Business ethics in the Perception of what it is; Siemens AG and its Global Business Operations, Ikuru Hope St.

Johns University, NY MBA, International Business, 630-BUET Business Ethics, Professor Schwartz Thomas July 2012

Abstract: This paper seeks to discuss the ethical issues associated with Siemens AG, its corporate strategy in the 90s and the changing game for its global business operation from 1999 to 2006, scandals that plagued the companys global business operations, the effects of international business laws, the cost of change, and the company adaptation

Contents 1. Introduction 2. Business ethics literature review 3. Company History 4. Winning Contracts In the 1990s 5. The changing game 1999 6. The new way 7. Unfolding the Folded 8. The Cost of Unacceptable business behavior 9. Accepting Change 10. Conclusion and Recommendation

1.0 INTRODUCTION: Before the opening of economies, only few companies had strived to cut across borders with their operation. in the 21st century, the order of the day is become the trade, competition, coopetition, collaboration, and most effectively business activities across cultures. Thomas Friedman, in his book the world is flat, described ten forces that changed the world, and the course of business operations. He examined the influences these forces had on shaping business and competition in a technology-fueled global environment in call to action for governments, businesses and individuals who must stay ahead of these trends in order to remain competitive. However, global business operations took another turn in the 80s, 90s, and to this present day as small companies grow and expand their operations across national borders, and international companies strive to keep their competitive advantage in saturated markets. Competition, collaboration, co-opetition, has been seen across the globe as companies strive for market shares. Business is war for profit, not fought by swords and guns, but by companies with strategies and tools used in achieving a competitive edge in a particular industry, or market. In Clausewitz's terms, the era of "set-piece" competition is over. We have entered the era of total competition. No matter your industry, company, or nationality, there is a battle-ready competitor somewhere who is busy thinking how to beat you. There are no safe havens1. The world has become smaller, variety is come to stay, the battle for the money is on, companies must adapt, and only performance is reality. a quote from Jack Welch states Strategy is not a lengthy, rigid action plan, but rather the evolution of a central idea through continually changing circumstances. In the fate of doing business, playing alongside change environmental, political, social, and technological- is critical for business sustainability, and growth.

MARK B. FULLER

In the course of Global Business Operations, business expansion and market crystallization has become the reach for companies across national borders, in search of new markets and retention of competitive advantage even in saturated markets. However, companies have been plagued with series of scandals from corrupt business practices, to unethical business deeds and so on. As the war on profits looms, in the context of global business operations, should these scandals tagged as; corrupt business practices, unethical business deeds be actually tagged as such? Businesses employ these strategies and tools to achieve competitive advantage in the markets. This paper seeks to discuss the ethical issues associated with Siemens AG, its corporate strategy in the 90s and the changing game for its global business operation from 1999 to 2006, scandals that plagued the companys global business operations, the effects of international business laws, the cost of change, and the company adaptation.

2.0 BUSINESS ETHICS LITERATURE REVIEW: Business operations have spurned many discussions across the globe, as logic and ethics continue to be in disparity on what should be acceptable and not acceptable in business practices. Could it be that the ethics of logic makes the practical ideal, or logic of ethics makes the ideal practical? Theres no right or wrong in business; neither good nor evil. In this part of the paper, I will review related literature, journal publications, articles, and scholarly works, on the subject of business ethics. This would help one ascertain a view on business ethics as a perception of doing the right thing, at the right time, in the right place.

By doing the right thing, at the right time in the right place, one would question the importance of this taught on business ethics. What is the right thing in business? when is the right time for business? And where is the right place for business. Ill start by giving literal definitions on three terminologies that would shape the arguments of business ethics as doing the right thing at the right time in the right place. These are as follows; Ethics: as defined by Encarta is a system of moral principles governing the appropriate conduct for a person or group. Business: as defined by Encarta is a commercial activity involving the exchange of money for goods or services Perception: as defined by Encarta is the process of using the senses to acquire information about the surrounding environment or situation. The inter-relation of these concepts serves as a trail for business organizations as they gear towards their goals. Ferrell and Fraedrich defined business ethics as "the moral principles and standards that guide behavior in the world of business" (Ferrell and Fraedrich, opcit, p. 6 1997).These principles and standards are the values of an organization in relation to its goal. They added further that the acceptability of behavior in business is determined by customers, competitors, government regulators, interest groups, and the public, as well as each individuals personal moral principles and values. For all stakeholders to be involved in determining an acceptable behavior in business operations, then there is rule that ascertains right and wrong in business. Hence, what is morally right may be wrong given that there are rules that govern the perception. Michael (2006) supports the point on personal moral principles, that in a situation where theres rule or no rule, one should look forward to ethical principles for guidance. A lesson from John Elkingtons book cannibals with forks, describes an idea known as triple

