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.
Orthofix Background
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
Case
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.
Stakeholders
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.
Individualism
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.
Utilitarianism
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.
Kantianism
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.
Virtue
Theory
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.
Action
Plan
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
References
“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.
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