By Kaufmann | December 16, 2008 4 Comments »
Siemens just settled on a major international corruption case. It turns out that over the past decade Siemens and some of its subsidiaries made at least 4,283 payments either to public officials or “agents” to secure or retain contracts. The estimated amount of the payments made in more than ten countries surpassed $1.4 billion. During the current case, the criminal damages from Siemens were calculated to amount for up to $2.7 billion. Now fines totaling $1.6 billion have been charged; Siemens cooperation with the authorities is cited as reason for the somewhat reduced fine…
As part of this settlement, Siemens escaped from having to formally acknowledge it paid any bribes, which allows it to keep bidding for U.S. public sector projects. Instead, the firm merely admitted to having had inadequate controls and keeping improper accounts…
Siemens’ shares fell slightly after the announcement of the settlement in Frankfurt trading, but then recovered. The stock had dropped 56 percent over the last year.
The case of Siemens illustrates what is important and what is not in seriously addressing corporate corruption. As usual, the bottom line resides with incentives: what truly raises the cost of bribing will matter, in contrast with PR-friendly measures that are useless in raising the cost of corruption.
For years many powerful corporates argued against tough measures imposed by governments and international organizations. This has included resistance to the adoption and implementation of the OECD anti-bribery legislation, the public ban on public procurement eligibility in World Bank funded contracts, and investigation and sanction by individual governments. Instead, many argued that ‘self-principles’ would suffice: trust the company, or group of companies, to rely on their own codes of conduct; on their signing onto their own collective integrity principles, and/or trust their (upgraded, Board-approved…) CSR policies– all of it without any need of outside monitoring or enforcement.
Obviously in the aftermath of the global financial crisis the credibility of such self-principles, self-oversight and self-regulation has been dealt a body blow, at least as it applies to the financial sector. Some dent had already taken place on the rest of the corporate sector in the aftermath of Enron (witness SoX, for instance).
Such self regulatory era is certainly over for banking, investment and financial firms. For other corporates, the case for more regulation is more complicated, because the same systemic risk posed by misgovernance in the financial sector does not apply elsewhere.
Yet the Siemens case brings up the importance of raising the cost of bribing by focusing on the reputational and business penalties resulting from such bribing. For years Siemens has been embroiled in reputationally costly accusations of bribing worldwide. The Volcker Report on the UN’s Oil for Food scandal listed Siemens as one of the bribing contractors (among many others, here for such transparent report). Some years prior to that mishap, Siemens’ telecommunications arm was banned by the Government of Singapore from bidding for public contracts for 5 years, after a public official was accused of receiving millions of dollars in bribes from the company. And now Siemens is being charged with a fine of US$1.6bn, an episode being covered by the media worldwide.
These are real costs, which would make any CEO pause and recalculate the cost-benefit equation on what eventually ‘pays’ to do, and what does not.
By contrast to this real cost of engaging in bribery, let me quickly mention what may be cosmetic in deterring bribery.
Some months ago, the Company Report on Siemens produced by Global Investment Watch indicated some of the challenges related to the corruption investigations that Siemens was facing. At the same time, under the heading of Corporate Governance & Social Responsibility, it stated: “Siemens fully complies with the German Corporate Governance Code’s requirements… Siemens has standard CSR policies… [it] also outlines its memberships and partnerships with the following: United Nations Global Compact; the WEF; …., and the German Business Ethics Network (DNWE).”
Of course some prominent companies and multinationals are taking the initiative and implementing serious corporate strategies to control bribery and assure integrity within their firms (while some others have it merely on paper, and as part of PR-department rhetoric). Yet now an era is essentially over for the corporate sector: no longer there is credibility to the notion that corporate (or sector-wide group of corporates) self-enforcement, self-regulation or self-principles will individually or collectively work on its own — without serious complementary measures, further transparency and third party monitoring.
First, much better monitoring and oversight mechanisms are needed, including through third party monitoring, whose results are fully and transparently disclosed to the public. Much more external transparency and disclosure (including appearing in briber lists, thorough investigations by the media, etc.) is warranted.
And more governments and international institutions should be encouraged to publicly list firms they sanction. That constitutes a powerful deterrent. Check here for instance the public webpage at the World Bank where hundreds of companies and individuals have been declared ineligible to be awarded World Bank-financed contracts due to fraud and corruption. And imagine a world where virtually every important international institution and government did the same. Again, the cost-benefit equation would be radically transformed in the calculation of any company officer contemplating whether a bribe is needed to secure a lucrative contract.
Further, serious financial penalties, plus legal prosecution of those aresponsible (including in higher level positions) is of importance. Many governments still need to enforce seriously the OECD anti-bribery convention they signed and ratified.
These do raise the cost of bribing, providing an incentive to align corporate integrity within the firm with their own bottom line.