Dep artmen t of “In tern ati onal Busin ess & Mana gement”

Facu lty of E con o mi cs and Busin ess

Dep artmen t of “In tern ati onal Busin ess & Mana gement”

Pos tbus 8 00, 9 700 AV Groning en The Neth erl ands

M ^ASTER T ^HESIS

THE EFFECTIVENESS OF MANAGERIAL REACTIONS TO CORPORATE SCANDALS

Author:

Juliane Gottschald

Supervisor:

Dr. M.A.G. van Offenbeek

Co-assessor:

Dr. A. Visscher

August 2010

A BSTRACT

This thesis investigates two contrasting case studies on managerial reactions to corporate scandals and evaluates their effectiveness in overcoming the scandals’ consequences. Siemens AG, the first case study, is defined as a best-practice example of post-scandal reactions. With respect to the second case study, Adelphia Communication Corporation filed for bankruptcy after the top management`s misconduct came to light. A cross-case analysis is applied and quantitative and qualitative analysis methods are used. Managerial reactions between Siemens and Adelphia differ in terms of number, nature (voluntary or involuntary actions) and their applicability to organizational learning. In addition, best-practice criteria on managerial reactions, that were defined during the conference “Corporate Scandals and Crisis Communication” in Berlin on June 10-11, 2010, are applied to both case studies. While Siemens meets all criteria, Adelphia does very poorly. The effectiveness of managerial countermeasures taken by both TMTs, are evaluated on the basis of three key performance indicators; namely stock market, annual revenues and reputation. Results show that Siemens`s financial performance and especially its reputation increased enormously within the first year after the scandal.

Only after one year, it started to decrease gradually. In contrast, Adelphia`s performance is determined by losses in financial performance and reputation. Only after the assignment of the new management under Schleyer, Adelphia begins to recover slowly and managed its way out of bankruptcy protection. Based on these results, countermeasures are grouped into effective, ineffective and harmful responses. Examples for effective countermeasures are reactive statements (fast edition of press releases), the introduction of an ombudsman-system and amnesty program, an active and open-communicated investigation within the own company, the fast replacement of and lawsuit against fraudulent executives and employees as well, the reorganization of the corporate structure. Ineffective countermeasures identified are e.g. the restatement of balance sheets, the removal of the corporate headquarters or late apologies. The delay of filing documents, a successive disclosure of fraudulent bahavior, misstatements or lies are seen as extremely harmful for a company after a corporate scandal. The differences in the company`s head reactions prove, that executives can influence the scandals outcome. Managerial implications for actions are derived at the end of this thesis.

Keyword(s):

Corporate scandals, Effective and ineffective managerial reactions, Business ethics, Siemens AG, Adelphia Communication Corp.

Juliane Gottschald Heymanslaan 52 a 9714 GN Groningen The Netherlands

juliane-gottschald@gmx.net

Student number: S1915630

A CKNOWLEDGEMENT

First and foremost, I would like to express my sincere gratitude to my supervisor, Dr. Marjolein A.G. van Offenbeek. Without her encouraging guidance through this paper, her continuous support and her numerous ideas and suggestions, this thesis would not have been possible.

Furthermore, I want to give my special thanks to my Co-assessor, Dr. Ad Visscher, for his helpful comments and advices.

I also want to thank Mrs. Julia Suckow of the German Press Association. She enabled me to attend the expert conference on “Corporate Scandals and Crisis Communication” in Berlin on June 10-11, 2010.

Last, but definitely not least, I am grateful to my family: my mum, Ramona, for her unconditional love and support, motivation and her good sense of humor, by which she has always managed to cheer me up during the hard times of my thesis; my younger brother, Tino, for reading every part of my paper, his valuable comments and always putting my thesis first; and my elder brother, Janko, for supporting me any time.

Special thanks go to my boyfriend, Philipp Matthes, for his time and help whenever I needed it. Finally, I am

very thankful to his family.

