The Bribery Scandal at Siemens Ag

Case Analysis: The Bribery Scandal at Siemens AG

The Siemens bribery scandal brought to light a strategic dilemma facing multi-national firms attempting to gain a competitive edge by operating abroad; specifically, how can they balance adherence to their own ethical and legal standards with the customs required to do business efficiently, or perhaps at all, in foreign markets?

? Germany's Co-Determination law has since drawn intense criticism as hampering competitiveness and creating untenable situations for management, rife with conflict-of-interest issues, not only because of Siemens, but also because of the number of other German-based companies accused of bribing labor union representatives.

? The forced resignation of CEO, Klaus Kleinfeld, despite the resulting success during his tenure, illustrates the predicament international managers face with regard to conflicting operational methods, and leads us to larger questions about accountability within an organization.

? As the case study author states, the Siemens scandal is representative of what many firms believe is the inevitable "ethical cost of intense competition in global markets", particularly emerging markets, where payments for contracts are described as common place and perhaps even required.

? Perhaps the most glaringly problematic observation remains that the Siemens AG top management claims that they failed to notice rampant, and arguably conspicuous embezzlement leading to lucrative foreign contracts.

Are there flaws in the German System of Corporate Governance?

The 2007 scandal resulting in charges against Siemens' Chief of Information Technology, Johannes Feldmayer, and Chief of Finance, Karl-Hermann Baumann, was rooted in illegal payments designed to work around German corporate governance laws. In this instance, IG Metall complained that Siemens was illegally funding smaller, rival union, AUB, in an attempt to grow and cultivate it as an ally against IG Metall in the bargaining process. This scandal marked the beginning of the unearthing of unethical behaviors in other German-based firms that have since lead to criticism that the Co-Determination law is antiquated and hampers competitiveness.

The Co-Determination law was designed to provide a mechanism for worker participation in management decision-making via a two-tiered system with a supervisory board having oversight of the management board. Critics, however, argue that the law, in fact, limits the management board's ability to make strategic decisions due to the control exerted by labor holding 50% of the seats on the supervisory board.

I agree with the author's statement that this creates, "a suspicious alliance between the management and the labor representatives". The end result was often agreements made prior to the official meetings to facilitate outcomes favorable to management. Although the law was meant to bring balance to the corporate governance structure, I would argue that the potential for corruption of the labor representatives, or on the other end of the spectrum, obstruction of the management board, has a destabilizing effect likely to manifest in questionable and dysfunctional partnerships, such as was the case with Siemens.

Another component of the Co-Determination law prevents selection of supervisory board members who are non-German, regardless of the expertise or perspective they could bring to the table. Naturally, the result is a limited, often recurring, and potentially like-minded pool of candidates, which the author points out, may have contributed to the ousting of Kleinfeld.

The facts presented indicate that the lion's share of the bribery scandal took place under Heinrich von Pierer, who was the CEO from 1992 until 2005, and the supervisory board chairman from 2005 to 2007. Kleinfeld took over in 2005 and, within a period of only two years, had accomplished a remarkable and profitable restructuring, as evidenced by a 26% increase in the stock price. This was not without growing pains, however, as it is speculated that Kleinfeld's aggressive management style, often described as "American", did not meet with the approval of the more conservative supervisory board. As such, analysts opined that the bribery scandal was used as an opportunity to remove Kleinfeld, citing the need for a "new beginning".

I agree that this is likely the case. The growth under Kleinfeld was impressive, particularly given the timeframe. Furthermore, the timing of the actual instances of bribery put them squarely during von Pierer's tenure as CEO; and he had already stepped down from the supervisory board. Nevertheless, under the power granted by the Co-Determination law, the supervisory board opted