Siemens is the latest German company caught up in a bribery scandal. (Previously, DaimlerChrysler, Volkswagon, Infineon and Commerzbank were all also found to have hidden slush funds useful for making discrete payments to foreign officials to smooth the way for large business transactions.) But the Siemens case is impressive for its size: no matter what country you are operating in, you can buy a lot of politician with $555 million! (Notably, Siemens' board finally decided to actually investigate the bribery allegations after Transparency International voted to kick the company out of its membership, and just before the German police started making arrests. See Former Siemens executive under arrest.)
Bribing foreign government officials is illegal in the United States, and, increasingly, in other countries (such as Germany) as well. In the U.S., this prohibition came about under the Foreign Corrupt Practices Act passed in the wake of Watergate. For years, the United States pressured other governments to follow suit (since most U.S. companies complained that the prohibition put them at a competitive disadvantage vis-a-vis the companies from other countries). However, it really wasn't until the formation of Transparency International and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions that this campaign gained any international traction. However, as Germany shows, old habits die hard.
Interestingly, in the U.S., the types of slush funds Siemens and other German companies are accused of having would constitute a violation of the U.S. securities laws. The reason is that these funds are undisclosed on the corporate accounts. (After all, a company is not likely to disclose a line-item saying "$555 million -- slush fund for making illegal bribes".) Also, the types of internal controls that have cause such sturm und drang with Section 404 (hey, that's German! Get it?) were actually first mandated by the FCPA.
Given all this, what the FT says is very very amusing:
It takes a big group to get in a mess as big as this. Siemens this week put its own estimate on the scale of the alleged embezzlement being investigated by prosecutors, saying that Euros 420m in suspect payments from 1999 onwards would be examined. The scandal should provoke change at Europe's largest conglomerate and prompt wider debate within corporate Germany.
Siemens' response to the probe has been less than emphatic. It was only after being on the brink of expulsion from Transparency International, an anti-corruption watchdog, that it appeared to recognise its compliance arrangements needed a serious overhaul. On Monday it appointed a new compliance adviser and said that an external law firm would review its systems. These moves are welcome as a first step. Companies seeking large-scale contracts across so many countries - Siemens has operations in 190 - need extremely robust systems for ensuring that money is clearly tracked. They also need a structure that lets businesses within a group operate as independent but accountable units with greater clarity of responsibilities.
More broadly, there are two issues for corporate Germany to consider. The first is transparency. The fullest account of what had been going on at Siemens came because the group had to make a filing to the US Securities and Exchange Commission. German company regulation would not have required it to be so open.
The second is board structure. This is especially high-profile for Siemens because the chairman of the supervisory board is Heinrich von Pierer, chief executive of the group from 1992 to 2005. As such, he is presiding over the group's response to inquiries into activities on his watch. This is a vivid instance of the discomfort that can arise when chief executives become chairmen in a way that is common among Germany's largest quoted companies. But the practice can be damaging in less prominent ways - for example, making it harder for a new chief executive to alter strategic direction.
This point would matter less if German supervisory boards were full of non-executive heavy-hitters. Two factors make this difficult to achieve. The first is that half the supervisory board must be made up of employee representatives. This limits the other places available. It also makes it much more likely that proceedings will be conducted in German - which itself may be a deterrent to appointing anyone not fluent in the language. Second, there is not a German business tradition of retiring from executive life while still young enough to seek an extended career as a non-executive director.
Germany has made considerable progress over the past decade in modernising its corporate governance framework. The Siemens case should serve as a wake-up call for companies that have not yet fully implemented the changes.
Indeed. Makes you wonder if all the European complaints about Sarbanes-Oxley are a case of protesting too much...