T ABLE OF C ONTENTS

TABLE OF CONTENTS ... III LIST OF FIGURES AND TABLES ... V LIST OF ABBREVIATIONS ... VI

1. INTRODUCTION ... 1

1.1 Problem statement and research question ...3

1.2 Contribution ...4

1.3 Thesis structure ...5

2. LITERATURE REVIEW ... 6

2.1 Business ethics ...6

2.2 The “dark side” of organizations ...9

2.3 Corporate scandals and crises ...10

2.4 Initial conceptual model of the research ...12

3. THEORETICAL FRAMEWORK ... 14

3.1 The principal-agent theory ...14

3.2 Perspectives on business ethics - from shareholders to stakeholders ...14

3.3 The soft system approach ...15

3.4 Organizational learning theory ...16

3.5 Refined conceptual model of the research ...17

4. METHODOLOGY ... 18

4.1 Research Design ...18

4.2 Case selection - why Siemens and Adelphia? ...19

4.3 Data collection ...21

4.3.1 Qualitative analysis ...21

4.3.2 Quantitative analysis ...21

5. MANAGERIAL REACTIONS TO CORPORATE SCANDALS ... 24

5.1 Siemens and Adelphia ...24

5.1.1 Siemens ...24

5.1.2 The Siemens scandal ...24

5.1.3 Adelphia ...25

5.1.4 The Adelphia scandal ...26

5.2 Managerial reactions ...27

5.2.1 Countermeasures within one week ...27

5.2.1.1 Siemens ...28

5.2.1.2 Adelphia ...29

5.2.2 Countermeasures within a quarter ...29

5.2.2.1 Siemens ...29

5.2.2.2 Adelphia ...30

5.2.3 Countermeasures within one year ...33

5.2.3.1 Siemens ...33

5.2.3.2 Adelphia ...37

5.2.4 Countermeasures after one year ...37

5.2.4.1 Siemens ...37

5.2.4.2 Adelphia ...39

5.3 The Fraud after the Fraud at Adelphia ...40

5.4 Conclusion ...40

6. THE COUNTERMEASURES’ EFFECTIVENESS ... 49

6.1 Comparison of Siemens and Adelphia within the first week ...49

6.2 Comparison of Siemens and Adelphia within a quarter ...52

6.3 Comparison of Siemens and Adelphia within a year ...55

6.4 Comparison of Siemens and Adelphia after one year ...60

6.5 Conclusion ...62

7. EXTERNAL INFLUENCES’ ROLE ... 65

7.1 Differences in the business perspective (social) & corporate governance structure (legal & socal) ....65

7.2 Corporate crime versus occupational crime (legal & social) ...66

7.3 The roles of victim and offender (social) ...66

7.4 A lack of morality (social) ...67

7.5 Siemens` prehistory (legal & social)...67

7.6 Failures of the accounting firms (legal) ...68

7.7 Conclusion ...68

8. MANAGERIAL IMPLICATIONS FOR ACTIONS ... 69

9. CONCLUSION ... 71

9.1 Conclusion ...71

9.2 Limitations ...73

9.3 Suggestions for further research ...73

REFERENCES ... 75

APPENDICES ... VII

Appendix I: The first Press Release of Siemens, 15.11.2006 ... VII

Appendix II: Different channels for informing all employees ... VIII

Appendix III: The “Tell us“ Helpdesk ... VIII

L IST OF FIGURES AND TABLES Figures

Figure 1: System model for the case studies ...4

Figure 2: The relationship between ethics and law (Crane & Matten, 2007) ...6

Figure 3: From morality to behavior (Greenberg, 2010, p. 46) ...7

Figure 4: From good to bad behavior (extract of Fisher & Lovell, 2009) ...7

Figure 5: Classification of scandals with regard to types (own illustration), ...12

Figure 6: Initial conceptual model ...13

Figure 7: The OL process (Steinfeldt & Hoffmann, 2003) ...16

Figure 8: Single-loop and double-loop learning (Worldpress, 2009) ...17

Figure 9: Refined conceptual model ...17

Figure 10: Classification of the two case studies with regard to types ...19

Figure 11: Conceptual Model ...23

Figure 12: The fraudulent system of Adelphia (own illustration) ...27

Figure 13: Changes in the compliance program of Siemens (Annual Report 2007, p. 43) ...34

Figure 14: Compliances-related sanctions of Siemens 2007-2009 (Sustainability Report 2009, p. 2009) ...36

Figure 15: Number of compliance commissioners in FY 2007 (left) and 2008 (right) ...38

Figure 16: Four main objectives of Adelphia`s turnaround effort (Dravesky, 2004) ...39

Figure 17: Communication plan for publishing new code of conduct and ethics (Dravesky, 2004) ...40

Figure 18: The new business strategy of Siemens: Fit

2010 (Siemens Annual Report, p. 33) ...46

Figure 19: Stock price of Siemens within the first week ...49

Figure 20: Adelphia stock Price and counteractions (SEC complaint, 2002) ...50

Figure 21: Stock price of Siemens within the first quarter ...52

Figure 22: Stock price of Siemens within the first year ...56

Figure 23: Stock price of Siemens after one year ...60

Figure 24: Managerial implications (own illustration) ...70

Tables Table 1: Similarities and differences between both case studies ...20

Table 2: Selected performance indicators ...23

Table 3: Changes of management at Siemens ...30

Table 4: Changes of management at Adelphia ...31

Table 5: Further changes of management at Siemens ...33

Table 6: Voluntary and involuntary countermeasures of Siemens and Adelphia ...44

Table 7: Effectiveness of countermeasures within the first week ...51

Table 8: Quarterly revenues of Siemens (4/2006 – 2/2007) ...53

Table 9: Effectiveness of countermeasures within a quarter ...53

Table 10: Revenues of Siemens (2005-2007) compared to revenues of Adelphia (2001-2003) ...56

Table 11: World`s Most admired companies (Fortune Magazine, Ranking 1) ...57

Table 12: Germany`s most admired companies (Fortune Magazine, Ranking 2) ...57

Table 13: Reputation Quotient Adelphia (Reputation Institute) ...57

Table 14: Effectiveness of countermeasures within one year ...58

Table 15: Effectiveness of countermeasures after one year ...60

L IST OF ABBREVIATIONS

AUB Arbeitsgemeinschaft Unabhängiger Betriebsräte

CM Crisis management

CSR Corporate Social Responsibility

DV Dependent variables

IV Independent variables MNCs Multinational corporations

MV Moderator variables

OL Organizational learning

SEC U.S. Securities and Exchange Commission

SOX Sarbanes-Oxley Act

S1 Sub-question 1

S2 Sub-question 2

S3 Sub-question 3

TI Transparency International

TMTs Top management teams

1. I NTRODUCTION

“T O EDUCATE A PERSON IN MIND BUT NOT IN MORALS IS TO EDUCATE A MENACE TO SOCIETY ”

(Theodore Roosevelt, 26

President of the United States of America, 1901–1909)

Already 100 years ago, the former President Roosevelt underlined the importance of morality that should be taught with education. However, while people`s education seems to have improved over the years, morality appears to have decreased in value: Enron, 2001 (Movie: “Enron: The smartest guys in the room”, 2005);

WorldCom, 2002 (Sidak, J.G., 2003); Tyco, 2002 (Kemmerer, C.H. & Shawver, T.J., 2006); Xerox, 2002 (Peemöller, V.H. & Hofmann, S., 2005); Volkswagen AG, 2005 (Edmondson G., 2005); Siemens, 2006 (The Economist, 18.12.2008); Lidl, 2008 (Stern.de, 09.02.2009); or lately Daimler AG, March 2010 (Focus online, 26.03.2010) - just to mention a few - the media report almost daily about top-managers` misconduct and cooperate scandals. This demonstrates a highly active dark side to organizations. Since the Enron scandal, as one of the biggest corporate bankruptcies in the U.S. history has been revealed in 2001 (Bratton, 2002, p.61), more organizational failures came to light and caused an intensified discussion about corporate governance and stricter governmental regulations. By doing so, the focus lies on the attempt to avoid further corporate scandals, but, unfortunately, they still take place (Skeel, 2005

). This raises the question on how top management teams (TMTs) should deal best with scandals in case of their occurrence. For that reason, this thesis will realize a cross-case analysis investigating two contrasting case studies, namely Siemens AG (largest conglomerate in Europe - Industry, Energy and Healthcare) and Adelphia Communication Corporation (sixth largest cable company in the U.S. until 2002). Siemens AG (from now on Siemens) managed to survive its corruption scandal and even presents better financial results than before. In contrast, Adelphia Communication Corporation (from now on Adelphia) filed for bankruptcy and was later on sold.

Hence, differences in the reactions of the top management will be identified and evaluated with respect to their effectiveness. The purpose of this paper is to provide managerial recommendations for action derived from comparing both cases.

