have been bribery cases in Italy to obtain turbine order from a company called Enel and telecommunications contract in Saudi Arabia. In the Saudi Arabia telecoms contract case Siemens has paid its then partner Beit Al Etisallat, a consulting firm $50 million. This includes $17 to clear past obligations and the rest to cover up the fact that Siemens had bribed to get the contract. The Saudi consulting firm had threatened Siemens of releasing documents to this effect, if not paid. In a report by Der Spiegel, it is suspected that Siemens channeled about 100 million euros through Dubai to Greece, in an attempt to obtain some lucrative telecommunications contract in the Athens Olympics, 2004 (Crime, 2006). On March 27th, another allegation of union intervention has been lodged against Siemens. One of the senior officials of Siemens board had channeled funds to a member of Association of Independent Employees allegedly to rise against IG Metall, the largest employee union in Germany by membership numbers. This is considered unethical as it goes against the German works council act and indirectly acts against the interest of employees (Matussek, 2007). The last major scandal is related to Cartel formation. This has been proved and fines to the tune of 396.5m have been imposed on Siemens. Siemens along with 9 other companies had fixed the price of gas insulated switchgears sold to electrical companies for more than 16 years (Oates, 2007). Cartels are considered unethical as they challenge the basic idea of free and fair trade. Corruption scandals listed above and their existence for close to more than 2 decades command a thorough analysis of the Germany corporate governance in general and Siemens unethical tolerance policies in particular. The Germans have been more conservative compared to the Anglo-Saxon version of corporate governance known to the world. In an Anglo-Saxon perspective these acts of bribery and cartels are considered completely unethical. Germans do not consider these as serious punishable crimes. This is evident from the responses of different stakeholders in their views about the different scandals. Siemens officers testified they paid bribe to secure the Italian turbine contract. In an attempt to circumvent Germany's law against bribery, they justified their act by quoting that they were not supposed to bribe public officials in a foreign country. As Enel was already privatized they cannot be indicted under the German law (Wharton, 2007). According to Donaldson, a professor at Wharton, German business people still have the attitude that bribery is alright because it does not matter that Germans are disciplined, the world outside does not run by the rules of soccer. DWS, Germany's largest fund management group is another stakeholder not impressed by allegations on Siemens. Its spokesman Claus Gruber says "We do not yet know the extent of the bribery scandal or why it happened" (Wright, 2007). The latter part of this statement gives an impression that bribery may be acceptable at some circumstances. All the charges stated above are consolidated as the current legal proceedings under the Interim report for Q1, 20071. The array of unethical behaviors has cost a ransom to Siemens in terms of reputation and money. Though the latter is bearable for a big company like Siemens reputation damage will take immense efforts to rebuild. The effects can be understood under the headings of stock, image and larger implications. In terms of stock Siemens has not suffered much. The initial raids on Nov 15th did not reflect in the stock prices and similar consistency was maintained during other allegations. The Siemens link with the Nigerian dictator caused, stock price to dip by 2.73%. But this was a short shock and immediately recouped to normal variations in the next few days to come. The stock lost about 3% on 28th March, preceding the stepping down of Johannes Feldmayer, but came back to normal in a day. This stock price non-variance can be attributed to several reasons like shareholder confidence or plans of Siemens to exit telecoms. Several constructive measures taken up by Siemens in terms of improving business standards have to a certain extent offset the negative claims on them. Evidence of constructive measures is shown in the increase of gross profit on sales from 4522 million in Q1, 2006 to 4805 million in Q1, 2007 (Siemens AG). As on 7th of April, 52 week low stands at 76.51 in June 2006 and high stands at 112.39 on February, 2007. Overall the stock has been on a high year on year in the last 5 year period. Instances of unethical behavior have tarnished the image of Siemens to towering levels. Siemens has been in existence over a century and Germans thought of great companies, lists Siemens as the first few. These scandals have led intellectuals ask questions on the integrity of such companies. As per Kogurt from INSEAD, the doubt rises on all German companies selling products to Governments over the last 30 - 40 years, where people knew something was cooking but were not sure of the details (Wharton, 2007). One of the immediate business related effect of corrupt practices has been from the Finnish firm Nokia, which had temporarily stalled its merger with Siemens for the network equipment section. After the initial revelations, Fair Trade Commission (FTC) of Japan and United States Securities and Exchange Commission (SEC), have clutched Siemens with intense investigations into the black money