A Little Issue of Bribery

Historically, European countries have had relatively lax bribery laws. Until about 10 years ago, companies were allowed to pay "commissions" to foreign officials. They could also deduct such payments from their taxes. That practice was outlawed in Germany in 1999 and in France in 2000. European countries are starting to take a much tougher line on practices that have often been employed in the past by companies as they attempted to win contracts.

In the past year or so, there have been two high-profile cases where European companies have been charged with bribing potential customers in order to obtain business. One case involves Siemens AG, Europe's largest engineering company. It does business in nearly 200 countries around the world and manufactures a wide range of products, including light bulbs, medical scanners, steam turbines, and high-speed trains. The other company is Alstom SA, a French engineering firm that makes power turbines, high-speed trains and subway cars. Here are their stories.

Siemens AG

In 2006, German police raided the company's headquarters looking for evidence that Siemens managers had bribed potential customers in order to win projects in various foreign countries. After an internal investigation in the fall of 2007, the company said it found $US 1.3 billion in suspicious transactions during the period 2000-2006. The investigation triggered the resignation of the company’s CEO and its supervisory board chairman. The U.S. Justice Department had been investigating Siemens under the Foreign Corrupt Practices Act. In 2007, a German court fined Siemens $US 284 million after the company admitted that it bribed government officials in Nigeria, Russia, and Libya in order to win telecommunications equipment contracts in those countries.

In July 2008, Reinhard Siekaczek, a sales executive at the company, was found guilty of breach of trust. He had funneled $US 77 million into a slush fund that was used to pay bribes to help win infrastructure contracts. He was fined $US 170,000 and given a two-year suspended sentence. He also testified that his superiors were aware of what was going on. In fact, he said they told him to organize a new way of raising money to pay bribes. So he created fake contracts that he used to extract $US 83 million from Siemens' regular accounts. He received a lenient sentence for cooperating.

In October 2008 a Munich court ruled that Siemens had paid $US 17.5 million in bribes to government officials in Nigeria, Libya, and Russia. These bribes were facilitated by Siekaczek. In November 2008, Siemens said it would set aside $U.S. 1.3 billion to pay for fines levied by the German and U.S. governments.

As a result of the scandal, there has been a massive personnel shakeup at Siemens. All but one management board member has been replaced. But all of this scandal didn’t affect the company's stock. In November 2007, the stock price was 32 percent higher than it had been a year earlier. Profits are up because of a successful restructuring.

Alstom SA

Alstom is alleged to have given hundreds of millions of dollars of bribes to go-betweens to win contracts in South America and Asia. Suspicious contracts include a subway expansion in Sao Paulo, Brazil, a hydroelectric plant in Ita, Brazil, and electric power stations in Singapore and Venezuela. In Brazil, for example, it is alleged that a mysterious middleman arranged payments to Brazilian politicians so that they would award lucrative public works contracts to Alstom. The middleman was paid $US 5 million, but so far there is no evidence that any Brazilian politicians actually received any money. If it loses its case, Alstom could be banned from bidding on contracts in fast-growing economies like Brazil. The company denies any wrongdoing and says it is a victim, not a perpetrator.

Documents seized by prosecutors allegedly show that the scheme was run by senior Alstom officials in Paris, and that cash was channeled through shell companies and Swiss bank accounts to make it look like Alstom was not involved. Investigators claim that the alleged bribery started in 1997, when a Paris-based Alstom executive wrote a memo proposing that a middleman be paid a big commission to help win political support in Brazil for Altom's bids. In another memo, the executive noted that the middleman was close to the governor of Sao Paulo and could "get things done" if he (the middleman) was paid 7.5 percent of the value of any contract that was signed. Shortly after that, a team of executives was formed to work with the middleman. Records of the "commission" payments were sent to a Swiss banker for safekeeping. The banker kept the records at the home of a secretary. The documents were discovered during the course of an unrelated probe after the banker was arrested and charged with laundering money for a South American drug ring. The identity of the middleman is still unknown.

Questions for Discussion

1. On p. 77 of the text, four ethical norms are noted. Briefly summarize the essence of each of these ethical norms. Which of the four approaches do you think was operative at Siemens? At Alstom? Explain your answer.
2. Use Figure 3.1 to analyze the Siemens and Alstom cases. What do you conclude? Explain your reasoning.
3. What steps can companies take to increase the likelihood of good ethical business practices? To what extent do you think these things would have been useful at Siemens and Alstom?
4. What is whistle-blowing? Was Reinhard Siekaczek a whistle-blower? Explain your reasoning.
5. Each year Transparency International publishes a Corruption Perceptions Index that ranks various countries based on the amount of corruption that is perceived to exist in each one. Which countries are least corrupt? Most corrupt? Do you notice any patterns? Explain.

