Cases
Strategy Documents
C11/2012

Reputation

Restoring reputation in the
wake of internal corruption:
Siemens and the
ma...
Restoring reputation
in the wake of
internal corruption:
Siemens and the
management of
transparency

Graph 1: Bribery With...
Restoring reputation
in the wake of
internal corruption:
Siemens and the
management of
transparency

Graph 2: The Siemens ...
Restoring reputation
in the wake of
internal corruption:
Siemens and the
management of
transparency

Conclusion: reputatio...
Leading by

reputation

©2012, Corporate Excellence - Centre for Reputation Leadership
Business foundation created by larg...
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Restoring reputation in the wake of internal corruption: Siemens and the management of transparency.

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It takes a long time to build up a good reputation but only an instant to destroy it. This may be because it is based on trust, which is very fragile and ephemeral, requiring care and attention. Integrity and compliance, regarding both pledges and standards, play an increasingly greater part in its appraisal and perception
In November 2006, the lid was lifted on arguably the biggest scandal involving a multinational corporation prior to the financial crisis and the Lehman Brothers case. An investigation that month revealed that a significant number of senior executives working for the German technology firm Siemens in several countries throughout the world had for years been paying illegal commissions to public servants in exchange for their support in the negotiation of multimillion-dollar contracts.
This document has been prepared by Corporate Excellence – Centre for Reputation Leadership. It has cited, from among other sources, the speech by José Aurelio Pérez, Head of Compliance at Siemens in Spain, delivered at the symposium organised by Dircomen Madrid on 19 June 2012.

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Restoring reputation in the wake of internal corruption: Siemens and the management of transparency.