This paper will follow the strategic decision making perspective (e.g. Child, 1972) rather than the population- ecology view of organizations (e.g. Hannan & Freeman, 1977). The former means that an organization depends on the decisions of its top managers and therefore relates to the firm-level. The latter approach points to the environment selecting the organizations for survival (based on Darwin`s evolution theory) and describes very different organizational populations (equitable with the industry-level; Han, 2007). From the strategic decision making perspective, we define TMTs as those managers that have the power to strategically decide for an organization. Positions considered herein are CEOs, board of directors and presidents. In the case of Siemens, the supervisory board is also taken into consideration. This is due to differing governance structures

1

Skeel (2005, p. 6) mentions three causal factors for that, (1) excessive risk-taking, (2) competition, and (3) the increasing size

and complexity of corporations. As long that these factors exist, corporate scandals will always occur.

that exist in corporate governance, namely the one-tier board structure and the two-tier board structure. The one-tier board (here Adelphia), a typical Anglo-Saxon governance model, is characterized by a collective board of executive and non-executive directors, where the functions of management and organizational control are not clearly divided (Van Veen & Elbertsen, 2008). By contrast, the two-tier board structure (here Siemens), is basically applied in Germany, Austria, Netherlands and Denmark and possesses a separate supervisory board that oversees the board of directors (Firth et al., 2007). Therewith, it has the power to veto some decisions made by the board of directors, and consequently also the power to take part in the strategic decision making process.

Synonyms for top management used in this thesis are “senior management”, “upper management” and

“company`s head”; top managers are also referred to as top executives.

The aim of this thesis is to answer the question what top managers can and should do in order to overcome scandal`s consequences. To define when a scandal is over, the author follows the long-term view and determines the following three criteria for a full corporate recovery:

With regard to economic and financial numbers, the firm reaches its status quo at least at the same level as it was before the scandal.

When it comes to reputation, it is hard to restore the old status, as corporate scandals are likely to stay on people`s mind. Therefore, a positive change is already regarded as the right direction towards recovery.

The firm adjusts its business strategy in order to likely prevent another crisis in the foreseeable future This process of adaption is consistent with the organizational learning process (see Section 3.4).

Whereby economic and financial numbers can sometimes be rather quickly increased in the short-term (e.g.

through the launch of other products), it is expected that reputation and changes in the business strategy can be only regained and implemented in the long-term transformation process. It is not about quickly minimizing the damage right after the scandal in the short-term, e.g. at the costs of other business units. Reputation “is formed by the beliefs that people hold about an organization based upon their experience with it, their relationship to it, and their knowledge gained through word of mouth or mass media” (Sims, 2009, p. 454). Unlike “image”, reputations can be formed over time (Balmer & Greyser, 2006). It is assumed that an organizational reputation has a positive impact on the financial performance and, therefore, necessary to primary attempt to regain after a scandal.

2

Following Slatter & Lovett (1999)

Corporate scandals with regard to occurrence, scope or damage have increased dramatically during recent years (Hill, 2004). Besides higher standards and (voluntary) initiatives (e.g. Global Compact Act of the United Nations

), there has also been introduced stricter financial internal rules and control mechanisms by the organizations themselves (corporate codes of conduct). Companies have shown an increased Corporate Social Responsibility (CSR) awareness as a response to the numerous scandals and the expectancy of the public (Castka et al., 2004).

However, corporate scandals are not only accompanied by direct economic damage, but also by reputation losses, which on their turn hampers company`s sales, credibility and cooperation with other companies and eventually worsens the current financial and economic crisis. When comparing corporate scandals, it is noticeable, that some companies went bankrupt while others emerged from their scandal relatively fast, apart from certain damage to their image and fine payments (e.g. Daimler AG). What are the reasons and what can be learned from these differences about the role upper management can take in order to manage and to clean up the damage after the occurrence of a scandal? This thesis, as an exploration of these variations, aims to point out actions that top executives take in such a situation and to provide a general summary of them.

Furthermore, practical implications on how to cope best with corporate scandals from a managerial point of view will be given by evaluating those managerial actions. Therefore, the following research question was formulated:

What are the managerial reactions to corporate scandals and how effective are they in overcoming them, in terms of financial and reputational factors?

To answer the main research question, there are three sub-questions formulated:

(S1) In what ways do top managers react to corporate scandals?

 Determination of different reactions (or no-reactions)

(S2) To what extent do differences in top management`s reactions explain differences in companies post-scandal performance?

 Why do some companies manage to survive corporate scandals while others do not?

(S3) What can companies learn from the reactions?

 Managerial implications

These sub-questions allow to answer the main research question in a more structured way. In addition, they are linked to the thesis structure and present a logic order for the response to the research question.

3

“The UN Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption.” (United Nations Global Compact Office, October 2008)

1.1 P ROBLEM STATEMENT AND RESEARCH QUESTION

Figure 1 shows the system model of this research. A system model illustrates a “separated entity of elements with interdependent relationships” (Krems, 2009).

Figure 1: System model for the case studies

Our system model explains very simple the post-scandal era investigated here, in particular the relationship between the three sub-questions (as indicated by the arrows). Any kind of corporate scandals entails consequences for the company itself as well as for all stakeholders. Therefore, we will identify which (S1) and to what extent (S2) management`s reactions (or non-reactions) influence these consequences, in a positive or negative way. Lastly, it will be evaluated what companies can learn from these actions taken (S3).

The outcome of this thesis will be important for academic researchers as well as professionals. With regard to academic research, much attention has been paid to the precursors and causes of organizational scandals but, unfortunately, there is not much about the post-scandal era yet (besides stricter corporate governance regulations). It is the aim to fill this research gap, that exists in that area probably due to the complexity in this field and the numerous corporate cases that never get revealed to the public. Concerning the professional level, this research provides in-depth knowledge for top managers on how to react and behave in case of corporate scandals. However, reality shows that many managers do not know what to do in such a situation, as the survey by the KPMG (Wirtschaftskriminalität in Deutschland, 2010) points out. More than one third of German companies involved in white-collar crime indicate own failures in handling their scandals. Moreover, only half of the companies possess a trained crisis management (CM) team. Therefore, the following paper intends to point out managerial implications regarding how to deal best with scandals in the company.

Summing up, not much (academic) debate has been devoted to this post-scandal era yet, even if there is

definitely a need for this topic, since it is important to know how to regain the company`s ethical and financial

1.2 C ONTRIBUTION

performance. To the author`s knowledge, such a research has not been realized yet and can provide the basis for further comparisons in organizational studies and theory building.

The next chapter of this thesis, Chapter 2, continues with a literature review, which explores parts of the existing literature on corporate scandals and how to deal with them. Subsequently, differences between the pre- and post-scandal eras in the academic debate will be recognized. An initial conceptual model is derived at the end of this chapter.

