The way German engineering firm Siemens changed its profit-at-all-cost corporate culture, cleaned up its ethics and held employees accountable after a giant corruption scandal has valuable lessons for SA firms such as KPMG, Steinhoff and EOH caught up in corruption.
Siemens, established in 1847 and now with 475,000 employees, has been one of the German companies trusted for their reliability, integrity and efficiency, until a corruption scandal in 2006 severely damaged its squeaky clean reputation.
Six years previously, Siemens had introduced a policy that made it compulsory for its subsidiary companies to include anticorruption clauses in supplier contracts. A year later, the company followed this up with 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.”
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However, in 2006, in spite of all these internal anticorruption steps, Siemens ended up being accused of corruption to the tune of $1.4bn, in which bribes were paid for contracts across the world. Linda Thomsen, then director of the US Securities and Exchange Commission (SEC), said the corruption was “unprecedented in scale and geographic reach” at the time.
Joseph Persichini Jr, 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.”
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 management and the board. 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 members and the board, and at worse condoned by them; and ordinary employees — taking their lead from senior management and the board — regarded such unethical behaviour as acceptable.
Graham Dietz and Nicole Gillespie commented in The Guardian that Siemens’s “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.
Essentially, after several international and internal investigations into the allegations, it became clear that over the years Siemens had secured global market dominance through bribery.
Until then, Siemens was generally 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, in 1998 the company was invited by Transparency International’s German branch to become a corporate member.
Typically, the first response by Siemens when the 2006 scandal erupted was to deny any corruption.
Anonymous whistle-blowers first raised the alarm 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, including the US, Switzerland, Italy and Lichtenstein. The US government started its own probe, since Siemens had listed on the New York Stock Exchange in 2001, meaning it could be investigated under the US Foreign Corrupt Practices Act of 1977. It also had to adhere to the Sarbanes-Oxley Act, which requires US-based companies to behave honestly.
After the official investigations, Siemens launched its own internal investigation, led by US law firm Debevoise & Plimpton and by Deloitte Touché. The costs of the internal investigations and reforms came to $1bn.
Shareholders discovering acted against the board and management. The firm’s CEO, Klaus Kleinfeld, and chair, Heinrich von Pierer, resigned.
Kleinfeld’s successor, Peter Löscher, 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 executives.
In 2008, Siemens pleaded guilty in the US to corruption under the Foreign Corrupt Practices Act and paid the SEC and the justice department $800m in fines. It paid the German government another $800m in fines for corruption.
The company appointed a new compliance director, Peter Solmssen. In 2007, following cases brought to court by the German prosecuting authorities, two former midlevel managers were convicted of bribery and given suspended sentences.
Siemens disciplined more than 900 staff, and fired several. The company worked in partnership with the World Bank to bankroll anticorruption activities for 15 years through setting up a $100m fund, called the Siemens Integrity Initiative.
Michael Hershman, cofounder of Transparency International, was hired to become Siemens’ governance adviser, stress-testing the effectiveness of the company’s overhaul of its governance practices. An internal investigation unit was established and an independent ombudsman appointed who could be approached by staff, clients and the public to report suspect behaviour, transactions and ethical breaches.
It set up compliance hotlines for employees. All staff were retrained in anticorruption practices. The firm introduced new, strict rules for internal compliance, risk and client-supplier interaction.
There are a number of key lessons from the Siemens corruption scandal. 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 on corruption.
Companies must institute their own internal investigations, in addition to the criminal probes by government agencies. Internal investigations must be done by independent outsiders.
There has to 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 and serve jail time.
Shareholders should hold boards and managements accountable to a higher degree. Siemens shareholders helped to force out the management and board.
Strengthening internal compliance, risk and anticorruption rules are important. Changing the corporate culture of an organisation, from the focus on profit at all cost to more sustainable goals are crucial. 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 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.
• Gumede is associate professor at the University of the Witwatersrand school of governance and author of SA in Brics.
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