  1. 1. Cases Strategy Documents C11/2012 Reputation Restoring reputation in the wake of internal corruption: Siemens and the management of transparency It takes a long time to build up a good reputation but only an instant to destroy it. This may be because it is based on trust, which is very fragile and ephemeral, requiring care and attention. Integrity and compliance, regarding both pledges and standards, play an increasingly greater part in its appraisal and perception In November 2006, the lid was lifted on arguably the biggest scandal involving a multinational corporation prior to the financial crisis and the Lehman Brothers case. An investigation that month revealed that a significant number of senior executives working for the German technology firm Siemens in several countries throughout the world had for years been paying illegal commissions to public servants in exchange for their support in the negotiation of multimillion-dollar contracts. Indeed, mention was even made of an indiscriminate and organised system of bribery and corruption approved by the firm’s top management in an implicit or explicit manner that seriously damaged Siemens’ reputation –both externally and, especially, internally for its half a million employees all over the world– whereby it was on the verge of disappearing altogether, in what would have been a second “Enron/Arthur Andersen” scenario in less than five years. Officials ranging from the U.S. federal authorities (including the SEC, the body regulating the stock markets) through to the OECD and the World Bank, and obviously the German authorities, as well as international institutions across the board, threw themselves into the task of analysing and identifying precisely the countries targeted and the mechanisms used by Siemens’ executives to commit unlawful acts and breach the firm’s pledge to conduct itself ethically in the different markets. Siemens’ global leadership was forced to resign en masse, including its president and CEO; five executives were arrested; over 1.5 billion dollars had been spent on illegal payments between 2001 and 2006, often accounting for half a contract’s total value, and former executives of the German firm were even identified in other companies “exporting” a model that received the damning epithet “Bribery was Siemens Business Model”. This document has been prepared by Corporate Excellence – Centre for Reputation Leadership. It has cited, from among other sources, ­ the speech by José Aurelio Pérez, Head of Compliance at Siemens in Spain, delivered at the symposium organised by Dircomen Madrid on 19 June 2012.
  2. 2. Restoring reputation in the wake of internal corruption: Siemens and the management of transparency Graph 1: Bribery Without Borders Bribery schemes were entrenched in many áreas of Siemens´s operations, according to Securities and Exchange Commission documents describing these and other projects. Country Project Years Contract ($MIL.) Bribe ($MIL.) Russia Hospital equipment 2000-2007 Unknown $55.0 Argentina National Identity Card 1998-2004 $1,000 40.0 China High-voltage lines 2002-2003 838 25.0 China Metro trains and signal 2002-2007 1,000 22.0 Israel Power Plants 2002-2005 786 20.0 Venezuela Metro rail lines 2001-2007 642 16.7 China Medical equipment 2003-2007 295 14.4 Bangladesh Mobile phone 2004-2006 41 5.3 Nigeria Telecommunications 2000-2001 130 4.5 Mexico Refinery modernization 2004 Unknown 2.6 Iraq Oil-for-food program 2000-2003 124 1.7 Russia Traffic control system 2004-2006 27 0.7 China Hospital equipment 1998-2004 Unknown 0.7 Vietnam Hospital equipment 2005-2006 6 0.4 Source: S.E.C.: ProPublica The need for radical change Suddenly, in no more than the flicker of an eye, corporate statements on values (responsibility, innovation and excellence), the compliance systems implemented up to that point and the words of its executives were all rendered worthless, and devalued just as much as the firm’s own reputation. It was essential to conduct a thorough overhaul of Siemens’ direction, as well as of its internal control measures, if the firm was to continue being a market leader in innovation and efficient solutions in the fields of health, mobility and energy as required by the globalisation process. “In no more than the flicker of an eye, corporate statements on values, compliance systems and the words of its executives were all rendered as worthless as its own reputation.” The firm therefore commissioned various U.S. auditors and consultancies to undertake an in-depth analysis of the situation and conduct a painstaking internal investigation –at an approximate cost of one billion dollars and encompassing 34 markets. This led Peter Löscher, the new chairman and CEO of Austrian nationality, who had been drafted in from the pharmaceutical multinational corporation Merck and had executive experience in the U.S., to announce a one-month amnesty for all those employees who blew the whistle on similar practices during their professional experience up to that moment in the firm. A policy was called for of “zero tolerance” with widespread corruption –a circumstance that had on this occasion affected Siemens because it had been discovered, but which, as several German experts affirmed, was common practice among German multinationals and which, furthermore, involved Federal tax incentives. This was illustrated by the increase in human resources –rising from 6 to 600 people responsible for compliance throughout the world, with 15% in the corporate area, 30% in the divisions and sectors and 55% in countries–, a new corporate governance structure, an internal survey involving a quarter of the workforce, and the implementation of a far-reaching programme of action: Siemens Integrity Initiative. Prevention spearheads the programme Prevention, detection and response: these are the three stages the firm introduced and applied as a result of the failures detected in its in-house ethical control system, according to José Aurelio Pérez, the Head of Compliance at Siemens in Spain. Yet the most important of all of these, in this executive’s opinion, is the first one, to which the compliance team dedicates over half its time, focusing on relations with, training and the supervision of employees (regarding whom any kind of conflict of interests needs to be avoided), business partners (who by acting as intermediaries Cases 2
