Case Study : Deutsche Bahn AG Deutsche Bahn on the Fast Track to Fight Co rruption Case Study: Deutsche Bahn AG 2 Authors: Katja Geißler, Hertie School of Governance Florin Nita, Hertie School of Governance This case study was written at the Hertie School of Governanc e for students of public po licy Case Study: Deutsche Bahn AG 3 Case Study: Deutsche Bahn AG Deutsche Bahn on the Fast Track to Fight Corru ption Kontakt: Anna Peters Projektmanager Gesellschaftliche Verantwortung von Unternehmen/Corporate Soc ial Responsibility Bertelsmann Stiftung Telefon 05241 81 -81 401 Fax 05241 81 -681 246 E-Mail anna .peters @bertelsmann.de Case Study: Deutsche Bahn AG 4 Inhalt Ex ecu tive Summary ................................ ................................ ................................ .... 5 Deutsche Bahn AG and its Corporate History ................................ ............................... 6 A New Manager in DB ................................ ................................ ................................ .. 7 DB’s Successful Take Off ................................ ................................ ............................. 8 How the Corruption Scandal Came all About ................................ ................................ 9 Role of Civil Society: Transparency International ................................ ........................ 11 Cooperation between Transparency International and Deutsche Bahn AG .................. 12 What is Corruption? ................................ ................................ ................................ .... 13 The Regulatory Framework on Corruption and Bribery ................................ ............... 15 Corruption in Germany ................................ ................................ ................................ 16 DB Anti -Corruption Strategy ................................ ................................ ........................ 18 Compliance Steering Committe e ................................ ................................ ................ 18 The Compliance Officer ................................ ................................ .............................. 19 Ombudsmen and Whistle Blowing System ................................ ................................ .. 20 From Punishment to Prevention ................................ ................................ .................. 21 Corruption Punishment ................................ ................................ ............................... 21 Corruption Prevention ................................ ................................ ................................ 21 Effectiveness ................................ ................................ ................................ .............. 23 The License to Operate of DB: A Business Case ................................ ........................ 25 Annex ................................ ................................ ................................ ...................... 28 Transparency International, Germany: List of Corporate Members ............................. 28 Deutsche Bahn Group Management Structure (2005) ................................ ................ 29 DB Compliance Steering Committee Structure (Korruptionsbericht 2005) ................... 30 List of References ................................ ................................ ................................ ....... 31 Case Study: Deutsche Bahn AG 5 Executive Summary Deutsche Bahn AG (DB) is a government -owned railway company in Germany and a lea d- ing provider of mobility, transport and logistics services in Europe. Since 1994 it has gon e a long way of significant investments in modernization, expansion, acquisition, and diversific a- tion that is preparing the company for stock -listing which the German federal government agreed to take place as soon as 2007. However, this success did not co me about without overcoming serious challenges. In the am- bitious run -up to modernizing its infras tructure as quickly as possible, DB launched big infrastructural programs with multi -million budgets. Not all of them were awarded in a tran s- parent and competi tive way, a business practice that led to serious corruption acc usations in the beginning of the year 2000. Bad press was combined with criticism from NGOs such as Transparency Inte rnational. This made Deutsche Bahn well aware that it would need a reliable and credible par tner in fighting corruption and to sell the new strategy to the public. Therefore, DB started c o- operating with Transparency International and joined it as a corporative member in February 2001. Despite DB’s ambitions to integrate TI in the development of the anti - corruption strategy, TI’s impact was only marginal and cooperation took place on an irregular basis and most often only over telephone conversations. Corruption is described by TI as unlawful use of an official position to gain an adva ntage in contravention of duty and involves both a supply side and a demand side. Companies have fallen prone to white -collar -crime in Germany and worldwide incurring significant f i- nancial and reputation losses. Corruption became increasingly important also for policy makers. Various legisl ative and self -regulating programs on combating corruption and bribery have been deve loped on the national and inter -national level (e.g. OECD, UN) to a dvocate non -corrupt behavior of individuals in the public and pri vate sector. Studies show that low corporate gover n- ance standards raise the cost of capital, lower the operating performance of industry, and impede the flow of investment. However, as long as corruption doesn’t re present an endogenous phenomenon and a thr eat to federal public interests in Germany, the main cha llenge is to address it adequately in corporations. From a public policy perspective, corruption represents a threat to the federal public inte r- ests through its spillover negative effects on domestic economic competition and growth and on German corporate competitiveness on the global market. The anti -corruption strategy developed by DB represents some innovative tool for Ge r- man businesses. However, its effectiveness is still to be analyzed and evaluat ed b eyond the number of cases already discovered and punished in DB. After 2000 the fight against corruption represented a business case for DB not only be- cause of financial losses but mainly to reputation damages that could s eriously affect the company’s strategy for listing to the stock -market. Case Study: Deutsche Bahn AG 6 Deutsche Bahn AG and its Corporate History Deutsche Bahn AG (DB) is a government -owned railway company in Germany and a lea d- ing provider of mobility, transport and logistics services in Europe. In Germany, DB is on e of the largest emplo yers. The German Federal government is its sole owner, employing about 229.000 staff. Deu t- sche Bahn is divided into three independent from another operating business segments. The mobility segment includes the company’s main pa ssenger transport divisions: DB Fernverkehr (long -distance transport) and DB Regio (regional and urban transport), carry around 1.7 billion passengers annually throughout Germany and to neighboring cou ntries. DB’s network system manages all infrastructure and ser vices, provides railway and craft maint enance, security and communication technology. The freight transport division or logistics segment moves about 280 million tons of freight annually 1 with its bus iness units Schenker and Railion. Deutsche Bahn has i ts headquarter in Berlin, and has offices in 150 countries. The co m- pany reported revenues of !25,055 million in 2005, which is an i ncrease of 4.6% over the previous year. The co mpany recorded a net profit of 610 million in 2005, which t akes up to 239% compared to 2004 2. Despite this increase in net profit, DB faces inten se co mpetition in its passenger transport segment. Deutsche Reichsbahn and Deutsche Bundesbahn The Deutsche Reichsbahngesellschaft (DRG) or the German Imperial Railway Company was founded around 1920 by uniting the Staats and Länderbahnen which were ope rat ed by formerly sovereign terr itories and kingdoms like Bavaria, Saxony, and Prussia. 1 DB Bahn Group Management Structure, 2005, http://www.db.de/site/bahn/de/unternehmen/konzern/konzern.html Case Study: Deutsche Bahn AG 7 With the end of World War II and the division of Germany into four zones the DRG stopped to exist. Train service was then controlled by each of the respective zones ind ivi dually. From 1949, authority over railway operations was transferred to the new governments. The DRG’s successors were named Deutsche Bunde sbahn (DB) [German Federal Railways] in the American, British and French sector of West German, while in the Soviet s ector in the East it was renamed to Deutsche Reichsbahn (DR) [German I mperial Railways]. After the German unification in October 1990, the railway system remained sep arated. Both rai lways, Deutsche Bundesbahn and the Deutsche Reichsbahn had great deficits and investments into the railway system have long been pos tponed for various political reasons. Corporate structures were not in place and efficient operation of both railways was far from being realized. In 1993 administrative and organizational problems of the German railway system were ad- dressed by the German Bundestag who decided to unit Deutsche Bundesbahn and Deutsche Reichsbahn to form Deutsche Bahn AG. A great majority of the parliame n- tarians voted in favor for changing