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Siemens Organizational Change

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The CEO of Siemens on Using a Scandal to Drive Change

With Siemens reeling amid a global bribery investigation, its board hired Peter Löscher

as the first outsider to become the company’s top leader. Here’s how he quickly moved to

rebuild the organization. The company faced allegations of bribery in several countries, and

eventually it paid $1.6 billion in fines. But as I always remind anybody who is listening, never

miss the opportunities that come from a good crisis—and we certainly didn’t miss ours. The

scandal created a sense of urgency without which change would have been much more difficult

to achieve, regardless of who was CEO. Siemens is a very proud company with a history of

innovation and success. In the absence of a catalyst like this, people would have asked

themselves, “Why alter anything?” (Loscher, (2012), pg. 40).

To understand how Siemens, one of the world's biggest companies, ended up paying $1.6

billion in the largest fine for bribery in modern corporate history, it's worth delving into Mr.

Reinhard Siekaczek's unusual journey. A former midlevel executive at Siemens, he was one of

several people who arranged a torrent of payments that eventually streamed to well-placed

officials around the globe, from Vietnam to Venezuela and from Italy to Israel, according to

interviews with Mr. Siekaczek, and court records in Germany and the United States. What is

striking about Mr. Siekaczek's, and the prosecutors' accounts of those dealings, which flowed

through a web of secret bank accounts and shadowy consultants, is how entrenched corruption

had become at a sprawling, sophisticated corporation that externally embraced the nostrums of a

transparent global marketplace built on legitimate transactions.

Mr. Siekaczek (pronounced SEE-kah-chek) says that from 2002 to 2006 he oversaw an

annual bribery budget of about $40 million to $50 million at Siemens. Company managers, and

sales staff used the slush fund to cozy up to corrupt government officials worldwide. The
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payment was to keep Siemens competitiveness of overseas, above all in his subsidiary, which

sold telecommunications equipment. "It was about keeping the business unit alive, and not

jeopardizing thousands of jobs overnight," he said in an interview. Siemens is hardly the only

corporate giant caught in prosecutors' cross hairs.

Congress passed a law barring American companies from paying bribes to secure foreign

business; law enforcement authorities around the world are bearing down on major enterprises

like Daimler, and Johnson & Johnson that have been under investigation (Schubert & Miller, pg.

1).

HISTORY

Siemens has a history that goes way back to 1847 when it was founded by Werner von

Siemens. He invented world’s first pointer telegraph and electric dynamo. It was incorporated in

year 1957 in India. The Siemens Group in India has emerged as a leading inventor, innovator and

implementer of leading–edge technology enabled solutions operating in the core business

segments of Industry, Energy and Healthcare. The Groups business is represented by various

companies that span across these various segments. Siemens brings to India state–of–the–art

technology that adds value to customers through a combination of multiple high–end

technologies for complete solutions. The Group has the competence and capability to integrate

all products, systems and services. It caters to Industry needs across market segments by

undertaking complete projects such as hospitals, airports and industrial units. The Siemens

Group in India comprises of 17 companies, providing direct employment to over 18,000 persons.

Currently, the group has 21 manufacturing plants, a wide network up of Sales and Service offices

across the country as well as over 500 channel partners.

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Today, Siemens, with its world–class solutions, plays a key role in India’s quest for

developing modern infrastructure. To raise the qualification and motivation levels of the

workforce through greater involvement in the entire business process, in 1993, Siemens launched

a fitness program with the name of top (time optimized process). In 1998, top was upgraded to

top+ through the addition of specific management instruments. Siemens acknowledged its social

responsibility in 2000 with its first Corporate Citizenship Report. Siemens’ 160-year history

reveals how visions can become reality. Since its founder years under Werner von Siemens, a

visionary inventor and entrepreneur who made an enormous contribution to technological

progress in the 19th century, the company has grown into a GLOBAL NETWORK OF

INNOVATION uniting over 450,000 people in more than 190 of the world’s countries

(“Siemens Ltd, “2015).

