Siemens Affair

The ancient proverb that “a fish always stinks from the head down” can be easily applied to the latest scandals that have been sweeping big, blue chip German companies in the last few years, denting the reputation of Munich-based Siemens AG in particular.

Ever since the global slush fund scandal that involved payoffs for huge foreign contracts broke in 2006, bribery revelations at Europe’s largest industrial conglomerate have reached an estimated 1.3 billion euros (about $2 billion).

The scandal, which is the biggest ever in Germany’s corporate history, has not only brought shame to Siemens, but within the past year, the entire top management team has been purged. Even though ex-CEO Klaus Kleinfeld had presided over a period of record profits and was never personally implicated in the scandal, he was forced to resign after losing the board’s vote of confidence last year and replaced by Peter Löscher, an outsider.

Former supervisory board chairman Heinrich von Pierer, who had also been Kleinfeld’s predecessor, had been so highly regarded among Germany’s business elite that Chancellor Angela Merkel had even tapped him to become technology advisor, an offer that was recently withdrawn.

Since Siemens is also listed on the New York stock exchange, the SEC, the US watchdog agency, has also been on the company’s heels to comply with anti-corruption regulations.

"A fresh start"

“Siemens is under tremendous pressure from the SEC, but you cannot stop the cleaning up process once you’ve started it. Just like you cannot be half-pregnant,” said Caspar von Hauenschild, a board member of Transparency International Germany, an anti-corruption agency in Berlin.

Von Hauenschild said that Siemens has done everything possible to clean up its act, but cannot afford any more major scandals.

“Löscher is giving Siemens a fresh start. The corporate culture against bribes is changing. What is amazing is that von Pierer and Kleinfeld didn’t regard bribes as a company or personal risk that cost them their jobs,” he said, adding that the top managers had let the scandal spiral out of control by leaving it up to their underlings to sort out conflicts abroad.

“A chief executive is responsible for implementing codes of conduct-- meaning zero tolerance for corruption,” said von Hauenschild.

Changing rules of the game

Since the late 1990s the rules of the game on corrupt business practices had started to change dramatically with government crackdowns on fraud and bribery. Part of the problem was that bribes involving foreign contracts were not only lawful, but even tax deductible in Germany as late as 1999.

Furthermore, cash payments to mediators or foreign officials in exchange for lucrative contracts that amounted to billions of dollars has been always been common business practice, especially in developing countries where corruption is rife, according to Frank Rothauge, a long time Siemens analyst at the private Cologne banking house Sal. Oppenheim.

“One needs to understand the mind-set back in the 1990s,” said Rothauge.

“Paying someone to get a foot in an emerging market with many competitors was regarded as a small price to pay in exchange for a huge contract that made a big contribution to company profits. It was the nature of the beast to provide such incentives,” he said.

Siemens did what most multinationals do, except on a much bigger scale, added Rothauge.

“Ideally, transparency in competing for orders based on quality, price and innovation is better for everyone, but the reality is different,” he said, explaining that telecommunications companies such as Nokia and Ericsson that refuse to accept bribes are often at a competitive disadvantage since they lose out on major contracts in spite of a superior product.

German firms not affected

Rothauge added that Siemens’ image has been hurt, but not too badly. The scandal has no real impact on the reputation of other German companies either, he added.

“At the end of the day, most business people know that other companies work in the same way. German companies are no worse off than the more honorable Scandinavians,” he added.

But just because everyone does it, doesn’t make bribery right, according to Daniela Bergdolt if DSW, which represents small investors of Siemens AG.

“Siemens had a fantastic reputation and it is the market leader in so many areas, such as medical technology. There was no need to resort to bribery,” she said.

“The ability to attract customers should be based on being good enough to be competitive,” added Bergdolt, who said that a complete management shake-up was not enough at Siemens and that the corporate system of illicit bribes has to change from the top down.

Easier said than done

Changing such a corporate culture is easier said than done, according to Marcus Lutter, a law professor and expert on corporate governance at the University of Bonn, who explained that when the rules to stamp out corruption suddenly changed in 1999, many companies, not just Siemens, had a hard time adjusting to a new, cleaner corporate environment.

“It is like telling a chain smoker ‘starting tomorrow you are not allowed to smoke anymore.’ It is tough to quit a bad habit. Some people are still going to look for some small corner in a garden to steal a puff,” he said.

Lutter also pointed out that the common German corporate practice of chief executives moving upstairs to the supervisory board, as von Pierer did, presented problems of its own at Siemens. “This was clearly a conflict. Kleinfeld could not be fully independent in his decision making with a former CEO looking over his shoulder,” he said.

The conflict meant that both had to go, according to Bergdolt, who agrees that Siemens is finally on the right course now with a brand new management team.

“Its image has even been somewhat restored now, but it has taken an awfully long time to get on the right course,” she said.