In Chapter 3, this paper deals with selected theories that will create a theoretical framework to refine the initial conceptual model. Applying different theories and integrating them within one framework ought to help to explain and understand the process of corporate scandals, from its origin to its overcoming.

Afterwards, Chapter 4 explains the research design, case selection, performance indicators and data collection for this study.

Subsequently, Chapters 5 and 6 present the results of this thesis. To begin with, the Chapter 5 introduces the case studies of Siemens and Adelphia and compares in detail the senior management actions taken after the scandal came to light. As said, both companies were involved in massive fraud, however, the difference is that Siemens emerged even stronger

after this scandal (2006) while Adelphia went bankrupt (2002). The question is why Siemens emerged its scandal by reaching its previous status back, while Adelphia went for bankruptcy as a result of its internal corruption. Therefore, Chapter 6 evaluates the effectiveness of the identified management actions (and non-reactions), by analyzing selected performance indicators, as discussed later on.

In Chapter 7, external drivers will be stressed that, irrespective of the scandals’ reactions, also have an impact on the company`s fate. Another issue to consider are undertaken CSR actions that are not directly linked to the scandal, but that, at the same time, improved key figures e.g. reputation or sales figures.

The subsequent Chapter 8 derives management recommendations on how to cope best with a corporate scandal and how to behave in the best way in order to minimize the damage, based on the results of the two case studies.

.

The final part, Chapter 9, contains the conclusion of this research. Lastly, the thesis terminates with limitations and suggestions for further research.

4 Please note that it is not my intention to defend or support organizational scandals, it is clear that cooperate scandals always do harm stakeholders. However, the object of this section is to identify the differences why some companies overcome them more successful than others.

1.3 T HESIS STRUCTURE

2. L ITERATURE R EVIEW

Literature on corporate scandals and business ethics in general is numerous and, hence, beyond the scope of this thesis to discuss here in detail.

This literature review on corporate scandals proved that in general not much is written about the definition, explanation and distinction of corporate scandals in particular. Scholars have rather focused on several case studies. The perhaps most famous one is the Enron Corporation business scandal of December 2001. Since then, a paradigm shift in the academic debate is noticeable. From that time on, many scholars deal with the causes and consequences of unethical behavior, pay special attention to corporate responsibility and discuss the importance of business ethics. It is essential to understand the field of business ethics, before being able to define an organizational “dark side”. This is done in the next two sections, followed by the section about corporate scandals and crises. At the end of this chapter, an initial conceptual model is presented.

Business ethics is said “to begin where the law ends” (Crane & Matten, 2007, p. 7), which means, it covers issues that are not determined by law. This is also described as the “grey area”, where no consensus about the right and wrong exists (see Figure 2).

Figure 2: The relationship between ethics and law (Crane & Matten, 2007)

In order to determine the right behavior, it is fundamental to define ethics and morality. Even if both terms are sometimes used interchangeable, clear definitions are given by Crane & Matten (p. 8):

“Morality is concerned with the norms, values, and beliefs embedded in social processes which define the right and wrong for an individual or a community.”

2.1 B USINESS ETHICS

“Ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for a given situation. These rules and principles are called ethical theories.”

Thus, morality provides the basis for ethics. Ethical standards in turn have an impact on the decision-making and the behavior in the workplace, but also influenced by other variables (described by the rounded boxes in Figure 3). The complete process is illustrated in Figure 3.

Figure 3: From morality to behavior (Greenberg, 2010, p. 46)

We have seen in this four-step model that behavior is influenced by ones morality, ethical standards and decisions. For evaluating this behavior, Fisher & Lovell (2009) deduced a scale with four degrees of rightness and wrongness of behavior from the semiotic square: The good, benignness, indifference and the bad, as described in Figure 4. Organizational behavior is critical in the indifferent and bad categories. Indifferent and bad behavior form the basis for corporate scandals (together with public denunciation).

Ethics

Prescribing the good life

Good Benign Indifferent Bad

Positive actions for good or to prevent harm being done.

Avoiding doing harm, supports the doing of good but takes no positive action to do good.

Ignoring harm done by or to others and disregarding the rights of others.

Taking action to do harm;

Taking no action to prevent harm being done.

Figure 4: From good to bad behavior (extract of Fisher & Lovell, 2009)

The question is, can profit seeking companies behave responsible and in a moral way? Webley & More (2003) found out in their empirical study, that companies with a published code of ethics also have improved financial results. Moreover, further studies have shown that ethical business behavior increases corporate reputation (Verschoor, 1998; LRN, 2006). A good reputation attracts customers who share the company`s values

(Creyer, 1997; Greenberg, 2010; p.47), improves employee morale, job satisfaction and relationships with business partners (Business Wire, 5.2.2004) and reduces controls by regulators (Noel Arnold &

Associates, 2007). This shows that companies also have to rethink their opinion towards business ethics.

Ethical behavior in organizations has become more and more important, not least through the shift in the acceptance of unethical behavior on the part of organizations. An expert on business ethics said already many years ago: “Ethical standards, whether formal or informal, have changed tremendously in the last century.

Standards are considerably higher. Business-people themselves, as well as the public, expect more sensitive behavior in the conduct of economic enterprise. The issue is not just having the standard, however. It is living up to them.” (Henderson, 1992). This seems even more important in present time, after huge corporate failures, like Enron or Parmalat, came to light.

If organizational actions are seen as ethical or unethical depends on the subjective perception of each person itself. Actions done in the grey area might be still acceptable for one person, but are unethical for another one.

The line between the grey area to ethical behavior is fluent. That boundaries can change as well (here from the grey area to the law area), shows the amendment in Germany in 1999

. Payments to other companies in order to receive contracts in return, were not longer allowed to be invoked as “new business supporting expenditure”. However, in some countries, no business would be possible without illegal bribe money (e.g.

Afghanistan, Russia)

. At this point, it is important to draw a distinction to so-called “facilitation payments”

The difference of facilitation payments compared to bribe money is that, according to the OECD Convention, they are not seen as an offence, but encourage public officials to perform their function

. Again, the transition between “bribery” (officially prohibited by law) and “facilitation payments” (in the grey are) is smooth; their legal status even differs from country to country

. The boundaries of ethically correct behavior and the organizational dark side, if not determined by law, defines each person individually, influenced by one`s morality.

5

The Body Shop, for instance, benefits by promoting its help to poor people from third world nations from whom it buys raw materials.

