Bribery and cover up have been topics covered extensively throughout the hundreds of years competitive business has been around. Orthofix, an international medical-device producer and distributor, had key executives caught in a bribery cover up scandals in both Mexico and Brazil. Heavy penalties and fines were levied against the company (to the tune of over $19 million) and their public image including relationships with stakeholders, patients, and customers took massive hits. The company continues to try to rebuild their image and gain back the trust of the public from scandals ranging from the beginning of the 2000’s until the mid 2010’s.
Founded in Verona, Italy in 1980, Orthofix is a now Texas-based medical device company specializing in the development, manufacturing, and distribution of orthopedic and spine products. Orthofix became a public company in 1992 and moved headquarters to the United States in 1995 when the company acquired American Medical Electronics. The company now operates in two segments, Global Spine and Global Extremities, doing business in over 70 countries worldwide.
The move to the U.S. coupled with their acquisition of AME helped boost the company’s total sales over $77 million by the end of 1996 (Reference for Business). Their new business line of bone growth simulators and bone substitutes were main contributors to their success. Also, the sale gave Orthofix an extensive distribution network in the United States allowing them to sell more products internationally. In the meantime, Orthofix has continued to acquire stakes in competing orthopedic companies allowing them to expand their product line and continuously innovate.
Orthofix markets and distributes its products through direct sales representatives and independent distributors to a variety of clients including physicians, hospitals, surgery centers and other purchasing organizations. A major portion of the company’s revenue comes from sales with large hospitals and surgery centers as the company has tried to acquire a multinational market share. The company’s mission is to offer highly valued minimally invasive medical devices for the orthopedic and trauma markets and to achieve market leadership by focusing on continuous innovation in the products they serve and offer (Zippia).
The CaseAs Orthofix moved into the 21st century, international business, specifically in Mexico and the Southern Americas, was important for the growth of the company. Orthofix did a large portion of their revenue in selling medical devices to government-sponsored hospitals in these regions and management at the corporation took steps to ensure this market for their business. From the start of the 2000’s until early 2010, Orthofix had committed acts of bribery that found the company paying routine bribes referred to as “chocolates” to Mexican officials to obtain lucrative sales contracts with government hospitals (SEC 2012 PR). These “chocolates” came in forms of cash, computers, televisions, and appliances and were given directly to officials by means of back channels and front companies. To cover the bribes, executives initially recorded them as cash advances and falsified their invoices
to support the expenditures. But, as the bribes became larger, they were eventually recorded as promotional and training costs. Yet, upon review, when an Orthofix executive noticed these expenses being consistently and significantly over budget, the bribery scandal was immediately found out and self-reported to the SEC.
The SEC found Orthofix guilty of committing bribery from 2003-2010, illicitly spending over $300,000 to secure nearly $5 million in illegal profits with Mexican officials. The company was reported to fully cooperate with the SEC and their demands and Orthofix was eventually found guilty of violating the Foreign Corrupt Practices Act and agreed to pay $5.2 million to settle the charges.
Yet, “where there’s smoke there’s fire”, and in 2017, Orthofix was once again charged with improperly booking revenue and making improper payments to doctors at Brazilian government-owned hospitals. The company was found improperly recording revenue as soon as products were shipped despite procedures requiring certain events in the transaction process to take place prior to receiving payment. In other instances, Orthofix immediately recorded revenue when it had provided customers with significant extensions of time to make payments (SEC 2017 PR) causing the company to misstate certain financial statements between 2011 and 2013. A separate SEC case found the company’s subsidiary in Brazil used high discounts and improper payments to induce doctors to use Orthofix products and created fake invoices to cover these services. The SEC was made aware of these crimes when the whistleblower, a doctor in Brazil, provided information to the SEC about an alleged kickback scheme operated by Orthofix (WSJ). Orthofix eventually agreed to pay $8.25 million in fines to settle their “channel stuffing” and SEC accounting fraud charges, as well as an additional $6 million in FCPA penalties, for a total of over $14 million in damages. In all, these scandals cost Orthofix over $19 million in SEC charged fines for violations relating to bribery and accounting fraud.
Because Orthofix is a public company, the future of its business and their success relies on its relationship with its stakeholders and potential customers. Their both illegal and unethical actions over the last two decades have caused public distrust and put the stakeholders in positions of risk. From a financial perspective, their stock OFIX has seen serious losses (down 85% in 2007). With that said, their share price has continued to steadily rise because they have taken steps to right their wrongs. The firing of all employees involved in these scandals was a good first step in the reshaping of their public image, but the company must make sure they don’t fall into previous practices moving forward. Orthofix prides themselves in their innovation and the high quality of the devices they provide for patients. The company should focus on continuing to rely upon the success of their products and allow for public trust to build over the positive review from customers and patients.
