CSGB6102 : Business Ethics and Corporate Governance Tyco International Business Ethics and Corporate Governance (CSGB6102 ) Alireza Khosroyar CGA110033
Tyco International:Leadership Crisis
Oct 28, 2014
Tyco International Ltd. (NYSE: TYC) is a Swiss security systems company incorporated in Switzerland, with United States operational headquarters in Princeton, New Jersey (Tyco International (US) Inc.). Tyco International is composed of two major business segments: Security Solutions and Fire Protection.Leonard Dennis Kozlowski[1] (born November 16, 1946) is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in purportedly unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former Tyco director. He is currently serving 8.33 to 25 years at the Mid-State Correctional Facility in Marcy, New York. His earliest release date is January 17, 2014, when he becomes eligible for parole. According to New York state inmate directory he has been granted conditional release at Lincoln Correctional Facility in New York City.
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CSGB6102 : Business Ethics and Corporate GovernanceTyco International
Business Ethics and Corporate Governance
(CSGB6102 )
Alireza Khosroyar CGA110033
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
1973 CEO: Joseph P. Gaziano
1975 Dennis Kozlowski
1982 New CEO: John F.
Fort IIIKozlowski
Promoted to President of
largest Division
• -98% paper work, cut salary convert to bonus• Business Week “corporate tough guy, respected & feared in roughly equal measure”•President of company, then CFO•Acquired $ 360 mil of global fire-protection
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
1992 Fort resign as CEO
1992 CEO: Kozlowski, 46
•Acquired Kendall & doubled earning•Increase salary $ 2.1 mil
1999 CEO salary $ 170 mil
1997 CEO salary $ 8 mil
2002 EPS >40% growth
Assisted by CFO, acquisition escalated, operating margin +22.1%
Assisted by CFO, acquisition escalated, operating margin +22.1%
2002, spent $ 8 bil on >700 acquisitions in last 3 yrs2002, spent $ 8 bil on >700 acquisitions in last 3 yrs
SEC investigate on amending Tyco’s EPS during 1999-2000
SEC investigate on amending Tyco’s EPS during 1999-2000
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
The fall of Dennis Kozlowski and othersIn early 2002, Frank Walsh’s scandal
Receiving $20 million commission for his part in securing and aiding the CIT merger, without the knowledge of the rest of board.
Kozlowski had made the payment.
Paying bribe, either unethical and against the law!
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
The fall of Dennis Kozlowski and othersAlso in 2002, authorities of the
bank discovered Kozlowski had sough to avoid $1 million taxes!He purchased $14 million rare
artworks.He instructed the shipping
company to send empty boxes to New Hampshire along with invoices!
He resigned as CEO on June 2, 2002 and was arrested on June 3.
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
The fall of Dennis Kozlowski and others
In September 2002, Kozlowski and Swart (CFO) were indict on: 38 felony counts for allegedly stealing $170 million from Tyco! Selling an additional $430 million Tyco stocks and not reporting!
Kozlowski also accused of granting $106 million to various
employees through “loan forgiveness” program. Swart also accused of falsifying
documents in this program in the amount of $14 million.
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
•New York prosecutors indict KozlowskiNew York prosecutors indict Kozlowski and Mark H. Swartz (former Tyco CFO)and Mark H. Swartz (former Tyco CFO) on numerous counts of grand larceny,on numerous counts of grand larceny, securities fraud, and enterprise securities fraud, and enterprise corruption.corruption.
Judge:•Kozlowski & Swartz pay $ 134 mil to Tyco•Fine $ 70 mil & $ 35 mil•Jail : < 7 years (appeal)
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
The fall of Dennis Kozlowski and others
• The consequences of CEO’s misconducts:
• President of Fire & Security: Fired (false account which impact on EPS)
• Auditor: Fired (Signed off Tyco’s audit report 2002)
• Share price dropped from $60 on Jan to $18 in Dec• Many of 260,000 employees were also shareholders,
watched their savings dwindle.• Tyco’s retirees: retired plan tired to company stock
price
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
Ethical and legal issues in this case
• Discrimination• Accounting Fraud• Bribery• Irresponsibility• Conflict of interest• …
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
Rebuilding an empireGeneral action
Company filed suit against Kozlowski and Swartz for more than $100 million.
The SEC (The U.S. Securities and Exchange) allows companies to sue insiders who Profited by buying and selling company stock
To restore investors faith, new management team recovered some of the funds taken by Kozlowski.
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
Rebuilding an empireFundamental changes:
Review of the company’s accounting and corporate governance practices
New board of director voted to make future executive severance agreement.Require the board chair to be an independent person rather
than a Tyco CEO.
Eric Fillmore was hired as Vice President of Corporate Governance.
To transform Tyco from a model of poor governance to a leader
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
During five years :Eric installed a corporate ethics program.A dramatic corporate culture was implemented 90% of headquarters staff were replaced.In 2008 ,Tyco was named Corporate Citizen of the
year for helping the homeless
Today TYCO ‘s ethics program stands as a role model for how one can clean up corporate
misconduct.
CSGB6102 : Business Ethics and Corporate GovernanceTyco International
Conclusion:
Centralization vs. Decentralized structureunethical issuesDifficult to detect misconduct
Decreasing tolerance 99% 1%Tolerance t hat today’s government and investors have for
misconduct
Tyco survival proves that some companies can survive major ethical scandals.
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