6

First changes were realized in 1996, but were not effective: Each bribe money payment, that is not brought to court, can still be set off against tax liability. (Transparency International, 17.03.1999)

7

Global Corruption Report 2009 (p. 397 – 402)

8

“Small ´facilitation` payments do not constitute payments made ´to obtain or retain business or other improper advantage`

within the meaning of paragraph 1 and, accordingly, are also not an offence. Such payments, which, in some countries, are made to induce public officials to perform their functions, such as issuing licenses or permits, are generally illegal in the foreign country concerned. Other countries can and should address this corrosive phenomenon by such means as support for programs of good governance. However, criminalization by other countries does not seem a practical or effective complementary action.”

(OECD Convention, adopted in 1997)

9

While e.g. Germany and the UK have prohibited these facilitation payments, the U.S. still excepts their use in other countries

(called grease payments)

A straightforward answer to what the “dark side” of organizations means, cannot be given as it is less acknowledged in organization studies. Theory mostly focuses on successful management models, even if a shift towards the exploration of the organizational “bad side” and its leadership has been noticeable (Vaughan, 1999). To begin with, Morgan (2000) describes an organization by giving eight different metaphors for it

. Looking at companies from these different angles also forms our understanding on how to manage them. The metaphor “The Ugly Face: Organizations as Instruments of Domination”, describes the fact that organizations are often used as an instrument of domination and power in order to accomplish the leaders` interests at the expense of all others. Therefore, multinational corporations (MNCs) sometimes even use their power to influence political decisions. In addition with the exploitation of its workforce, Morgan (2000) wants to demonstrate the dark side of highly successful organizations in their way to even more profit seeking.

According to him, these metaphors do not pretend the “right” way of thinking, they rather illustrate the complexity and ambiguity of organizations.

In order to understand this organizational complexity, it is necessary to consider the individuals, who eventually run the organization. According to Bella et al. (2003), the employees’ behaviour is also strongly influenced by the organizational context, in which they are embedded. The British author John Le Carré explains the organizational bad side in his novels, saying that it is in the nature of organizations to even eclipse human values and individual needs. In contrast, Boddy (2006) rather blames immoral

managers and describes them as “organizational psychopaths”. Nevertheless, Stacey (2007) argues that organizations are in principle not bad; they are rather more influenced by their unstable environments, than by the management decisions and control. Therefore, organizations that want to succeed under conditions of uncertainty and continual change, must learn from the chaos they operate in and create new perspectives. Stacey does not see organizational change as a result of the overall managerial plan, but it is because of the communication and interactions between employees, managers and others, based on their own ideologies and attitudes. Thereby, he talks of an “unofficial” communication between the employees and others, which does not take place during official meetings or the regular working process

. The ”unofficial” communication, considered as the organizational “dark side”, provides the basis for the learning and changing process (Stacey, 2010). This paper will pick up Stacey`s idea that the dark side is able to cause organizational change, but as indicated before, the strategic decision making perspective will be applied. It is assumed that it is mainly the managers` power to choose the future direction for an organization, even if external (legal, social and ecological) circumstances have to be taken into account.

10

Organizations as: (1) Machines, (2) Organisms, (3) Brains, (4) Cultures, (5) Political Systems, (6) Psychic Prisons, (7) Flux and Transformation, (8) Instruments of Domination

11

It is important to consider the differences between immoral (doing the “wrong” things and knowing it, used in the context of disapproval), unmoral (having a lack of morality – either good or bad - its neutral) and amoral (not knowing the difference between “right” and “wrong”)

12

The unofficial communication is mainly about possible organizational improvements, the feedback of customers and their desires or personal critics about the boss.

2.2 T HE “ DARK SIDE ” OF ORGANIZATIONS

The initial position of the dark side, if triggered deliberately (due to mismanagement, an inadequate surveillance or the neglect of duties) or accidentally (due to uncontrollable external forces), is of high importance to define, as it gives direction to if and how top managers should react to it. This thesis is mainly based on a deliberately dark side - caused by the top managers, but it also assumes top managers are able to resolve the scandal. Despite that, external forces will not completely be disregarded in this paper.

At this point, a distinction between an “invisible” and “visible” dark side is drawn. Whereas the invisible dark side considers unethical behaviour only within the organization itself (and therefore unknown for the general public), the visible side appears in public and usually attracts more interest and criticism and, as a result, involves higher financial and reputational damage. In the worst case, it entails a corporate scandal. The fact that nine out of ten MNCs have been involved in scandals during the last three years (Agenda - Insights into growth, governance and performance, 3/2009), demonstrates such a highly active, visible dark side of organizations whose negative consequences for all stakeholders should not be underestimated. Such a high number of companies involved in scandals gives the impression that the dark side of organizations can be rather seen as “normal” than exceptional in these times.

The next section defines corporate scandals and differentiates them from organizational crises, as both terms are often used interchangeable (Krystek & Moldenhauer, 2007). It is important to make this distinction because a crisis does not necessarily lead to a scandal, while a scandal often entails a crisis.

In general, the word “crisis” originates from the Greek noun “krisis” and means “turning point” (Dictionary of the English Language, 2009). With regard to an organizational crisis, Barton (1993, p.2) defines it as “(...) a major, unpredictable event that has potentially negative results. The event and its aftermath may significantly damage an organization and its employees, products, services, financial condition, and reputation”. Pearson and Clair (1998) argue: „An organizational crisis is a low-probability, high-impact event that threatens the organization`s survival and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly”. Crises are mainly exogenously triggered (e.g. natural catastrophe, economic recession, political restraints) and are therefore more or less unpredictable. In comparison to organizational crises, the paper assumes that corporate scandals are in principle endogenously triggered (by management`s misconduct). They normally do not occur overnight and are hence more predictable

(first main difference to the definition of an organizational crisis). In the cases of Siemens and Adelphia, the misbehavior of management had taken its course over many years before the scandal came out.

Thus, the second main difference to organization crises can be derived, that is to say that the probability of a scandal`s appearance due to (long-lasting) bad management behavior is higher than a crisis caused by (sudden) external conditions. Kepplinger (2001) mentions another essential difference between organizational

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Predictable in a way that they will happen; the exact time of emergence, e.g. after months or years, is rather unpredictable.

2.3 C ORPORATE SCANDALS AND CRISES

crises and scandals, that is that scandals can be avoided. Moreover, he lists the following characteristics of a corporate scandal:

Public denunciation;

Public outrage;

Allocation of guilt;

Prominence of the culprit(s);

Typical progress;

Consequences.