Siemens Growth

Siemens (Berlin and Munich) is a global powerhouse in electrical engineering and

electronics. The company has 343,000 employees (as of September 30, 2014) working to

develop and manufacture products, design and install complex systems and projects, and tailor a

wide range of services for individual requirements. Siemens is a global powerhouse positioned

along the electrification value chain – from power generation, transmission and distribution to

smart grid solutions and the efficient application of electrical energy – as well as in the areas of

medical imaging and in-vitro diagnostics. Orders totaled €78.4 billion and revenue from

continuing operations was €71.9 billion in fiscal 2014. We operate in excess of 289 major

production and manufacturing plants worldwide. In addition, we have office buildings,

warehouses, research and development facilities or sales offices in almost every country in the

world.
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The Crisis
Late in 2006, Siemens is confronted with allegations of bribery payments. The company

immediately takes measures to clarify and deal with these allegations. In mid-December 2008,

Siemens reaches an agreement with authorities in Germany and the U.S. The proceedings

dealing with accusations of bribing public officials are simultaneously terminated in Munich and

Washington D.C. In the course of the affair, the company implements a comprehensive

compliance system. The group will explore organizational change in order for Siemens to be in

compliance. Driven especially by SOX, companies are turning to change management to provide

needed discipline for changes to IT infrastructure and systems. To ensure the integrity of systems

storing regulated data, as well as the attendant IT policies and procedures, companies are

increasingly adopting change management practices. Europe's largest engineering company

found about half a billion dollars in suspicious transactions spanning the past seven years --

twice the amount German authorities flagged in November after more than 200 police raided the

offices and homes of employees. Prosecutors in Germany, Italy and Switzerland suspect

company officials were running an elaborate network of secret bank accounts and sham

consulting contracts to bribe potential customers, and more managers and employers could face

arrest as the investigation continues. If authorities find that Siemens didn't do enough to thwart

the alleged scheme -- or that senior management condoned it -- the company could face costly

lawsuits and bans on lucrative public-sector contracts. (Esterl, 2006)

The New Vision

Siemens lacked in value based leadership and culture, inconsistent communication,

training and company did not take the necessary measures to penalize the conduct in breach.

Siemens understood changes had to be made in how they did business. They also needed in
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business to bridge the gap between theory and practice. Quinn (2004) describes leading with

values are being internally directed, other focused, externally open, and purpose-centered; that is

one begins to transcend self-serving needs in favor of others. (Hess & Cameron, 2006). Siemens

needed a change in leadership.

Born in Bremen in Germany, Klaus Kleinfeld began his career as a marketing consultant

in 1982 but before long had joined Siemens, the global engineering and technology services firm,

and one of Germany’s greatest companies. Kleinfeld started out as an advertising and design

manager in 1987, but swiftly rose through the ranks, and was appointed CEO of Siemens Corp in

the US in 2002, and then returned to Germany as head of strategy, where he was promoted to the

Siemens AG CEO spot in 2005. Kleinfield used some of his experience from running the

business in the US, some of the American can do entrepreneurial attitude. Kleinfield also

received credit for turning Siemens into “A proper company”, once he took over as CEO. He

disposed of underperforming subsidiaries, and told workers to accept longer hours for less pay or

lose jobs. His reforms were opposed by the trade unions and some directors, but their impact was

dramatic; sales rose by 16 percent and profits leapt by 35 percent to just under $4 billion, while

shares soared to 40% increase in just two years ( Davidson, 2009). He introduced new labor

terms extending working hours, sold off some poor performing units on the handheld set side,

merged the computer-services units and software divisions, and engineered a tie up with Nokia.

Despite some fierce criticism of his approach, his rewiring of the German firm boosted sales,

profits and market capitalization.

Unfortunately for Kleinfeld, his time at Siemens came to an unsatisfactory conclusion

when the company became engulfed in a well-publicized bribery scandal. Kleinfeld was not

implicated, but nevertheless resigned following the firm’s Chairman, Heinrich von Pierer’s
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outster. With Siemens reeling amid a global bribery investigation, its board hired Peter Löscher

as the first outsider to become the company’s top leader. Mr. Löscher is credited with rebuilding

Siemens after many of the company's senior managers were swept away in the bribery scandal.