Analyzing the actions of Orthofix through the lens of an Individualist shows that while the business was certainly trying to maximize their profit, they were doing so outside the context of the law and the normally agreed-upon standards of society. According to Milton Friedman’s view on Individualism, all companies must abide by the same set of rules for this economic model to successfully work and “these laws therefore restrict what a business is ethically allowed to do to profit” (Salazar 18). In thinking of both the bribery and accounting fraud violations committed by Orthofix, it is clear that the actions performed by executives at the company were outside the bounds of legality of the system and state the company operated in and were therefore unethical in the nature of Individualism.
As a business context theory, Orthofix was certainly trying to maximize their profits, but, in doing so, broke laws and suffered penalties and fines that eventually lead to a net loss of profit in these areas where the acts were committed. The company’s system of checks and balances in their management and accounting departments was not strong nor diligent enough to uncover these crimes over the majority of time they had taken place, inevitably leading to the barrage of fines levied against the company. While Orthofix may have secured a short-term window of increased profit and brand success in Mexico and Brazil by enticing customers into using their products, they failed to see the long-term damage these crimes would carry. The severity of fines for crimes like those done by high-ranking executives inside the company should have created cause for concern, but the short-sighted mindset exhibited by these same people was the catalyst towards the penalties faced. With that said, their brand image and public trust were also hurt through these actions. Customers would now be less inclined to work with a crime-rated organization and the public was going to be less likely to invest in a company that showed trends of operating outside the bounds of the law.
In looking at this case in a Utilitarian sense, the actions of those in Orthofix would be deemed unethical because of their absence of consideration towards the owners and stakeholder’s happiness and desires. Through a Utilitarian lens, “all beings who are capable of experiencing happiness should be considered when weighing the costs and benefits of actions” (Salazar 20). Actions should lay consideration for all beings the action will affect, and a decision should be made depending on the value of the total benefit of the action.
Prior to any crimes being committed, executives involved should have considered the pros and cons of bribing officials and its lasting effects. If executives considered their actions first knowing bribery could only lead to financial fraud (more crime), they would have seen the short-term gains weren’t worth the long-term losses. Executives failed to think about the desires of the stakeholders, the image that the scandal would cast on the company and the adverse effect it would have on the business relationships moving forward.
More foresight should have gone into consideration for the crimes and what would follow by these executives at Orthofix. Employees continued to bribe officials for personal gain in their region and used fraudulent accounting measures to cover their tracks. As the illegal payments and profit grew, their attention towards the risks attached to not only themselves, but also innocent stakeholders only decreased. Utilitarians are concerned about the long-term costs and benefits of actions (Salazar 20), while executives at Orthofix were more concerned with their short-term profits. OFIX executives acted selfish in the short-term and ruined their long-term chance of success. Not only were the acts committed by these members at Orthofix highly illegal, they were also extremely unethical from a competitive and sympathetic view point.
A Kantian view of this case would be interested in the intent or will behind the motivations of the people involved to commit the action. Kantianism would examine the ethics involved in bribing state officials for personal/business gain and using fraudulent accounting measures to cover a crime. In a Kantian analysis, the concerns are “the moral permissibility of the action and the moral worth in the motivation of the action” (Salazar 21). It was bad will for executives at Orthofix to commit crimes of bribery and put the company at serious financial risk.
Another important aspect of Kantianism relies on the fact that people should act only according to maxims that could be universalized and acted upon. With relation to the acts of bribery – Could it be made a universal law to always bribe customers to get what you want? This would be impossible, because if everyone bribed everyone in every business transaction, it would be impossible to bribe someone. Also, according to Kant, he claimed “it is wrong to lie, cheat, and steal, no matter the positive consequences that occur” (Salazar 21). In examining the moral permissibility of this action again, executives at Orthofix cheated the law by bribing official for profit gain and lied about it by manipulating their accounting records in order to not get caught. Every aspect of this action goes against the key ideas of rationality and morality in the act of practicing good will.
With attention to the fraudulent accounting measures used to cover their bribery scheme, this would be deemed unethical as well. Universalizing this maxim would leave: Could everyone cheat on their accounting measures to hide things from the government? I don’t believe this is possible because if everyone was hiding things from the government by improperly reporting financial statements, the government would know and it wouldn’t be possible. Also, it would be impossible to universalize cheating, lying, or manipulation because “An action is rational and permissible if it meets certain standards that demonstrates respect for the autonomy and rationality of all people affected by the action” (Salazar 21). Lying and cheating demonstrate a severe lack of respect for the government, its laws, and all other people abiding by those laws.
