Siemens Saddled with Scandals A Doubts over German Board Structure Case Solution

According to the Economist, unlike the United States, bribery was a country-wide phenomenon in many European countries including Germany. Businesses would explicitly declare earnings from bribed contracts as "useful expenses". However, the situation changed in the early 2000s as Germany aimed to improve its ranking in the Global Transparency Index (Economist, 2008). Siemens was one of the companies that were caught under the radar following the country's shift towards ethical governance. This created numerous issues for the company as it was also listed on the US Stock Exchange which had stringent corruption laws and the company's operations could be potentially compromised in the US. 

1. Introduction 

Siemens was one of the fastest-growing companies in Europe during the late 1990s and early 2000s. Klaus Kleinfeld became the 11th CEO of Siemens in 2005 following von Pierer. He was famous for transforming the company's US business unit from a loss of €800 million to a profit of €600 million during his tenure as CEO of Siemens US during 2000-2002. 

In 2006, Siemens faced extreme backlash as two of its top-level employees were convicted by the court on bribery charges. Klaus Kleinfeld was the CEO of the company during the time this corruption surfaced. While both Kleinfeld and Von Pierer, former chairman of the supervisory board, were not found guilty of this corruption, they were both criticized for their leadership as these malpractices occurred during the time when these two were the CEOs of the company. Majority of the alleged corruption and bribery was committed during the time when Pierer was the CEO. Whereas, when the malpractices were caught, Kleinfeld was the CEO. Siemens was found guilty of two charges of bribing. Firstly, Siemens was charged for creating and managing slush funds of approximately €426 million (around $571 million) for bribing the government officials to gain foreign contracts. Two of its former employees were found guilty of bribing an Italian company to gain contracts. Consequently, Siemens was charged with a penalty of €38 million earned from profits from those business contracts. Secondly, the company's management board was accused of bribing an independent labour union that was pro-management to counter IG Metal, a powerful labour union that held almost 50% of the seats on Siemens board.  

In this report, we will discuss and analyse the issues faced by Siemens in its management and failures of ‘corporate governance’ which led to such embezzlement leading to the ignominy of the company in Germany as well as internationally. This report will go over problems faced by the company like two-tier governance, and bribery, discussing them in detail. Following this discussion, we would examine the recommendations on how Siemens can improve its reputation, management, and compliance practices.

2. Problem Statement 

Numerous problems were identified in this case study pertaining to Siemens. Expanding and transforming Siemens had been a challenge for the executives of Siemens due to several reasons. Firstly, Siemens was set up in a strained economy of Germany which had slow growth and hefty taxation policies which put businesses at a disadvantage as compared to their other European and American counterparts. Secondly, who is to be blamed for the company’s malpractices and corruption which led to ignominy and backlash from stakeholders across the world? Concerns were raised regarding the board structure of the company's German board which was divided into the two-tier board: the management board and the supervisory board under the Co-determination management style. More specifically, which board was responsible for the damage caused by using illegal methods like bribes and misappropriation of funds– the management board or the supervisory board? Was the co-determination management a source of inefficiency for the business? Why were there rampant corruption and bribery in Siemens? Finally, what would be the fate of Siemen's CEO Klaus Kleinfeld, and what should be the company's strategic way forward? Should the board extend the contract of the CEO or terminate it in light of the recent scandal? 

3. Discussion 

According to the book Corporate Governance Matters, “Corporate governance” refers to a system that an organization adopts to avoid potentially self-interested managers from abusing their power by engaging in activities detrimental to the welfare of the company and its shareholders and stakeholders. Usually, a supervising system is established in a company consisting of board of directors, and sometimes external auditors. The former foresees management of the company while the latter crosscheck the reliability of financial statements. Moreover, the governance system is also influenced by other stakeholder bodies like labour unions, shareholders, customers, government bodies and regulators and suppliers. (Larcker & Tayan, 2020). 

Siemens followed the Co-determination board structure as a medium of corporate governance as regulated by the German government.

Board structure: Co-determination

German companies have a two-tier board under the German Stock Corporations Act. The two boards are the management board and supervisory board. The management board looks after the operations side of the business and consists of managing directors that are appointed for a five-year tenure and may be reappointed numerous times in the future. The chairman along with managing directors make the decisions of the management and running of the company. On the other hand, the supervisory board consists of equal representatives of both the employees and the shareholders in the company. Employee representation on corporate boards is compulsory in Germany, with three levels of intensity: complete equivalence for employees in coal, iron, and steel industry, quasi-parity (50%) for other companies with more than 2000 employees, and equal for those with 500–2000 employees. The media industry is the only industry that is exempted from such obligations (Becht, et al., 2003).

Since Siemens had more than 2000 employees, its supervisory board consisted of 20 members. Of these 20 representatives, 10 would be elected by the shareholders while the remaining 10 would be elected by the employees and labour unions. However, the chairman was elected by shareholders and his/her vote had double power as compared to rest of the elected members of the board. This supervisory board mainly consist of non-executive directors that were responsible for directing the management board. The supervisory board had the sole responsibility of governance only and they could not be assigned any managerial responsibilities. 66% of the supervisory board elected the management board. Therefore, most of the management board members made an effort to maintain a positive relationship with the employee representatives.