The first outsider to lead 166-year-old Siemens, Mr. Löscher, a blunt Austrian, showed little

hesitation in challenging Siemens's ingrained German culture. He famously remarked shortly

after taking over that Siemens management was "too white, too German, and too masculine."

Such comments and restructuring efforts that cost thousands of jobs robbed him of the support of

many at the company. While Mr. Löscher, a former Merck & Co. executive, succeeded in

resurrecting Siemens's reputation in the wake of the bribery scandal, he failed to meet the

ambitious financial goals he set for the group (Troianovsk, 2013).

Mr. Loescher said he was “uncompromising” in his compliance and integrity message.

The new broom then went on to clean up the operating structure, reducing the confusing

portfolio of nine divisions to four – energy, industry, health care and urban infrastructure. The

head count was reduced by about 30,000 and new programs were launched, such as developing

trains and other electrical products that were 30 per cent more energy efficient than the previous

generation (Reguly, 2013).

Definition of Project

Siemens is an international conglomerate that has a rich history of innovation and success

that fell to internal corruption, and corporate bribery. With global operations around the world,

Siemens is well-known for being one of the world’s biggest industrial groups (Troianovski,

2013, pg. 1). As a result of a major corporate scandal, Siemens faced charges of Foreign Corrupt

Practices Act (FCPA) violations, and paid $1.6 billion to resolve the charges with the Security
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Exchange Commission (SEC), U.S. Department of Justice, and Office of the Prosecutor General

in Munich. Starting in the mid-1990s until 2007, Siemens paid kickbacks and bribes to win

contracts from Iraq’s government in the United Nations oil-for-food program, and for projects

including commuter rail in Venezuela, mobile-phone networks in Bangladesh, power plants in

Israel, and traffic-control systems in Russia. Siemens used off-book accounts to conceal the

illegal payments (Wenzhong & Limin, 2012). The SEC alleges that the executives who

perpetuated the scheme worked at Siemens, and its regional company Siemens Argentina. One of

the executives departed from Siemens, and acted as a payment intermediary in the scheme.

Siemens paid more than $100 million in bribes to such high-ranking officials as two former

Argentine presidents, and former cabinet members. The executives falsified documents

including invoices, sham consulting contracts, and participated in meetings in the United States

to negotiate the terms of bribe payments. They used U.S. bank accounts to pay some of the

bribes (SEC Charges Seven Former Siemens Executives with Bribing Leaders in Argentina

2011).

A review the impact of these scandals on company operations indicates instability among

top level leadership can convey a strong message to shareholders and investors about the

financial soundness of an organization, and the lack of a board’s competence in handling its

oversight responsibilities. Bribery and corruption among the ranks of leadership created a lack of

trustworthiness calling into question the integrity of Siemens’ corporate leaders. The

implementation of the various organizational changes had a simple goal of reducing bureaucracy

and making Siemen a more agile performing company in a fast-changing world delving into

delving into fast emerging markets (Loscher, 2012, pg. 40).

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Diagnosis of Current Situation

A few top managers, and board members violated their ethical and moral duties to the

shareholders and investors of Siemens at the risk of satisfying their own greed. On Dec. 13,

2011, SEC charged seven former Siemens executives with violating the FCPA, and for their

involvement in the company's decade-long bribery scheme in Argentina. Their plot was to retain

a $1 billion government contract to produce national identity cards for Argentine citizens. In a

parallel criminal action, the Department of Justice announced charges against former executives,

and agents of Siemens. All received charges of conspiracy to violate the FCPA, and the wire

fraud statute, money laundering conspiracy, and wire fraud. As a result, a couple of board

members received temporary prison sentences while several top managers were ousted during

the height of the bribery revolution (A change of gear at Siemens, 2007, pg. 852).

Company stocks plummeted during this timeframe. Additional fallout from the bribery

scandal was the constant change of CEOs from Heinrich von Pierer to Kleinfield to Loscher.

Significant leadership changes created some unrest among employees in various divisions.