Especially the “public denunciation” is of high relevance. Mass media rather tend to report about bad news (in average about 60 percent of criticism; Vollbracht, 2005) and have therefore the power to “[…] successful […]

telling their audience what to think about” (Cohen, 1963). This refers to Becker (1981) who says that behavior is not scandalous until it is labeled as such. Drawn from this, one can argue that the media are able to transform a scandal into a corporate crisis, and vice versa, by continuously publishing bad news about the company (act as catalyst) and therewith increasing publicity. This, in turn, rises the risk of losing reputation.

With the Enron collapse started a wave of further corporate scandals. As the seventh largest company in the U.S. and employer of more than 20,000 employees (Sarra, 2002: 715), Enron`s failure with such a breadth and depth of damage came as a shock to all stakeholders (damage of U.S.-$ 1 billion). Further scandals were e.g.

Arthur Anderson (2001), Tyco, WorldCom and Adelphia (all 2002). From that time on- known as the post- Enron era, much attention was paid to changes in corporate law and accounting regulations. Many scholars evaluate the outcome of the new launched Sarbanes-Oxley Act (SOX) in July 2002 by the U.S. government (e.g. Bartov & Cohen, 2009; Roychowdhury, 2009). Others deal with the antecedents of corporate scandals, e.g. Bragues, (2008) who particularly focuses on the characters of corporate leaders and their lack in moral.

Albeit scandals exist because of the top-executives` lack in morality, their weak character or personal greed and enrichment, they are also the results of white-collar crime, which has been increasingly paid attention to during the last years - in the academic debate as well as in corporations. Such a development is due to the recent occurrence of momentous scandals, but, also to the risks that had been largely obscured, but meanwhile discovered by the corporations themselves and revealed by the media (PricewaterhouseCoopers, 09/2009).

Sutherland (1940) was the first one who paid attention to white-collar crime in general. However, over the

years, the formulation of a clear definition was given up (Gisler, 1994, p.30), which is probably due to the

wide range of delicts, that exists. Literature basically differentiates between occupational crime and corporate

crime (Clinard & Quinney 1994; Hagan 1996: 236). Whereas occupational crime describes premeditative

behavior with regard to employees that want to enrich themselves by damaging the company (e.g. thievery of

company property, sellout of company secrets to competitors; here Adelphia), corporate crime incorporates

criminal acts done in favor of the company (e.g. bribe money for placing the order, defraudation of the revenue; here Siemens). As a result, once these consequences reveal to public, it is likely to cause a corporate scandal with enormous damage (e.g. economic, environmental, social).

Still, not all scandals are alike. They can be classified in many different ways, e.g. types, involved offenders and victims, kind of contraventions, amount of damage, time for recovery or attracted media attention.

Figure 5 shows one way of classifying scandals with regard to types (figure incomplete).

Figure 5: Classification of scandals with regard to types (own illustration),

Still, this classification does not state anything about comparing scandals with regard to their magnitude. This can be done e.g. in terms of evaluating the actions and behavior (indifferent or bad; refer back to Figure 4).

To what degree the scandals of Siemens and Adelphia are comparable is investigated in Section 4.2. The next section introduces an initial conceptual model and examines the variables used in this research.

This chapter has taken the field of business ethics as starting point for introducing the topic and then has moved on to the organizational dark side and corporate scandals. Academic debate has mainly focused on the pre-scandal era yet, e.g. the antecedents of scandals, managers’ lack in morality and their personal greed.

However, with regard to the post-scandal period, there definitely exists a research gap. Literature here focuses only on interventions taken by the government as response to scandals, e.g. the impact of the SOX (Moore, 2006) or the publication of SEC enforcement criteria (EPA, 2009). The role of companies taking countermeasures themselves has not been investigated yet. Hence, available literature is scarce and does not provide any conceptual frameworks, tested hypothesis or scientific insight in this topic. Based on this gap in the literature, we derived the research question and sub-questions, as indicated in the introduction.

2.4 I NITIAL CONCEPTUAL MODEL OF THE RESEARCH

For identifying the set of variables and the presumed causal relationships among them, an initial conceptual model is developed in Figure 6. As shown in the figure, the independent variables (IV) applied in this research are the managerial reactions taken after the scandal. These ones influence the company performance indicators, which represent the dependent variables (DV). However, there also exist external influences, which may act as moderator variables (MV) on the one hand, or as IV on their own, on the other hand. MV here influence the effects of the managerial reactions on the company performance, this is the relation between the IV and DV. By not paying attention to the moderators, the actual coherence between IV and DV would be misrepresented. Acting as IV on their own, external influences have a direct link to the company performance.

Both cases underline the importance of considering external influences.

Figure 6: Initial conceptual model

In the next chapter, this initial conceptual model will be expanded by theories in order to evaluate the

effectiveness of the countermeasures and to answer the question of my thesis in the end.

3. T HEORETICAL F RAMEWORK

In this chapter, prevailing theories and conceptions that are applied to explain the two cases of Siemens and Adelphia are described and integrated to a refined conceptual model.

For identifying the origin of corporate scandals, business ethicists are expected to look at the principal-agent theory (Laffont & Martimort, 2002). The principal-agent theory is a well known instrument to describe the problematic relationship that often exists between firm managers and shareholders. On the one hand, shareholders as the principal contracts the company`s leaders as an agent to act in their interests and to do certain tasks for them with their property. On the other hand, the managers have their own interests (e.g.

higher remuneration, power, esteem). This leads to an inherent conflict of interest, known as agency relation.

Another feature can be the so-called asymmetric information. This means that principals only have limited knowledge and insight into what their agents do and aim. Both, the conflict of interest as well as the asymmetric information lead to moral hazard. This means that managers are prone to take higher risk because the “gamble with other people’s money” (Federalist in finance, 28.10.2006). Referring back to Figure 3, the question is if TMTs use their information advantage and the shareholders` money for achieving their own aims or for acting in the interest of the company. The decision on how to behave (ethical or unethical) is affected by one`s morality

. In contrast to top executives, also shareholders can be more risk-taking and money driven and therefore behave unethically by pressuring their agents to increase company performance (agents face fear of firing). Either top managers or shareholders, choosing to behave in an immoral way forms the precondition for a corporate scandal in the end. The principal-agent theory is used in this thesis, because it is the basis for the occurrence of a corporate scandal. If shareholders would have the same information as managers, bribery should not occur, because overcoming a corporate scandal is expensive and consequently harms the shareholders.

The next approach stresses different perspectives on business ethics. Given the existence of different perspectives, it might be that corporate misbehaviour can lead to a scandal in one country, but is not regarded as scandalous enough in another country.