bottom line consisting of three Ps; Profit, People, and Planet. He argued that companies should prepare three different (and quite separate) bottom lines. One is the traditional measure of corporate profitthe bottom line of the profit and loss account. The second is the bottom line of a company's people accounta measure in some shape or form of how socially responsible an organization has been throughout its operations. The third is the bottom line of the company's planet accounta measure of how environmentally responsible it has been. The goals and values of an organization are attributed to the priority the company gives to each bottom line. if a company attributes 80% priority to Profit from the exchange of goods and services it offers, given that they abide with the principles governing their conduct of operation (either by morals or rule) in the environment. More so, if the perception is right and theres acceptability by all stake holders, even when theres a morality flaw, then one can say they are doing the right thing, at the right time, and in the right place.

3.0 COMPANY HISTORY: With 165 years in business, Siemens AG employs over 300,000 people across one hundred (190) countries in over eight (8) products group, and listed on various capital markets in the world. Headquartered in Germany, Siemens was found in 1847 by Werner Siemens, Johan G. Siemens, and johann G. Halske. From the early days of innovating the pointer telegraph (a telecommunication device) used for transmitting messages reliably over longer distance, the company set itself for doing business across national borders. Siemens, from the 18th century into the 19th century conducted business activities across borders, from London to Russia, India to Ireland, Bulgaria to china. by 1892 Siemens was recognize as public corporation and its operations extended pass pointer telegraphs, the company has emerged to become a fully fledged

engineering company. coming after the second world war were it lost over 40% of its assets, the company was plagued with issues of forced labor (using war prisoners for production), however, to maintain freedom of action and the chances of survival, the company relocated to west Germany, and reorganized for the future. Shortly afterwards, the company resumed its operations and spurred more innovation. The resurgence of business operations across national borders continued once again by winning dam construction contracts in Argentina, Egypt, and India. By 1974, Siemens innovation of the worlds first brain scanner, which enabled physicians detect tumors and other brain diseases. Innovation, product diversification, and diversified market presence has been the epitome of its success and competitive advantage.

3.1 WINNING CONTRACTS IN THE 1990S: Siemens AG with its technological innovations in different sectors, ranging from energy, infrastructure , to medical innovations, has established its presence across national borders as the world became smaller, and economies opening up for new business opportunities. Siemens AG, achieved a global presence in the 1990s becoming a global player in the business world, as they reorganized their market strategies and expanded their business into global markets. The company, intermittently craved solutions for every market it conducted business operations. Siemens AG, recognized Asia-Pacific at an early stage as a key market: by 1997 the company was represented throughout the region with 45,000 employees, around 70 joint ventures and over 60 plants. Siemens also continually adjusted its portfolio: 1990 saw the creation of the largest European company in the computer industry, Siemens-Nixdorf Informationssysteme AG (SNI), which in 1999 became part of Fujitsu Siemens Computers AG. Siemens was able to further enhance its standing as a leader on the world market for electrical and electronic products through the acquisition of Plessey in Britain in 1991 and Rolm in the United States in 1992. However, success and failures comes with a price to be paid. From the 1990s on, Siemens changed from a company dealing mainly with public customers in regulated markets to a global competitor increasingly under pressure from the shareholders. Using john elkingtons triple bottom line concept on profit, people, and place, the company has on one hand could be said to be doing the right thing at the right time and in the right place. Siemens AG, created market solutions, satisfied customer, created jobs etc. the market performance and the perception of stakeholders (customers, competitors, government regulators, interest groups, and the public, as well as each individual) earned the company acceptability of behavior in business. However, Siemens AG maintained its competitive advantage and business

