April 16, 2009 / 9:45 AM / 11 years ago

Siemens compliance push to yield new business

FRANKFURT (Reuters) - Bloodied by a bribery scandal, German engineering group Siemens AG (SIEGn.DE) is training an army of whistleblowers in a compliance push that could help win more contracts even during the economic downturn.

Shareholders of German industrial conglomerate Siemens arrive for the company's annual shareholders meeting in Munich, January 27, 2009. REUTERS/Alexandra Beier

Siemens, whose products range from power stations and trains to lightbulbs and hearing aids, now has a pioneering compliance network to remove the blot of corruption from its image.

Its efforts to be squeaky clean will be a selling point to win orders from customers such as governments, utilities and other large corporates.

“They have turned the disadvantage now into an advantage,” analyst Theo Kitz at brokerage Merck Finck said. “I don’t know of any major company that has a compliance officer on its management board. Now they want to become the major shining example and use that as a PR advantage.

“If I were a customer, the top criteria is price in relation to quality, but if all else is equal then I would give the contract to the one with the best execution record, the best reputation, which includes compliance issues,” Kitz said.

Siemens ended one of the biggest corporate corruption investigations in history when it agreed to pay around 1 billion euros to settle probes by U.S. and German authorities into bribes it paid to win contracts.

It could have been worse if Siemens had not acted swiftly in setting up measures to prevent and detect bribery, ending a scandal that took the scalps of its top leaders. Its response has been more aggressive than that of rivals tainted by scandal.

Commerzbank analyst Ingo-Martin Schachel said customers want a clean, trustworthy partner, “and the best way to demonstrate that is to make business with companies like Siemens that comply with strict compliance rules.”

TELL US HOTLINE

Siemens has seen no fall in orders due to compliance restrictions, a spokesman said, but acknowledged it was hard to tell how many contracts it had clinched due to its clean image.

“To win an order, you also need excellent products and services as well as a deep understanding of customer needs. But without any doubts, compliance is becoming more and more important and is about to be a competitive advantage,” he said.

In the past 18 months, Siemens had set up an anonymous hotline for employees to report irregularities, has trained nearly half of its 430,000 staff and urged rivals to join its anti-corruption efforts.

Manager bonuses are tied to efforts to ensure the tone from the top reaches the rank and file, who are trained on payment and accounting flows as well as handling gifts and donations.

The U.S. Department of Justice has commended Siemens for its steps and the Dow Jones Sustainability Index ranked it number one in the “Compliance” category in its 2008 global survey. It was at the bottom of the list in 2007.

That has not yet boosted Siemens shares, which have lagged the DJ Stoxx European Industrial Index .SXNP by around 10 percent this year, in part on expectations it will have to cut its earnings outlook.

The December deal initially helped boost Siemens’ share price, but the stock has dropped since early this year due to expectations of downward revisions to its profit guidance.

Siemens trades at around 9 times forecast earnings versus rivals Schneider Electric (SCHN.PA) at nearly 11, Alstom (ALSO.PA) at 9.5 times and ABB ABBN.VX at almost 13, according to StarMine, which weights estimates by analysts’ track records.

MIXED VIEWS

Plenty remain unconvinced of Siemens’s stance and ethical funds for instance still have mixed feelings on the company.

Fund manager Standard Life said Siemens is not in any of its five ethical funds because of its nuclear power business, operations in Myanmar and involvement in producing weapons.

By contrast, an ethics council in Norway’s $300 billion-plus wealth fund wanted to exclude Siemens, but the government chose to keep the stock so it could use its influence as a shareholder to boost anti-corruption work at the company.

BHF Bank analyst Jochen Klusmann said some customers had probably blacklisted Siemens or tried to renegotiate prices before the settlement late last year. “But now they are through all of that and I would say they are now on neutral ground.”

Others note Siemens stands to benefit from government stimulus measures designed to avert the threat of a long drawn-out recession.

“They (governments) will make sure that they give orders to the company that has the best compliance monitoring network ... when it comes to allocating those orders to certain companies, compliance will be a very important criteria,” said Commerzbank’s Schachel.

“Siemens ... has a first-mover advantage in the area of building up such a strong compliance network,” Schachel said. “I think it can definitely generate new business.”

Editing by David Holmes

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