For judging the moral behaviour within, and of, our investigated companies, it is necessary to identify fundamental differences in the way in which organizations practice business ethics and manage the relationship to their stakeholders. Fisher and Lovell (2009) mentioned four different perspectives: (1) the pluralist, (2) the critical, (3) the classical-liberal-economic and (4) the corporatist. The focus will be on the classical-liberal-economic and corporatist approach, as they most relate to the case studies dealt with in this

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This is also affected by the “greed-is-good ideology” that has prevailed during recent years (Krugman, 4.06.2002) and the increased societal pressure for it. For an intensive discussion on “greed” and its consequences, please refer to Gray et al. (2005).

3.1 T HE PRINCIPAL - AGENT THEORY

3.2 P ERSPECTIVES ON BUSINESS ETHICS - FROM SHAREHOLDERS TO STAKEHOLDERS

paper. While the former is mainly applied in Anglo-American corporations (here Adelphia), the latter better describes the business relationships in Germany (Siemens), among others. The classical- liberal theory only strives to increase shareholder wealth, just aiming for economic rationality and high financial results.

Employees are seen as “resources”, only used to satisfy shareholders’ interests. Business behaviour has to comply with (inter)national laws, which are seen as the minimum and maximum of required morality. This relates to Morgan`s “Ugly Face”- metaphor (2000, p. 401) which describes exactly this motivation of corporations. On the opposite, the corporatist perspective also pays attention to the interest of different economic stakeholder groups (e.g. shareholders, employees, non-equity financiers - possibly the state). In Germany, the employee representative on the supervisory board (as one stakeholder group) has a right to participate in the organizational decision-making. The major difference between both approaches is in the topic of the moral agency, which is defined as “the ability of individuals to exercise moral judgement and behaviour in an autonomous fashion, unfettered by fear for their employment and/or promotional prospect”

(Fisher and Lovell, 2009, pp. 18-30)..

In the academic debate, a shift from the shareholder theory towards a stakeholder theory (not only to economic stakeholders, but to all stakeholders) has been noticeable during the last decade (Smith, 2003).

However, things look different in reality. Shareholders are still the most important stakeholder group for companies. As they provide company funds, major shareholders often intervene in the business proceedings.

Unfortunately, the focus on shareholder value and short-term profits is still prevailing in companies, as the recent financial crisis has shown. The severe consequences of this financial crisis have forced companies to slowly rethink their business practices and behaviour towards business ethics.

In the initial conceptual model (Figure 6), we have defined that “company performance” is the dependent variables. For conceptualizing these performance indicators, this study draws on Checkland`s soft system approach (1981). He defines five E`s - used for the “performance measurement” of systems, whereby he talks of an entity that has been produced from an input into an output. The five E`s are:

Efficacy - checking, that the output is produced (at all),

Efficiency - checking, whether minimum resources are used to obtain the output,

Effectiveness - checking (at the higher level) whether the transformation (input to output) is still worth doing,

Ethicality - is this transformation morally correct,

Elegance - is this an aesthetically pleasing transformation?

3.3 T HE SOFT SYSTEM APPROACH

The importance of ethical behavior is reflected this theory. Ethicality is the vital criterion, as it decides if a corporate scandal can occur and thus, always has an impact on the other four criteria and the other way around. It could also be the case that if the ethicality changes over time, it moves from the grey area into the law area. Such an amendment happened in Germany in 1999, when “new business supporting expenditure”

were banned by law. According to Checkland (1981), companies always need to pay attention to the circuit, where all five E`s are embedded, and the consequences of an unethically transformation. If unethical performance is disclosed to the public and is indeed judged as immoral by it, it is likely that a corporate scandal turns out (see Siemens and Adelphia). Latest from here, the company has to learn from the scandal and to find a solution for a “turnaround” by implementing change activities. This leads us to the next theory, the organizational learning theory.

According to Easterby-Smith et al. (1999), the idea of organizational learning (OL) has been already presented in the management literature for decades, but it has only become widely recognized since the 90s. We have defined in the Introduction that one criterion for a full recovery after a scandal is the adjustment of the business strategy, business culture and business structure in the long-term. OL is fundamental for such a change process. As indicated, the company has to change in order to make another scandal unlikely.

Checkland’s theory has shown that the five E`s always need to be watched and according to changes in one E, all other E`s change. These changes require permanent OL. In this context, OL is defined as “the detection and correction of error” (Argyris, 1977) and involves the following steps: (1) to gather information, (2) to interpret

& process information, (3) to share knowledge and (4) to memorize and recall knowledge (see Figure 7).

Figure 7: The OL process (Steinfeldt & Hoffmann, 2003)

There are three basic levels, where learning can occur: the single-loop learning, the double-loop learning and

the deutero-learning. (Argyris & Schön, 1996). The single-loop learning (or adaptive behavior) is primary

concerned with “how to best achieve existing goals and objectives” but “keeping organizational performance

within the range specified by existing values and norms”. This means that the strategy and objectives of the

cooperation remain the same. In contrast, the double-loop learning (or innovative behaviour) involves changes

of the organizational values and norms themselves. The deuteron-learning occurs when the organization learns

how to fulfil single- and double-loop learning (Argyris & Schön, 1996; p. 22); in short, when it learns how to

learn. As deutero-learning only follows the other two forms, we rather pay attention to single- and double-loop

learning (Figure 8). Because it is likely that short-term efforts, e.g. quickly regaining financial results after the

scandal (single-loop), will not make a difference in avoiding to remake mistakes and to prevent a further

scandal in the future, the focus lies on the double-loop learning process. Therefore, it will be studied whether

3.4 O RGANIZATIONAL LEARNING THEORY

Siemens and Adelphia have changed their organizational culture in the long-term (double-loop) for a complete recovery, based on (re)new(ed) values and norms.

Figure 8: Single-loop and double-loop learning (Worldpress, 2009)

In summary, this chapter has paid attention to four different theories and perspectives, that provide the basis for our refined conceptual model. It has been argued that the principal-agent theory can be seen as initial precondition for corporate scandals by describing existing conflicts of interest between managers and shareholders. This means, that even if the imbalance of information and interests between principals and agents always exists, it does not necessarily lead to a corporate scandal. Given the different business ethics perspectives, we have seen that they are important to consider in order to see how organizations practice business ethics and manage the relationship to their stakeholders. However, in case of a scandal, the perspectives also affect the managerial reactions, which in turn influence the company performance. For analyzing and assessing this corporate performance, the soft system approach is applied. The new, refined conceptual model is illustrated in Figure 9 and shows that executives can draw conclusion for their managerial reactions on the basis of the company performance (arrow from “company performance” to “managerial reactions”). These changes in the company performance provide the basis for the OL process.