acceptability in the 1990s by influencing business and contract decisions on a global scale, by paying bribes. This act of influencing businesses and contract decisions by bribery was however been in the German tax code, were bribery is deductible during taxation. the economist mentions that until 1999 Siemens openly claimed tax deductions for bribes, many of which were listed in its accounts as useful expenditure, bribes were referred to as "NA" -- a German abbreviation for the phrase "nutzliche Aufwendungen," which means "useful money.". That meant the company legally did the right thing that was required of it to keep its competitive advantage, also maintain market performance hence was then the acceptable behavior in business. a former top executive in Siemens in the 1990s.peter eigen, founder of the transparency international group Reinhard Siekaczek argues that payments were vital to maintaining the competitiveness of Siemens overseas, particularly in his subsidiary, which sold telecommunications equipment. It was about keeping the business unit alive and not jeopardizing thousands of jobs overnight,. from an ethical standard point, taking the stakeholder factor of acceptability, people also in the concept of triple bottom line, did the right thing, at the right time, in the right place. Siemens AG, being in a business war with other global competitors played by the rules of the game, as it was acceptable both to all stakeholders and individuals. the other end of such a competitive advantage, monopoly was about to set in, as the level playing ground wasnt becoming even more competitive to compete when such a strategy was employed. An excerpt from Steven Salbu (1997) describes the effect of such an acceptable strategy. Cases abound in which U.S. firms have lost business by refusing to pay illegal bribes sought by foreign officials. One study suggests that U.S. companies lost $45 billion of international business in 1994 alone to international competitors that paid bribes. " Moreover, a classified report compiled by U.S. Intelligence agencies predicts that U.S.

businesses will be seriously disadvantaged in bidding for $1 trillion international capital projects against foreign companies that pay bribes.' Secretary of Commerce Ron Brown recently testified before the House International Economic Policy and Trade Subcommittee that in two hundred cases of bribery and extortion recently studied, U.S. Exporters lost half the sales, totaling $25 billion.

However, the competitive advantage enjoyed by Siemens AG in the 1990s was an acceptable corporate strategy, which was acceptable in global business operations.

3.2 THE CHANGING GAME 1999:

With growing number of international businesses calling on a rule for global business operations due to the competitive advantage some businesses wields on the global market, which is believed doesnt foster true growth and will cause more harm on economies. the Organization for Economic Co-operation and Development (OECD, formed in 1961, with the sole purpose to promote policies that will improve the economic and social well-being of people around the world, provides a forum in which governments can work together to share experiences and seek solutions to common problems) came into the matter in order come salvage the situation of business operation in the world.

In 1997, Germany a member state of the OECD complied with the recommendation of OECD on the change of the German law which allowed for bribes as deductibles under its tax codes. by 1998, members of the OECD had all adopted an anti-bribery policy of foreign officials in

international business, and called on non OECD member states to adopt the policy, which was successful. A new day was to begin in the world of business in 1999. The previously acceptable business behavior was to change. Change of law from the previous acceptable business behavior meant the previous business behavior on using competitive strategy of influence in international business operation is no more acceptable by stakeholders. The rules are changed, acceptable becomes unacceptable.

3.3 THE NEW WAY The New Global Business Policy has been defined; it becomes the acceptable behavior for business activities. Like a frequent saying goes, change is the only constant. The change of international business operations law by the OECD to level the playing ground for all business organization to harness potential market without the fear of losing out in the competition to by companys who wield powers to influence market decisions impacted the changing scenarios and it adaptation. Siemens AG, from 1999 had to deal with change, as the acceptable business behavior has become unethical. An environment change has destabilized the companys competitive advantage structure. With change as a constant, even when we realize it, managing that transitional shift comes with opportunities, failures, and hiccups in business. Machiavelli once said There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order to things. Siemens AG, having sensed the transitional shift in global business operation, also made a transitional shift in their corporate strategy, but this time they continued with the newly unacceptable business behavior for attaining a competitive advantage. an excerpt from New York Times on an interview

with a former Siemens AG Exec, on how the new corporate strategy was used.

