How a Company's Management Model—Either Centralized or Decentralized—Can Influence Compliance Risks

Drawing on real-world examples, it's clear that both approaches have their pitfalls when taken to the extreme. To truly understand the nuances and potential risks, let's delve into the true stories of Siemens and ABB Ltd., each representing a different end of the management spectrum.

Story 1 - Siemens: The Perils of Centralized Management

The German multinational Siemens, known for its work in sectors like energy, healthcare, and automation, found itself embroiled in allegations of widespread corruption and bribery dating back to 2004. The heart of the scandal emerged from an investigation by the German news magazine, Spiegel. The magazine published unreleased internal memos from Siemens' former head of compliance, Albrecht Schäfer, who alleged that senior executives, including then-Chairman Heinrich von Pierer, were aware of corrupt practices. Shockingly, Siemens' internal investigators notably disregarded these memos.

Both U.S. and German authorities got involved, scrutinizing Siemens for possible violations of the Foreign Corrupt Practices Act (FCPA). Ultimately, in 2007, Siemens settled with Munich prosecutors for €201 million based on questionable payments totaling €420 million. Following this settlement, the company identified €1.3 billion in potentially illegal payments globally, leading to high-profile resignations and terminations, including that of CEO Klaus Kleinfeld and Chairman Pierer.

Story 2 - ABB Ltd: The Pitfalls of Decentralized Management

Swiss tech giant ABB Ltd. adopted a business model encapsulated by the catchphrase "being local worldwide." This decentralized approach empowered local operations to make decisions tailored to their specific markets. Commercially, this model resonated well and contributed to ABB's growth in various sectors. However, this success turned out to be a double-edged sword when it came to compliance.

ABB's decentralized structure inadvertently led to an environment where local offices bypassed or ignored compliance protocols set by the company's headquarters. This lack of oversight became glaringly evident when ABB faced not one, but three enforcement actions related to the FCPA. The company had to pay a combined $537 million in resolutions to both the DOJ and SEC for violations occurring in multiple countries, including Nigeria, Angola, Kazakhstan, Iraq, Mexico, and South Africa.

What Went Wrong?

In a centralized management system like Siemens', where all decisions are made at the headquarters, field managers often feel sidelined. This environment can cultivate a top-down tolerance for corruption, infecting the entire organization. 

On the other hand, in a decentralized setup like ABB's, the dispersion of authority can lead to ineffective enforcement of compliance rules, particularly those related to the FCPA.

Striking the Balance

These examples may sound extreme, but they illustrate a crucial point: both centralized and decentralized management models can be breeding grounds for FCPA risks. So, what's the middle ground? It involves achieving a harmonious blend of centralized oversight and field-level autonomy. This balance can create an atmosphere of mutual accountability, which is essential for effective compliance management.

Conclusion

In the end, whether it's centralization that verges on authoritarianism or decentralization that gives way to rogue behavior, the extremes in management models are where compliance risks lurk. The ultimate aim is to foster a corporate culture where compliance is not just a checkbox but a guiding principle. This balance can be achieved through a carefully calibrated management model.

So before you lean too heavily on one management style, consider its compliance implications. Because, at the end of the day, good governance isn't just good ethics—it's also good business.