scandal (Taylor, 2007). As an indication of loss of shareholder confidence in the Siemens management, a demand for Heinrich von Pierer, currently Siemens supervisory board chairman and former CEO (CEO during the time when scandals took place) to step down has increased (Harding and Dierks, 2006). The overall picture of German corporate governance is seeking a change at the back of unethical behavior from Siemens and VW. There are several flaws in the Siemens board which are common to German boards and hinder the ethical functioning of firms. In the board system of Germany, the banks that fund companies have influential board positions in such companies. This makes the firm vulnerable to banker's choice and at times of non performance makes it a target of hostile take over funded by the banks on board. The lines of managerial decision making and employee interest protection have overlapped in the German boards because of the 50:50 employee representation laws in Germany. These practices appeal to change in the current situation to an Anglo Saxon style of corporate governance to ensure stricter controls and transparency. US scandals like Enron, WorldCom etc are slightly different in nature compared to Siemens. The overall destruction is much less compared to the US scandals. The US scandals were mainly to improve the stock value where as Siemens scandal is more to do with bribery and embezzlement aimed at surviving in the competitive world. The corporate governance and control systems in German are much severe compared to US controls. The case of Siemens symbolizes dramatic failure of such controls. Considering the different scandals in Germany involving, VW, Siemens etc the pattern is still not conspicuous like the US era of scandals. The US was plagued by Enron like scandals, followed by investment banking, Mutual Fund Company and NYSE scandal (Wharton, 2007). Siemens survival amidst all these scandals may be attributed to some of its inherent strengths. Its existence for over a century without any such major scandals until recently has served to maintain share holder confidence at such troubled times. Continuous innovation and business restructuring to keep up with the times is a unique gift helping the firm survive in the competitive environment. Stalled JV between Siemens and Nokia was reinstated on 1sr April, 2007 inspite of investigations underway. This establishes the faith Siemens has nourished over the years in the corporate circle. The weakness which has lead to disgrace at recent times may be because of failure of control systems. As per Heinrich von Pierer "They (Managers) apparently took advantage of our decentralized organization and believed they had found methods which could not be detected by our external and internal control mechanisms" (Spiegel, 2006). Acknowledging the failure of compliance agents and the involvement of departmental heads in the embezzlement Heinrich von Pierer stated "..But if the director of sales, the head of distribution, the director of accounting and the audit director in a division cooperate to cover up activities, it becomes extremely difficult. In this case, even our installed network of 885 compliance agents in operating divisions and regional units worldwide was evidently unsuccessful" (Spiegel, 2006) The opportunities in the light of recent scandals would be to come out clean or, atleast tighten the control mechanisms to avoid such drastic failures in future. The only threat at the company corporate governance level would arise only if Siemens AG does not heed to the opportunity. In the era of M & A's apart from the financials, unethical behavior and reputation may be a major reason for a hostile bid, though this scenario looks unrealistic until Siemens involves in further scandal. Conclusively it is time Siemens AG understands the true meaning of ethical governance. Ethics relate confirmation to both moral as well as professional principles. All stakeholders including local community, employees, partners and customers are a subject for ethical behavior by any company. In a business perspective the balance between business objectives and ethical behavior is important as the both do not always go together perfectly well. Though the dilemma or grey zone exists in such areas of business, decisions that stand by common good would save Siemens face in future. References: "Corruption scandals tarnish Germany's clean image" Taipei Times. 27 November, 2006. 7 April, 2007. http://www.taipeitimes.com/News/worldbiz/archives/2006/11/27/2003338150 "Hit by an Earthquake: How Scandals Have Led to a Crisis in German Corporate Governance". Knowledge@Wharton: Leadership and Change. 28 March, 2007. 7 April, 2007. http://knowledge.wharton.upenn.edu/article.cfmarticleid=1695 "Report: Siemens Scandal May Involve Top Executives". DW-World.DE. 27 November, 2006. 9 April, 2007. http://www.dw-world.de/dw/article/0,2144,2249977,00.html Harding Luke, Dierks Benjamin. "Rising scandal threatens to engulf Siemens' chairman". The Guardian. 14 December, 2006. 8 April, 2007. http://business.guardian.co.uk/story/0,,1971420,00.html Matussek Karin, "German Union Seeks to Widen Siemens Employees' Probe (Update1)". Bloomberg. 2 April, 2007. 7 April, 2007. http://www.bloomberg.com/apps/newspid=20601100&sid=arJzzYG2U4b0&refer=germany Oates John, "Siemens ex-CFO named in bribery probe". The Register. 15 January, 2007. 