Sources: David Crawford and Mike Esterl, "Siemens Prepares for Fines of $1.3 Billion," The Globe and Mail, November 6, 2008, p. B9; Mike Esterl and David Crawford, "At Siemens, A Conviction could Trigger More Cases," The Wall Street Journal, July 29, 2008, p. B1; David Crawford and Mike Esterl, "Siemens Fine Ends a Bribery Probe," The Wall Street Journal, October 5, 2007, p. A2; "Ex-Manager Details Siemens Slush Fund," The Globe and Mail, May 27, 2008, p. B9; Mike Esterl and David Crawford, "Siemens Probe May Point to Board Members," The Wall Street Journal, January 17, 2008, p. B13; David Crawford and Mike Esterl, "Siemens Ruling Suggests Bribery Spanned Globe," The Wall Street Journal, November 16, 2007, pp. A1, A17; David Crawford, "French Firm Scrutinized in Global Bribe Probe," The Wall Street Journal, May 6, 2008, pp. A1, A18; David Crawford, Antonio Regalado, and David Gauthier-Villars, "Bribe Probe Exposes Alstom Network in Brazil," The Wall Street Journal, June 19, 2008, pp. B1-B2.

Answers to Questions for Discussion

1. On p. 77 of the text, four ethical norms are noted. Briefly summarize the essence of each of these ethical norms. Which of the four approaches do you think was operative at Siemens? At Alstom? Explain your answer.

The four ethical norms are utility (does a particular act optimize the satisfaction of all constituencies), rights (does it respect the rights and duties of the individuals involved?), justice (is the act consistent with the canons of justice?), and caring (is the act consistent with the responsibility to care for others?).

Most students will argue that bribery is always unethical because it violates every one of the four ethical norms. Thus, none of the ethical norms were operative at either company. This argument is illustrated in Figure 3.1 on p. 77. Other students may argue that bribery is not automatically unethical because one ethical norm may be more important than the others. For example, some students might argue that the norm of utility overrides the others because keeping a company in business is the most important thing (and using bribery will facilitate a company's survival). Overall, they might argue, everyone in the society will be better off because the company continues to operate and provide employment, pay taxes, etc. Students making this argument may recognize that bribery can result in higher-than-necessary product costs, or shoddy products, but they may still feel that the negative aspects of this would be overridden by the positive aspects of a profitable company and the benefits to society that it provides. Regardless of the position that students take, this question provides an opportunity to examine in detail the practical aspects of the various ethical norms.

2. Use Figure 3.1 to analyze the Siemens and Alstom cases. What do you conclude? Explain your reasoning.

Students will likely already have analyzed Figure 3.1 as they answer the previous question. By way of summary, the following points should be made. It is most likely that students will see bribery as unethical because none of the ethical norms are satisfied (they may also feel that bribery is always wrong because in the Canadian context it is illegal). Some students may conclude that bribery is ethical in this case because one ethical norm is more important than the others. It is highly unlikely that any students will say that all four ethical norms are satisfied.

3. What steps can companies take to increase the likelihood of good ethical business practices? To what extent do you think these things would have been useful at Siemens and Alstom?

Several actions that companies can take to increase the likelihood of ethical business practices are discussed on pp. 78-80 of the text. These include top management support of high ethical standards, adopting written codes of ethics, and instituting ethics programs.

It is impossible to know for sure whether such actions would have been useful at Siemens and Alstom. Some students will have doubts about whether such actions will have any effect. They will point to the fact that most large companies have written codes of ethics, and many of them have ethics programs as well, yet that certainly hasn't stopped bribery from occurring. They may conclude that we simply have to accept that a certain percentage of people in any organization will do whatever they think is necessary to get what they want, and they won’t be deterred simply because the act is illegal or unethical.

Other students will argue that the most effective action (top management support for ethical practices) obviously isn't being taken because bribery cases continue to arise. Or they may conclude that top management is sincere about supporting ethical practices, but is not taking into account how goals and strategies that are set by top management may be motivating lower-level employees to behave. For example, in some companies there is unusually strong pressure on individuals to achieve corporate goals. In those situations, employees may feel that they have no alternative but to engage in questionable practices in order to reach the goals. This means that top management has to think about the implications of strategies and goals and the unanticipated negative impact they may have on subordinates. Put another way, top management can't simply say it supports ethical behaviour and then set goals that will motivate managers to behave in unethical ways.

4. What is whistle-blowing? Was Reinhard Siekaczek a whistle-blower? Explain your reasoning.

Whistle-blowing occurs when an employee tries to put an end to a company's illegal or unethical behaviour by publicizing it. For example, Jeffrey Wigand went public with charges that the cigarette manufacturing companies knew their product was habit-forming and dangerous to peoples' health.

Reinhard Siekaczek was not a whistle-blower because he did not go public with allegations of bribery at Siemens. Rather, after he was charged with being part of the bribery scheme, he decided to help the prosecutors in return for a more lenient sentence than he otherwise would have received.

5. Each year Transparency International publishes a Corruption Perceptions Index that ranks various countries based on the amount of corruption that is perceived to exist in each one. Which countries are least corrupt? Most corrupt? Do you notice any patterns? Explain.

Transparency International's 2008 Corruption Perceptions Index shows that the least corrupt countries are Denmark, New Zealand, Sweden, Singapore, Switzerland, and Finland. The most corrupt countries are Iraq, Myanmar, Somalia, Sudan, Haiti, and Afghanistan.

The map on the Transparency International website (transparency.org) shows a clear pattern: the most economically developed countries in the world (Canada, the U.S., Australia, New Zealand, and the countries of western Europe) have the least corruption, and the least developed countries in the world (various countries in Africa, South America, the Middle East, and Southeast Asia) are the most corrupt. (Note: Some students may argue that labeling the least developed nations as most corrupt is simply the result of imposing a western bias on them, and that business practices in those regions are simply different, not more corrupt, than those in western nations.)