Figure 9: Refined conceptual model

3.5 R EFINED CONCEPTUAL MODEL OF THE RESEARCH

4. M ETHODOLOGY

This chapter presents and justifies the appropriate research design, case selection and data sources to answer the research question.

According to Yeung (1995), the research design relates to “the overall structure and orientation of an investigation”. It involves “deciding how the strategy and methods will be implemented in the context of a specific inquiry […]” (Thomas, 2004, p. 20). In the current thesis, the chosen research strategy will be the

“case-study strategy”. In detail, two contrasting case studies will be examined (Siemens and Adelphia). A case study is “making extensive observations of an individual or small group of individuals” (p. 111; in my case the behavior of the top executives). Yin (1989, p.23; adjusted 2006, p.18) says: “A case study is an empirical inquiry that

investigates a contemporary phenomenon within its real-life context, when

the boundaries between phenomenon and context are not clearly evident, and in which

multiple sources of evidence are used.”

All three conditions are valid for my project. When it comes to the case study design, Yin (1989, p. 46) proposed four different types: (1) single-case (holistic), (2) single case (embedded), (3) multiple case (holistic) and (4) multiple case (embedded). The case study design here will be Type 3: A Holistic, Multiple Case Study, as the author investigates only one scandal at each company (the scandals of Siemens and Adelphia as single units of the analysis, means holistic). Moreover, it provides a multiple case design as basically two contrasting cases are explored. Therefore, a cross-case (or cross-site) analysis is employed, which leads us to the method.

In general, quantitative, qualitative, or both analytical methods can be required in a case study (Thomas, 2004, p. 21). While quantitative research relies on numerical data and measurement, qualitative research applies narrative and verbal data. This paper utilizes both methods, which is advisable in a multidisciplinary field such as management (Thomas, 2004, p. 20). While the description of the management actions is primarily completed by the qualitative analysis, the evaluation of the countermeasures’ effectiveness is based on quantitative research. Thus, the quantitative results help to interpret the predominantly qualitative findings.

Given that academic knowledge of post-scandal behavior is still incomplete and a literature gap prevails, the research question was designed to be an open-ended and exploratory question. The analytic technique applied is to analyze the two case studies by “building an explanation about the case & identifying a set of causal links” (here through management actions and performance indicators), the so called “explanation building”

strategy (Yin, 1994). This also relates to the inductive research approach and means that an author attempts to

4.1 R ESEARCH D ESIGN

induce new theory from cases (here the practical implications at the end of this thesis) rather than starting out from a theory. The process mainly begins with an observation, and continues with the attempt to find patterns and regularities, followed by the formulation of tentative propositions or hypotheses. Finally, new theory can be derived (Trochim, 2006). However, not all steps can be followed in this paper. According to Yin (1994), there is a legitimate reason for some case studies not to have any propositions, e.g. in which the topic is subject of exploration. As seen, literature about TMT`s behavior after corporate scandals is still missing and tested hypotheses or conceptual frameworks do not exist yet. As further exploration of this topic is necessary, Yin`s argumentation is followed here. Hence, this thesis does not provide any propositions at last.

This paper uses two case studies of Siemens and Adelphia for answering the research question. According to Yin (1994; 2003), sample selection should be rather by a replication logic instead of a statistical one.

Therefore, cases can be selected according to either yield similar results (literal replication) or on the contrary, completely opposite results (theoretical replication). This thesis applies the theoretical replication, as the most important criterion for selecting both cases has been the contrast in ending the scandal: Siemens survived the scandal even with better performance afterwards. In contrast, Adelphia filed for bankruptcy only after three months. Having such a divergence in the “outcome”, enables us to research and highlight more easier the differences in the reactions. Furthermore, both scandals are quite comparable with regard to type and scope. They has been both classified as fraud scandals, as indicated in Figure 10.

Figure 10: Classification of the two case studies with regard to types

(own illustration; Fraud-Part adapted from Deloitte & Touche GmbH, 2009)

4.2 C ASE SELECTION - WHY S IEMENS AND A DELPHIA ?

Fraud as subtype of corporate scandals can be divided again into three kinds, that all apply to the offenses investigated in the two case studies. Whereas Siemens can be categorized as a corruption scandal, committed in the advantage of the company (red frame), Adelphia was involved in manipulating financial statements and damaging company assets (green frame). Both companies misused liquid assets, however, the difference at this point is that Siemens` misconduct can be seen as “corporate crime” (done in favor of the company) while Adelphia`s behavior demonstrates “occupational crime” (enormous personal enrichment, besides falsifications of balance sheets).

In addition, with regard to magnitude, both scandals were caused by TMT`s actively bad behavior (refer back to Figure 4). In both cases, managers and even colleagues knew about the unlawful and unethical actions.

They are both exceptional and are ranked under the top-five of the worst management scandals respectively in Germany and the U.S. (Prof. Dr. Hans-Peter Müller, 10.06.2010). The Adelphia case study was favoured over the famous Enron case. Even if both were at the heart of the corporate accounting scandals at the beginning of this decade and both companies excluded from consolidated financial statements in a similar way, most research has been dedicated to Enron, but only little literature focuses on Adelphia. For this reason, we will look at the less investigated scandal of Adelphia.

Adelphia and Siemens also show some crucial differences. To begin with, the type of crime differs. While Siemens incorporates corporate crime, the Adelphia scandal represents occupational crime. Thus, the scandals comprise different subtypes of fraud. Furthermore, as discussed earlier, there are differences in the corporate governance structure and business perspective. While Siemens applies the Continental-European model, Adelphia has the Anglo-Saxon model. Concerning the business perspective, it has been pointed out that business ethical perceptions among Germany and the U.S. differ. The focus in Germany is mainly on economic stakeholders; however, in the U.S. most attention is paid to shareholder value. During this research, these differences will be used to draw more specialized practical implications at the end. A summary of similarities and differences between the Siemens and Adelphia scandals is given in Table 1.

Table 1: Similarities and differences between both case studies

Criterion Siemens Adelphia

Similarities Classification

Under top-five of worst management scandals (in Germany and U.S.)

Fraud Scandals (broad)

Scope and magnitude

Scandals took place due to management`s behavior

Actively harm to company and all stakeholders

Differences

End of scandal

Successful overcoming

Improved company performance

File for bankruptcy after three months

Company sale