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This case discusses the bribery scandals that were unearthed at Siemens AG (Siemens) in 2006 and
2007. There were a series of scandals that involved some of the company's employees bribing
foreign officials to gain contracts and creating slush funds for this purpose.
In another case, the company was accused of bribing labor representatives on the supervisory board
in order to gain their support for its policies. After the German authorities conducted raids on in
Germany, investigations were initiated on Siemens in several other countries like the US, Greece,
Italy and Switzerland for possible misconduct.

As a fallout of this scandal, the CEO of the company, Klaus Kleinfeld, and the chairman of the
supervisory board, Heinrich von Pierer, had to resign even though they were not directly implicated.

With bribery scandals surfacing in Siemens and many other German companies like Volkswagen,
questions were also raised about the effectiveness of the Co-determination law in Germany, which
advocated a system in which a supervisory board governed the management board and at least half
the supervisory board seats had to be filled by labor representatives.

In such a system, critics contended that the management always needed the labor representatives'
support to be in job and gain support for company policies, which led to a suspicious alliance
between them. The case also highlights the opinions of several analysts on the issues related to
bribing by the German companies and Siemens in particular and the challenges the new CEO is
likely to face at Siemens.



In December 2008, the Munich, Germany-based Siemens AG (Siemens) agreed to pay fines to the
tune of ¼1 billion towards settlement of corruption charges that had hit the company since 2006.
This included a record US$800 million fine imposed by the US authorities and another ¼395 million
imposed by German authorities.

This ¼1 billion was in addition to the billions of Euros that it paid in fines, back taxes and late
interest charges by 2007.4

Peter Loescher (Loescher), who joined as the CEO of Siemens in 2007, following the major bribery
scandal that broke out in the company, said, "We regret what happened in the past. But we have
learned from it and taken appropriate measures. Siemens is now a stronger company."5

On May 14, 2007, a German court convicted two former managers of Siemens AG (Siemens) for
diverting the company's money to bribe employees of Enel SpA6 (Enel), an Italian energy
company.7

Both the former managers admitted that they had bribed employees at Enel who had demanded
money in return for contracts. They also said that they had not done anything wrong as they did it
for the benefit of the company and not for any personal gain. Moreover, there was no other way to
win contracts in several countries abroad where bribing for contracts was a common practice, they
said...

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Siemens was initially started as Telegraphen-Bauanstalt von Siemens & Halske (Siemens &
Halske) in 1847 by Werner von Siemens (Werner) and a mechanical engineer, Johann Georg
Halske (Halske)...

 

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On November 15, 2006, around 30 offices and private homes related to Siemens and its
employees were raided by some 200 police officers, tax inspectors and prosecutors in Munich,
and other cities of Germany, to probe suspicions of bribery, embezzlement of company funds and
tax evasion...

 !

The series of bribery allegations came in the aftermath of Siemens' sale of its loss-making mobile
handset unit in 2005, to a Taiwanese company, BenQ. Here too, Siemens did not cover itself in
glory as it was seen as having got rid of the unit because it could not easily lay off its employees...

"

After the bribery scandals were unearthed at Siemens, the company started many initiatives to
strengthen its corporate governance and compliance controls. A law firm Debevoise & Plimpton
LLP (Debevoise & Plimpton) was appointed to conduct an independent and comprehensive
investigation into the company's compliance and control system with the help of the independent
auditor for Siemens, KPMG...

# !  $

Around the same time as the Siemens cases came out, unethical practices surfaced in other
German companies including Volkswagen AG (Volkswagen), Deutsche Telekom AG,
Deutsche Bahn AG and Deutsche Post AG. At Volkswagen, a senior executive was fined
¼576,000 and received a suspended prison sentence in January 2007 for bribing labor
representatives with money, foreign trips and prostitutes.

Since several of the corruption scandals involved the bribing of labor representatives on the
boards of German companies, some analysts felt that the Co-determination law or
Mitbestimmung in Germany was flawed...

%

Analysts opined that on account of increasing competition, companies were resorting to illegal
payments to win international contracts especially in some emerging economies where the practice
was common. Siemens along with many other companies was found guilty of paying bribes to
secure contracts abroad...



c c
Ë Understand the impact of the bribery scandals unearthed at Siemens AG on the company and the
economic climate in Germany

Ë Analyze the steps taken by Siemens AG to prevent such incidents in future

Ë Discuss the role of the co-determination law in the bribery scandals that surfaced in German
companies

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