Markets

As Stryker's Legal Troubles Grew Its Management Got Richer

By Jim Edwards

Updated on: February 20, 2009 / 4:02 PM EST / MoneyWatch

At Stryker, the maker of bone replacement devices and drugs, there appears to be a policy of rewarding management for the moral failings of their company. Over the last two years, Stryker has been the subject of investigations by the SEC, FDA and Department of Justice into corrupt practices and the manufacturing quality of their products.

You can read the NY Times story on the most recent criminal convictions here.

The response of the company's board of directors? To give their top people a pile of extra stock options and consultancy contracts. What follows is a summary of Stryker's legal difficulties and, after that, the rewards Stryker has given its top people in the aftermath of those difficulties. All the information is drawn from SEC documents:

Stryker's legal history:

2008: One criminal probe into two salesmen who were distributing misbranded devices and bone drugs and actually giving doctors instructions on how to use them. That's right -- Stryker salesmen were training bone doctors. The reps pleaded guilty.
2008: Three warning letters from the FDA regarding quality at three different manufacturing plants in 2008.
2008: Received subpoena into whether company was complying with a previous agreement not to pay kickbacks to bone doctors.
2008: DOJ subpoena received into whether Stryker violated the Foreign Corrupt Practices act, which bans companies from paying bribes to do business in foreign countries.
2007: Settlement of DOJ probe into kickbacks paid to knee doctors.
2007: SEC inquiry into whether Stryker violated the Foreign Corrupt Practices act, which bans companies from paying bribes to do business in foreign countries.
2006: Was the subject of grand jury hearings into whether Stryker was violating antitrust laws. No charges brought.

That protracted failure of leadership was rewarded with the following largesse in 2008:

CEO Stephen MacMillan: 150,000 stock options at $42 per share.
99,000 restricted stock units went to nine members of management, including:
Curt R. Hartman, Vice President, Finance: 15,000 restricted stock units
Andrew Fox-Smith, Group President, International: 15,000 restricted stock units.

You'll notice that at the end of 2008 there was a significant change of management at Stryker, in which a group president, CFO, and a vp finance all relinquished their posts. Were they being punished for failing to instill into their underlings a sense of responsibility? No. Here's what they got:

Stephen Si Johnson, Vice President, Group President: relinquished that position but gets an advisor to the company role: $400,000 in 2009, $200,000 in 2010. Plus benefits.
Dean Bergy, CFO: relinquished that role but gets an advisory role through 2011, $450,000 salary. Plus benefits.

None of these executives have been accused of any wrongdoing.

Even though Stryker salesmen gave doctors illegal instructions on how to put together its products, Americans are generally banned from suing device makers if they are injured by those products.

Stryker employees: you can download the federal prosecutors' fact sheets on sales reps Justin Demming and Martin Darnell here.