7 April, 2007. http://www.theregister.co.uk/2007/01/15/siemens_cfo_named/. Siemens Interim Report. "Interim Report Fiscal Year 2007 Quarter 1". Accessed on 7 April, 2007. http://www.siemens.com , Path: Investor relations; Financial Publications; Quarterly reports Spiegel, "Siemens Corruption Scandal". Spiegel Online. 18 December, 2006. 7 April, 2007. http://www.spiegel.de/international/spiegel/0,1518,455234,00.html Taylor, Colleen, "U.S., Japan authorities join in Siemens' 'black money' probe". Electronic News. 2 February, 2007. 7 April, 2007. http://www.edn.com/article/CA6413060.htmlref=nbra&q= Wright Christopher, "German corruption - Siemens withstands bribery storm". Ethical Corporation. 8 March, 2007. 7 April, 2007. http://www.ethicalcorp.com/content.aspContentID=4916 Appendix: 1 Note 12 in the Interim Report: First quarter of Fiscal 2007 explaining legal proceedings Note 12 Legal proceedings On December 12, 2006, the Japanese Fair Trade Commission (FTC) searched the offices of over 10 producers and dealers of healthcare equipment, including Siemens Asahi Medical Technologies Ltd., in connection with an investigation into possible anti-trust violations. Siemens Asahi Medical Technologies is cooperating with the FTC in the on-going investigation. On January 24, 2007, the European Commission announced its decision to fine the major European and Japanese producers of high-voltage gas-insulated switchgear for alleged antitrust violations in the European Market between 1988 and 2004. Gas-insulated switchgear is electrical equipment used as a major component for turnkey power substations. The fine imposed on Siemens amounts to 396.6. The fine imposed on VA Tech, which Siemens has acquired in July 2005, amounts to 22.1. Furthermore VA Tech was declared jointly liable with Schneider Electric for a separate fine of 4.5. The European Commission has not yet issued the grounds for its decision. The investigation of the European Commission started in May 2004. Siemens has cooperated with the investigation but disagrees with the decision and intends to challenge the fine in court. As previously reported, Munich public prosecutors are conducting an investigation of certain current and former employees of the Company on suspicion of embezzlement, bribery and tax evasion. Arrest warrants were issued for former and currently suspended employees of our Com business Group who were taken into custody, questioned and later released. In December 2006, the former Chief Executive Officer (CEO) of Com was arrested, questioned and released. Siemens' former Chief Financial Officer (CFO) was interrogated as a suspect by the public prosecutor. Both of these individuals are former members of the Corporate Executive Committee of Siemens. The Munich prosecutor's investigation as well as related investigations in Liechtenstein and Switzerland are ongoing. In Greece, public prosecutors are also conducting an investigation with regard to a former officer of Siemens Greece and have questioned the CEO and another employee of Siemens Greece as witnesses. In January 2007, the former officer paid over to Siemens approximately 7.8 in funds Siemens believes were misappropriated. The U.S. Department of Justice is conducting an investigation of possible criminal violations of U.S. law by Siemens in connection with these matters. Siemens understands that the U.S. Securities and Exchange Commission's enforcement division is conducting an informal inquiry into the matters at this time. With regard to the foregoing matters, the Audit Committee of the Supervisory Board has engaged an independent external law firm to conduct an independent and comprehensive investigation to determine whether anti-corruption regulations have been violated and to conduct an independent and comprehensive assessment of the compliance and control systems of Siemens. Siemens currently cannot exclude the possibility that criminal or civil sanctions may be brought against the Company itself or against certain of its employees in connection with possible violations of law. The Company's operating activities may also be negatively affected due to imposed penalties, compensatory damages or due to the exclusion from public procurement contracts. To date, no charges or provisions for any such penalties or damages have been accrued as management does not yet have enough information to reasonably estimate such amounts. Furthermore, changes affecting the Company's course of business or its compliance programs may turn out to be necessary. Siemens AG and its subsidiaries have been named as defendants in various legal actions and proceedings arising in connection with their activities as a global diversified group. Some of the legal actions include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. In the ordinary course of business, Siemens may also be involved in investigations and administrative and governmental proceedings. Given the number of legal actions and other proceedings to which Siemens is subject, some may result in adverse decisions. Siemens contests actions and proceedings when considered appropriate. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, Siemens often cannot predict what the eventual loss or range of loss related to such matters will be. Although the final resolution of such matters could have a material effect on Siemens' consolidated operating results for any reporting period in which an adverse decision is rendered, Siemens believes that its consolidated financial position should not be materially affected. Read More