Mr. Siekaczek set things in motion by moving money out of accounts in Austria to Liechtenstein and Switzerland, where bank secrecy laws provided greater cover and anonymity. He said he also reached out to a trustee in Switzerland who set up front companies to conceal money trails from Siemens to offshore bank accounts in Dubai and the British Virgin Islands.

Each year, Mr. Siekaczek said, managers in his unit set aside a budget of about $40 million to $50 million for the payment of bribes. For Greece alone, Siemens budgeted $10 million to $15 million a year. Bribes were as high as 40 percent of the contract cost in especially corrupt countries. Typically, amounts ranged from 5 percent to 6 percent of a contract's value.

The most common method of bribery involved hiring an outside consultant to help "win" a contract. This was typically a local resident with ties to ruling leaders. Siemens paid a fee to the consultant, who in turn delivered the cash to the ultimate recipient. Siemens has acknowledged having more than 2,700 business consultant agreements, socalled B.C.A.'s, worldwide. Those consultants were at the heart of the bribery scheme, sending millions to government officials. Siemens AGs competitive strategy was unacceptable anymore by stakeholders, it was considered to be unethical as the perception on global business operation changed. Siemens continued to implement their old corporate strategy under disguise, but because all stakeholders (the acceptability of behavior in business is determined by customers, competitors, government regulators, interest groups, and the public, as well as each individuals personal moral principles and values) had had their perception on global business operation changed, Siemens AG

competitive strategy was faulted in business practices which lead to series of bribery and corruption scandals.

3.4 UNFOLDING THE FOLDED: Following the definition of business ethics by Ferrell and Fraedrich as "the moral principles and standards that guide behavior in the world of business, which they elaborated as the acceptability of behavior in business is determined by customers, competitors, government regulators, interest groups, and the public, as well as each individuals personal moral principles and values. A case on how one Siemens AGs corporate strategy was exposed, is stated below in an excerpt from Post Gazzette,

One day in early 2004, senior Siemens AG executive Michael Kutschenreuter says, he got a disturbing phone call from a Saudi Arabian businessman. The caller said he represented Beit Al Etisallat, a Saudi consulting firm that had been a business partner of Siemens. Now Beit wanted $910 million in commission payments. If Siemens didn't pay up, the caller threatened, he would forward documents to the U.S. Securities and Exchange Commission detailing bribes paid on the German industrial giant's behalf to win telecommunications contracts in the kingdom.

Mr. Kutschenreuter says he alerted his superiors, including Klaus Kleinfeld, now the chief executive of Siemens, and Heinrich von Pierer, the CEO at the time. Mr. Kutschenreuter also says that with the backing of the Siemens management board, he reached a deal in January 2005 to pay Beit Al Etisallat $50 million. He says $17 million was for past obligations and the rest was what he describes as "hush money" to make the problem go away. However, Siemens suspended Mr. Kutschenreuter after his arrest and says its payments to Beit Al Etisallat were perfectly legitimate. Siemens says that it is cooperating with authorities and that any wrongdoing was confined to "individual acts" by renegade managers.

source: http://www.post-gazette.com/stories/business/news/at-siemens-witnesses-cite-pattern-ofbribery-470090/?print=1

In unfolding the folded, as the acceptable business behavior becomes unacceptable, stakeholders play a major role in upholding the acceptable business behavior, even when bad business practices are used in disguising manners to attain competitive advantage.

3.5 THE COST OF UNACCEPTABLE BUSINESS BEHAVIOR:

From the excerpt above, one can tell that conducting business in an unacceptable manner has a direct effect a company practicing such acts. The effect trickles down to the companys triple bottom line, as profit, people, and place is affected. More money is spent in a case of blackmail as the company strives to keep its brand and reputation in the market place, avoid legal and government sanctions in any place it conducts its business operations. In January 2011, the Greek Parliamentary Investigation Committee (GPIC) stated in a letter to Siemens that the alleged damage suffered by the Greek state amounts to at least 2 billion. The crux of the matter, both stake holders and the company suffer However, from the year 2000 to 2009 scandalous revelations of Siemens AGs global business operation has sparked a range of discussions of the companys corporate strategy across the globe. Series of trials and possible prosecutions are ongoing in regards of the companys unacceptable business behavior. More so, in 2008, Joseph Persichini, head of the FBI field office in Washington, D.C., said, "Their actions were not an anomaly. They were standard operating procedure for corporate executives who viewed bribery as a business strategy. However, series of fines has been slammed on the company, due to its modus operandi for a competitive edge. The company also, agreed to pay fines. In January. 2008, Bloomberg news stated that, Norway's Department of Defense has stopped doing business with the company amid a probe over alleged bribes to ministry members.