  3. 3. Restoring reputation in the wake of internal corruption: Siemens and the management of transparency Graph 2: The Siemens Compliance Program Prevent > lear guidelines Siemens C Business Conduct Guidelines Training Programs ompliance helpdesk C “Ask us” Detect Continuous Improvement omprehensive control C system asily accesible reporE ting channels “Tell us” Respond Clear consequences Unequivocal response Basis for sustainable business success Source: Siemens, 2012. require regular and ongoing audits or due diligences) suppliers (who should be the driving force behind the entire process and comply not only with legislation but with the highest internal ethical standards), for which there is a common ethical code of conduct of mandatory observance, as well as specific standards and specifications in each case. Concerning training, which is a key issue for ensuring prevention, in 80% of the cases it is organised in a faceto-face and customised manner. Completing the trio of prevention measures, albeit first in importance, is an internal and fully confidential system for attending to employees and senior executives whereby they may submit queries or resolve doubts regarding any issue that requires clarification. Secondly, the detection system also has an arrangement of briefing channels – both internal and external, such as the contracting of an employee ombudsman – catering for the reporting of any kind of conduct that may cause concern and may be suspected of occurring within the firm. Thirdly, internal disciplinary measures and the consequences for those that commit some form of irregularity, according to the degree of noncompliance regarding corruption and the lack of ethics in their duties, have been significantly hardened and publicly disclosed within the firm. In turn, and respectively, the goal of the first and most important step, prevention, is to provide credible and accurate information for management through the use of policies and procedures; regarding the second, detection, it is to pre-empt any contingency or event that might damage reputation through the use of whistle-blowing channels; and in the third case, it is to punish any conduct that has managed to elude these prevention and detection mechanisms, and has actually taken place, thanks to the implementation of disciplinary measures and the search for solutions (to date, more than a thousand sanctions and disciplinary measures have already been applied). Sector collaboration and outside help In addition to all the above, over the next 15 years Siemens will allocate a total of 100 million dollars through the World Bank to projects organised by different international NGOs in the fight against corruption in the arrangement of major contracts or in the management of development aid, and it has become proactively involved in a series of collective actions with its sector to foster high ethical standards among all the market players and the development of anti-trust legislation. “Corporate culture, the specific way each company has of conducting its business, does not depend on words, but instead on deeds, as with reputation, its outcome.” In 2007, for example, Siemens announced it was to cease it operations in those countries in which the payment of illegal commissions is considered an absolute pre-requisite, such as Sudan, as well as suspend for two years in a row the reception of funds for projects financed by the World Bank until the internal issues arising from the scandal have been fully resolved. The overall aim is to continue fostering a culture of integrity and a way of operating not only within the firm itself, but also across the board in business, with competitors and, more importantly, within society at large. Cases 3
  4. 4. Restoring reputation in the wake of internal corruption: Siemens and the management of transparency Conclusion: reputation begins with a transparent and credible culture There is no point in proclaiming principles, values and ethical codes if the business culture in a country and/ or company involves a business model that is based on an approach that is tolerated or even accepted in a way that is radically opposed to what they claim to defend and postulate through such declarations. In Siemens’ case, if there is a basic lesson to be learnt by other companies, it is that corporate culture, the specific way each company has of conducting its business, does not depend on words, but instead on deeds, as happens with reputation, its logical outcome. Moreover, the example set by the company’s senior executives and middle management is of capital importance. It is no longer possible today to do business throughout the world, driving innovation and excellence, if it is not done responsibly, transparently and credibly, with this approach to business becoming a clear source of competitive advantage and one that generates a sound reputation. Yet neither is it possible to ensure a company’s employees will strictly adhere to its ethical standards if their supervisors are not their main champions and advocates. Training, collaboration and assimilation regarding this approach on the part of each and every one of a company’s stakeholders are essential for this to be a success, whereby they will represent it with integrity wherever they are, and will therefore become the principal ambassadors for its reputation. Cases 4
  5. 5. Leading by reputation ©2012, Corporate Excellence - Centre for Reputation Leadership Business foundation created by large companies to professionalize the management of intangible assets and contribute to the development of strong brands, with good reputation and able to compete in the global market. Its mission is to be the driver which leads and consolidates the professional management of reputation as a strategic resource that guides and creates value for companies throughout the world. Legal Notice This document is property of the Corporate Excellence - Centre for Reputation Leadership and has as its objective to share business knowledge about Brand, Reputation, Communication and Public Affairs Management. Corporate Excellence - Centre for Reputation Leadership is the owner of all the intellectual property rights of the images, texts, designs and any other content or elements of this product and has the necessary permission for its use, and therefore, its copy, distribution, public release or transformation is prohibited, without express authorization from the owner.

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