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. pp. 84-87 of the text, four approaches to ethics are described. Briefly summarize each of these approaches. Which of the four approaches do you think was operative at Siemens? At Alstom? Explain your answer.
2. The concept of "moral intensity" is described on pp. 88-89 of the text. How intense is the issue of bribery in the Siemens and Alstom cases? Explain your reasoning.
3. On pp. 90-98 of the text, several strategies actions are described which might help to improve ethical decision making. Briefly summarize these various strategies, then indicate how well, or how poorly, you think each of these actions would have worked in the Siemens and Alstom cases. Explain your reasoning.
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. pp. 84-87 of the text, four approaches to ethics are described. Briefly summarize each of these approaches. Which of the four approaches do you think was operative at Siemens? At Alstom? Explain your answer.

The utilitarian approach tries to achieve the greatest good for the greatest number of people. Some people might be disadvantaged by a decision, but overall everyone would be better off. By contrast, the moral rights approach looks at actions independent of their consequences. In other words, some things are simply right, and other things are simply wrong. The universal approach can be summarized as "do unto others as you would have them do unto you." This approach assumes that actions that limit the freedom of others are suspect. The justice approach focuses on whether the cost and benefits of an action are equitably distributed across people. It means, for example, that rules should be impartially applied and no favoritism shown.

Many students will argue that none of the ethical norms were operative at either company. They will say that bribery is always unethical because it violates every one of the four ethical norms. 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 utilitarian approach overrides the others because it is important to keep a company in business (and using bribery may facilitate a company's survival). Overall, they might argue, the society will be better off because the company continues to operate and provide employment, pay taxes, etc. A current example is the argument that automobile companies should receive government aid so they can stay in business and provide employment for thousands of Canadians. 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 these negative aspects 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. The concept of "moral intensity" is described on pp. 88-89 of the text. How intense is the issue of bribery in the Siemens and Alstom cases? Explain your reasoning.

In order to determine how intense this issue is, we must assess the six factors that influence moral intensity. When dealing with an issue like bribery, students may be uncertain about the relative importance of the six factors, so their answers may vary quite a bit. Having said that, a typical student response might be as follows: social consensus (high; people in Germany and France would generally agree that bribery is wrong); probability of effect (high; bribery definitely will have some effect on society); temporal immediacy (low; considerable time may elapse between the bribery behaviour and its consequences); proximity (low; those giving the bribes will be psychologically close to those receiving them, but not close to the individuals who may be negatively affected by the practice of giving bribes); concentration of effect (low; effects will be distributed across everyone in the society); magnitude of consequences (low to moderate; the bribery behaviour of one company is not likely to have a significant impact on a lot of people in the society). This series of assessments is simply illustrative. There will likely be considerable debate about whether effects will be high, moderate, or low for any one of the factors. For example, it can be argued that temporal immediacy is high for the people who receive the bribes and low for the rest of the people in society who may experience negative outcomes only years later if it is discovered that shoddy equipment was installed. As another example, it can be argued that the magnitude of consequences is low for individuals in a society, but if bribery is commonplace the entire society may be negatively affected.

3. On pp. 90-98 of the text, several strategies actions are described which might help to improve ethical decision making. Briefly summarize these various strategies, then indicate how well, or how poorly, you think each of these actions would have worked in the Siemens and Alstom cases. Explain your reasoning.

The strategies which might improve ethical decision making focus on three areas: individual managers, organizations, and the government. Individual managers must think clearly about their own values and standards so that when they are confronted with an ethical dilemma, they have clear guidance. Organizations try to improve ethical decision making by instituting codes of ethics and whistle-blowing systems, and by having top managers model ethical behaviour. Governments enact laws in an attempt to motivate individuals and organizations to make ethical decisions.

It is difficult 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, 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 company has a written code of ethics or because there is a law against it.

Other students will argue that top management support for ethical practices doesn't work either since bribery cases continue to occur. 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 practices 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) have the most corruption. (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.)