Siemens AG drew a line under its massive bribery scandal on Monday when it said it would pay 1bn ($1.36bn) in fines to US and German authorities and appointed an independent watchdog to monitor its compliance. FT, December 2008

On November 22, 2010, the Nigerian Government and Siemens Nigeria entered into an out of court settlement, obligating Siemens Nigeria to make a payment in the mid doubledigit Euro million range to Nigeria in exchange for the Nigerian Government withdrawing these criminal charges and refraining from the initiation of any criminal, civil or other actions such as a debarment against Siemens Nigeria, Siemens AG, and Siemens employees. Siemens AG Corporate Communications and Government Affairs

These are a few of many revelations of Siemens AG global business operations. in reality, both the stakeholders and the company have been impacted by Siemens AG, corporate strategy.

3.6 ACCEPTING CHANGE: Siemens AG, quick to realize that the acceptable business behavior has changed; had at all times cooperated with stakeholders whenever there was an issue relating to unacceptable business practices. The companys cooperation during the SEC investigation lead to a reduced penalty, but also gave way to a complete re-design of the companys internal ethics and compliance controls, in a statement from security and exchange commission, Siemens received through its cooperation, even in the absence of a voluntary disclosure, were plain the $450 million fine that was paid to the Justice Department, although quite substantial, was a far cry from the advisory range of $1.35 billion to $2.7 billion called for in the Sentencing Guidelines. Siemens AG, after a 2011 legal proceeding in Munich, Germany acknowledged that, A variety of factors, many of which are beyond Siemens control, affect Siemens operations, performance, business strategy and results and could cause the actual results, performance or achievements of Siemens to be materially different from any future results, performance or achievements that may be

expressed or implied by such forward-looking statements. In particular, Siemens is strongly affected by changes in general economic and business conditions as these directly impact its processes, customers and suppliers. This may negatively impact our revenue development and the realization of greater capacity utilization as a result of growth. Yet due to their diversity, not all of Siemens businesses are equally affected by changes in economic conditions; considerable differences exist in the timing and magnitude of the effects of such changes. The company having realized the plague brought by its corporate strategy in the old acceptable business behavior has made efforts to change and adapt to the new acceptable business behavior, reorganized it management team by replacing former executives with individuals outside the company, Siemens hired Michael Hershman, of Transparency International, to help build a compliance and anti-corruption policy and training program.

4.0 CONCLUSION AND RECOMMENDATION In my perception of doing the right thing, at the right time, and in the place in business. It is ideal to take into consideration, the ethics of logic which makes the practical ideal, and logic of ethics makes the ideal practical. Machiavellis quote as cited above There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order to things. when the acceptable logic of ethics which make the practical ideal is struck with a wind of change to make the ideal practical, then one must realized that the acceptable norm is become unacceptable and must abide to the new. Business practices are governed by rules, and those rules are enacted by stakeholders, therefore every business organization should keep itself fluid enough to adapt to its constant changing

environment. In this case of Siemens AG which operated in the manner of influencing the market decision, bribing foreign officials, and applying corrupt business practices in the 1990s had no problems as such practices were acceptable. But after 1999 when the OECD intervened with a global business policy as to a new acceptable business behavior, Siemens AG continued by disguise to operate the unacceptable business practices, which was faltered as stakeholders revealed those practices which are now scandals. Maybe if Siemens AG had changed the modus operandi it used in the 1990s, knowing that theres a new rule, such scandal wont have occurred. but change is not as easy as the six letter word sound. it requires time build change; therefore anticipating change becomes ideal for business operations. Kofi Atta Annan, former SecretaryGeneral of the United Nations once said the greatest impediments to change is the restraints bureaucracy put on themselves on a BBC interview. Likewise in business, the greatest impediment to change is a restrain the standard operating procedures put on its people.

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