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Tyco International:Leadership Crisis

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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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Tyco International:Leadership Crisis

  1. 1. CSGB6102 : Business Ethics and Corporate Governance Tyco International Business Ethics and Corporate Governance (CSGB6102 ) Alireza Khosroyar CGA110033
  2. 2. CSGB6102 : Business Ethics and Corporate Governance Tyco International 1973 CEO: Joseph P. Gaziano 1975 Dennis Kozlowski 1982 New CEO: John F. Fort III Kozlowski 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
  3. 3. CSGB6102 : Business Ethics and Corporate Governance Tyco International 1992 Fort resign as CEO 1992 CEO: Kozlowski, 46 •Acquired Kendall & doubleddoubled 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 yrs 2002, 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
  4. 4. CSGB6102 : Business Ethics and Corporate Governance Tyco International The fall of Dennis Kozlowski and others In 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!
  5. 5. CSGB6102 : Business Ethics and Corporate Governance Tyco International The fall of Dennis Kozlowski and others Also 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.
  6. 6. CSGB6102 : Business Ethics and Corporate Governance Tyco 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.
  7. 7. CSGB6102 : Business Ethics and Corporate Governance Tyco 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 enterprisesecurities fraud, and enterprise corruption.corruption. Judge: •Kozlowski & Swartz pay $ 134 mil to Tyco •Fine $ 70 mil & $ 35 mil •Jail : < 7 years (appeal)
  8. 8. CSGB6102 : Business Ethics and Corporate Governance Tyco 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
  9. 9. CSGB6102 : Business Ethics and Corporate Governance Tyco International Ethical and legal issues in this case • Discrimination • Accounting Fraud • Bribery • Irresponsibility • Conflict of interest • …
  10. 10. CSGB6102 : Business Ethics and Corporate Governance Tyco International Rebuilding an empire General 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.
  11. 11. CSGB6102 : Business Ethics and Corporate Governance Tyco International Rebuilding an empire Fundamental 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
  12. 12. CSGB6102 : Business Ethics and Corporate Governance Tyco 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.
  13. 13. CSGB6102 : Business Ethics and Corporate Governance Tyco International Conclusion: Centralization vs. Decentralized structure unethical issues Difficult 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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