Research Paper on Siemens

This research paper is focused on discussion of the article Bavarian baksheesh from The Economist magazine, dated December 18th 2008. The discussion will be supported by the textbook Business Law Today: The Essentials, 2007. In particular, we will refer to section Rights of Shareholders from chapter 20 Corporations.

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The article exposes the resonant case of Siemens corporation involved in bribery to support its operations worldwide. The corporation “pleaded guilty to charges of bribery and corruption and agreed to pay fines of $800m in America and €395m in Germany, on top of an earlier €201m” (the Economist). The primary goal pursued by corporation is to win contracts. The bribery process was like clockwork: there were cash desks, where managers could take money, and cashiers asked no questions. Illicit payments were masked as useful expenditures or simply kept off books of the corporation. Within several years Siemens paid hundreds million dollars to the officials to get profitable contracts. However, prosecution presented enough evidence to establish the guilt of Siemens behind the reasonable doubt.

The one can ask how all this relates to the rights of the shareholders? Well, since bribery was encouraged and concealed by the top managers and directors of Siemens, we can conclude that management has breached its fiduciary duty before shareholders. Although they did this pursuing the “interests of the corporation” and seeking profits, shareholders may consider such practice to be intolerable. Illicit payments, used to win contracts, increased profits for many years but, finally, corporation has to pay enormous debts and company’s image is tainted. Besides, this will negatively affect company’s earnings in next periods. Therefore, we may conclude that corporation suffered loss because of wrongful acts. Corporate directors failed “to sue in the corporate name to redress a wrong suffered by a corporation” and thus “shareholders are permitted to do so derivatively in what is known as a shareholders’ derivative suit” (textbook, p. 627).

There is no doubt that directors will try “to prevent any action against themselves” (textbook, p. 627), hence, shareholders have the right to claim damages from company’s executives to the benefit of Siemens corporation as a whole. In order to do this, they have to present their complaint to the board of directors following a formal procedure of a derivative suit. If the board fails to resolve reported issue, the court will accept the suit and shareholders could exercise their right.

However, Siemens’ shareholders can decide not to bring an action against the board. It is important to realize that “any damages recovered by the [derivative] suit normally go into corporation’s treasury, not to the shareholders” (textbook, p. 627). Shareholders may agree that bribery was to the best interest of the company and authorize that kind of activity.

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