How a giant stumbled and recovered: Lessons from Siemens’ near collapse

In 2006 Siemens offices throughout Germany were raided by the country’s federal prosecutors. A bribery scandal had been brewing since 2003, and by November 2006, the raid looked to mark the beginning of the end for the 165-year-old company.

But unlike other firms that suffered great scandals and dissolved afterwards — like Enron — Siemens has recovered and is again thriving. Just how it managed to do so was part of what Hentie Dirker, regional compliance officer at Siemens, was in Toronto to speak about on Oct. 16.

Dirker was part of a day-long session on ethical leadership at Ryerson University, and in his talk he argued that one advantage Siemens had over other firms that vanished after a significant scandal was that Siemens had “always produced excellent products.”

Dirker said that “we wandered off the right path somewhere along the way. We started to sell and compete on pricing instead of having the best product out there. Now we’ve gotten back to telling our customers that, sure, our products might cost a bit more, but they will run for the next 30 years and you won’t have to worry about them.”

The strategy has already borne fruit, as Dirker pointed out that the last two years have been Siemens’ best ever in terms of profits, which is testimony that a company can behave ethically and still generate big returns.

But getting to a time when a company so steeped in corruption could talk about clean and ethical business practices with a straight face wasn’t easy. Bribery itself wasn’t made illegal in Germany until 1999, and Siemens’ activities in the years immediately following show that it was nothing short of hooked on the practice.

One key to curing the habit was the earnestness with which Siemens took on its recovery. It knew it had to bring everything going on under the table for so many years into broad daylight.

So Siemens declared an “amnesty” for all employees. They could come forward and give any information they had about bribery payments or any other misdeeds at the company under the guarantee that they would not lose their jobs for doing so. Upper management wasn’t so priviledged, however. While they were encouraged to come forward, they were not given any guarantees with regards to job protection. Many reasoned, however, that it was better to divulge what they knew than be found out by the massive investigations that were sweeping across the entire company.

Another step in cleaning up the business was insisting on accountability all the way up the chain of command. Where the company once had a “four-eyes principle” (every transaction signed off by two people) it switched to the American model where the CEO takes responsibility for the company’s actions. The switch alleviated the problem of denial seen in the four-eyes approach, as when something was discovered to be amiss, each signatory would invariably blame the other.

A third change broadened managerial responsibilities. Before managers only told employees what needed to be done on an operational level — but Siemens now demands that its managers bring soft skills into the mix. Managers now present case studies to employees to get discussions going about the direction of the company and what values it stands for. Dirker says it is obvious which managers are adopting the new way and which aren’t, and the latter  are dealt with accordingly.

Tied to the greater involvement of managers in the lives of workers was a switch from a rules-based system to a values-based one. And those values extend beyond the office. Dirker stressed that managers only gain moral respect when they behave ethically both at the workplace and away from it.

To guide such moral behaviour, all Siemens employees are trained to ask themselves four questions before taking a given action: Is it right for Siemens? Is it consistent with the company’s core values? Is it legal? And would you be willing to be held accountable for the action?

If the employee can answer “yes” to all four, Dirker says they don’t have to worry, and can act with confidence.

Dirker then turned to the mechanics of the scandal itself, or the “juicy stuff,” as he puts it.

Investigation of the company showed that there were some 1,000 suspicious payments worth over US$1 billion in total. Most of these infractions came from third parties acting on behalf of the company. For example, a business person or government official would tell a Siemens sales representative that by receiving the payment, they would talk to the right people on behalf of the company in order to close a deal.

Aiding the shady process was an opaque internal structure. During the investigation it was wasn’t possible to know how many people had signatory authority at the company, and how many bank accounts were connected to Siemens.

The solution was to centralize bank accounts back in Germany. Now any payment made anywhere in the world must first be cleared in Germany, after a thorough background check on all parties involved.

For its earlier sins Siemens was hit with US$2 billion in fines, and it cost the company another US$1 billion to remediate the problems and establish a new internal-control system.

Dirker said the company was happy to get off with just the fines. It paid them as part of an agreement with the U.S. Department of Justice and the U.S. Securities and Exchange Commission, rather than risk losing its business licence in the U.S. and in Europe. If that would have happened, Dirker said, it likely would have killed the company.

So what are lessons for miners in jurisdictions where briberies and smaller “facilitation” payments are the norm?

Dirker admitted that the issue of facilitation payments are especially sticky in some parts of the world.

“While we do have a no-facilitation payment policy, it is easy to say it and harder to do it at times,” he said. “It is tough in places like Africa where you can have people with AK-47s coming up to your car and telling you that you must pay.”

To deal with such a circumstance, Siemens added a caveat to its policy. If a worker’s life or liberty is in danger, they are allowed to make a payment.

“But they should ask for a receipt,” Dirker said. And while the crowd erupted into laughter at the comment, he wasn’t joking. In order to be reimbursed Siemens wants a receipt, and even then it can take up to a year to get the reimbursement, as the company must do thorough due diligence to make sure that no improper payments were made.

Heads of junior mining companies might find such due diligence on a facilitation payment an unrealistic option, given tight budgets and employee constraints.

But Dirker says even smaller companies have resources at their disposal to ensure they are behaving in an ethical way.

He recommends Transparency International Canada’s checklist, which is posted on its website, as a good place to start.

For executives looking to delve further into the issue of compliance, the US. Department of Justice also posts the elements of effective compliance on its website, under its sentencing guidelines.