Someone following the Virtue Theory model would be most interested in examining someone’s character and assessing if they are “virtuous” or not. This theory differs from the previous three in that they “analyze individual actions whereas Virtue Theory analyzes a person’s character” (Salazar 23). Important characteristics to be considered when analyzing someone’s traits include their virtues (honesty, wisdom, insight) and vices (greed, selfishness). Executives involved in these scandals showed a number of vices that can be considered unethical.
Executives at Orthofix displayed certain vices like greed and selfishness that showed a poor judgement of their true character. By only thinking of the profits of their short-term gain, they exhibited key traits and characteristics that directly oppose the key virtues that build a good character. Bribing officials for personal gain (regionally and business) was selfish and showed a lack of temperance and no respect for their stakeholders or innocent parties involved. Also, they showed fraudulent behavior traits in the covering up of their crimes financially. Key virtues like honesty and trust were clearly missing from the people who committed these actions. Honesty and trust between themselves, clients, and customers has become strained because of the way in which these people acted, and their relationships could be negatively affected as they try to grow.
Justified Ethics Evaluation
In my opinion, the actions of key high-ranking executives at Orthofix were unethical and highly illegal. The actions committed, both bribery and the reporting of fraudulent accounting measures, go directly against the goals and expectations of the free market. Breaking the law to gain an advantage can always seem like a good idea in the short-term, but most people will eventually slip and get caught, realizing the consequences were never worth the risk. The bribery was the steppingstone to fraudulent accounting practices used to cover up the initial scandal, leading to an avalanche of crimes and problems too big to cover. Negligence regarding the consequences of their actions resulted in heavy penalties against the company and negatively impacted many people that were never involved.
The risks and rewards of their actions should have been considered more heavily and with much more severity. Understanding how hard it is to break the law and get away with it in this modern age of technology should have been a caution to anyone interested in doing so for their own personal gain. With that said, systems like the SEC’s whistle-blowing reward provide a strong incentive for individuals who notice unethical and illegal acts happening in business to report them. Often times, people involved in these acts can be scared of reporting incidents for loss of their job or blackmail, but through their anonymous system and monetary reward, it provides a reason for people to act lawfully.
These executives at Orthofix did not act in an ethical manner and failed to show rational and moral judgements in their actions. Not only did they cheat to gain an unfair advantage over their competition, they lied and covered their tracks with the hopes of continuing their ruse and never be caught. They inevitably put the company and its stakeholders at extreme risk and valued their own self-interests over that of the greater whole.
The company has already taken important steps in fixing the public image fallout associated with their scandals. Orthofix fired employees directly involved and responsible for the makings behind the schemes and immediately worked with necessary parties to “implement significant remedial measures” (SEC 2012 PR). With that said, the company’s image continues to fluctuate as they’ve had multiple scandals and struggle to engrain a trustworthy relationship with the public.
The problem with Orthofix seems to be a lack of training with regards to ethical responsibility in the workplace and helping employees make rational and grounded decisions based on their experiences. I recommend an extensive overhaul of the current training and orientation-type processes in order to start from the ground-up. All existing and new employees should be required to take these training courses that thoroughly cover the expectations and ethical practices members of their organization should abide by. Provide case examples from your own company in order to show people how serious the consequences can be for acting in a way that could hurt the company. Team members will have a better understanding of what is required from them and will be able to make grounded and rational decisions to benefit the entire organization.
Benjamin Wosky - Western New England University senior
“Orthofix History.” Zippia, 27 Aug. 2020, www.zippia.com/orthofix-careers-33893/history/.
“Orthofix International NV.” Reference for Business, www.referenceforbusiness.com/history/Oe-Pa/Orthofix-International-NV.html.
“Press Release.” SEC Emblem, 10 July 2012, www.sec.gov/news/press-release/2012-2012-133htm.
“Press Release.” SEC Emblem, 18 Jan. 2017, www.sec.gov/news/pressrelease/2017-18.html.
Sun, Mengqi. “Whistleblower in Orthofix Bribery Case Awarded $1.8 Million.” The Wall Street Journal, Dow Jones & Company, 25 Sept. 2020, www.wsj.com/articles/whistleblower-in-orthofix-bribery-case-awarded-1-8-million-11601064562.