There were factions of employees who experienced severe frustration over bureaucracy, and

requested more autonomy for independent decision-making (Loscher, 2012, pg. 41). The lower

level employees were the recipients of change, and felt that the corruption scandal was a result

failed leadership causing them to feel ashamed, and shocked since they loved being a part of

Siemens (Loscher, 2012, pg. 41). Authorities conducted four international investigations into

alleged wrongdoings of Siemens, but in an attempt to develop an internal system to prevent and

detect unethical and illegal conduct, Siemens announced its own internal inquiry (Esterl, 2006,

pg. 2).
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According to the SEC's complaint, approximately $31.3 million of the $100 million in

bribes paid were made after March 12, 2001, when Siemens became a U.S. issuer subject to U.S.

securities laws. As a result of the bribe payments it made, Siemens received an arbitration award

in 2007 against the government of Argentina of more than $217 million plus interest for the DNI

contract. In August 2009, after settling bribery charges with the U.S. and Germany, Siemens

waived the arbitration award (SEC Charges Seven Former Siemens Executives with Bribing

Leaders in Argentina 2011).

There was the discovery of an aggressive growth strategy that influenced managers to

view bribes as an easy short-cut to achieving tough, performance goals, a power down, simple

organizational structure which essentially allowed divisions to autonomously function, and a

simplistic process of checks and balances which allowed the disbursement of payments (Nash,

1995, pg.1). These scandal issues appeared to have been the normal part of the German

corporate culture with very few regulations against bribery, kickbacks, and payoffs.

Additionally, German companies allowed the payment of bribes to win contracts, and often

included them on balance sheets as well as acquiring tax deductions against them (Nash, 1995,

pg. 1).

Recommendations

Siemens is to create a culture of integrity by moving toward a value based culture. The

company needs to make compliance a competitive advantage as well as act as change agents.

The company needs to improve policies by simplifying and controlling processes to

minimize business disruptions while following compliance objectives.

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Bribery has been defined as “the offering, giving, receiving, or soliciting of something of

value for the purpose of influencing the action of an official in the discharge of his or her public

or legal duties.” (Fritzsche, 1998). Bribery, as one of the notorious business ethical problems,

has surfaced as important issues in an increasingly interdependent world economy. Therefore, to

fight against bribery, suggested solutions are also provided. On one hand, internal ethical

environment shaping is of urgent need; Siemens should immediately follow the four stages of the

structure of ethical environment from ethical awareness to ethical leadership to improve its

current ethical predicament. On the other hand, external supervision and cooperation from

international and national community to media is also in demand. Although business ethics is in

an actual fact as old as business, however, it did not garner sufficient attention until 1970s. As

the ethical problems keep surfacing and disrupting the business order, business ethics, as an

academic discipline as well as a business practice, is on its way of gaining momentum. To probe

into it and make this oxymoron a better guide of business code of conduct, more and more efforts

are still in much need (Wenzhong & Limin, 2012).

Implementation Plans

The implementation plan for Siemens is to make immediate changes from the top down.

The use of business consultants were restricted, payments to banks accounts became restricted.

Siemens Implemented a compliance program while expanding global compliance within the

organization and putting processes into place. Anti-corruption training for managers was created

as well as compliance tools were put into place that add simplification of processes. Siemens

begin compliance with an employee incentive system. The company extends the scope of

compliance, and creates a culture of integrity.

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(Slocum, 2009).

Summary:

Siemens put into place an anti-corruption plan. The anti-corruption tool kit requires a

commitment to communicate compliance from the highest levels of management both internally

and externally. Siemens committed to maintain a compliance board to centralize information and

provide direction. The program is to conduct continuous assessments of compliance risk. The

plan also consist of training for all, and communication on policies and expectations.

Communicate message that compliance is not rewarded but expected (Slocum, 2009). Siemens

scandal allowed them to make integrity and transparency their highest priority. It was important
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that the company’s top management and employees be made of aware of all compliance

violations those that are against the law or violate Siemens business code. Siemens also created a

report channel for compliance reporting violations. This is available 24 hours 7 days a week in a

very secure manner. You can call the number and report any violation at any time. Siemens also

agreed to report compliance related development that is included in annual reporting. This report

will include compliance cases reported as well as disciplinary sanctions.

(Slocum, 2009).

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