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Tyco - A corporate governance failure

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A brief look at one of the most notorious scams of early 2000s, Tyco, and their strategy to turn the company around

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Tyco - A corporate governance failure

  1. 1. A Corporate Governance Failure Prepared ByKaran Bhagatwala : Roll No. 09Harshit Bhinde : Roll No. 12Meghana Bhogle : Roll No. 13Sonali Gohil : Roll No. 35Avinash Kadam : Roll No. 52Snehal Kadam : Roll No. 53
  2. 2. September 12th 2002 Meghana Bhogle (13)
  3. 3. TYCO History Investment company focused on Science and Energy conversion. 1964: Public Trading. 1968: Acquisitions. 1982: Re-organization of Business Segments. 1986: Growth through acquisitions. Prior to scandal: $ 38 billion OR & 2,40,000 employees worldwide. Meghana Bhogle (13)
  4. 4. Rise of Dennis Kozlowski 1975: Assistant Controller 1987: BOD 1992: CEO 1993: Chairman Meghana Bhogle (13)
  5. 5. Robert Morgenthau : Sherlock Holmes In 1999, the SEC initiated an inquiry into Tycos practices. In January, 2002, questionable accounting practices came to light. Robert kept digging into the record keeping of Tyco and Kozlowski. No individual whistleblower. Scandal had already spread extensively. Snehal Kadam (53)
  6. 6. Courtroom Drama Kozlowski hired an attorney that defended his actions. Asking for lenient sentence citing his immense charitable donations. Owen Heimer asked the judge that no leniency be shown to Kozlowski. Citing his excessive spending spree and disregard for the shareholders of the business. Snehal Kadam (53)
  7. 7. TYCO: Corporate Governance System Composition Kozlowski Firm’s board of directors including:  Mark Swartz, CFO;  Lord Michael Ashcroft, who joined with the ADT merger;  Richard S. Bodman, a venture capitalist;  Stephen W. Foss, CEO of a textile concern;  Frank E. Walsh, Jr. Harshit Bhinde (12)
  8. 8. Key Details of Misconduct Frank E. Walsh, Jr. received $20 million commission. Walsh also held controlling interest in 2 firms that received >$3.5 million for supplying aircraft and pilot services to Tyco. Stephen Foss received $751,101 for supplying aircraft and pilot services to Tyco. Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home. CEO and CFO had sold 100 million dollars worth of shares, and then stated to the public that they still owned them. Harshit Bhinde (12)
  9. 9. Key Details of Misconduct Kozlowski received $81 million in unauthorized bonuses. Tyco forgave a $19 million, no-interest loan to Kozlowski . Kozlowski’s income taxes on the loan was paid by Tyco. Kozlowski used Tyco to avoid around $1 million import taxes after purchasing $14 million in rare artwork. $2.1 million for the birthday party of Kozlowskis wife was billed to Tyco. Kozlowski granted $106 million to employees through “loan forgiveness” and relocation programs. Harshit Bhinde (12)
  10. 10. Criminal Charges on CEO & CFO In all 38 felony counts. For:  Allegedly stealing $170 million from Tyco.  Fraudulently selling an additional $430 million in stock options.  Taking $242 million from a program intended to help Tyco employees buy company stock.  Granting $106 million to various employees through “loan forgiveness” and relocation programs.  Falsifying documents in this loan program in the amount of $14 million. Sonali Gohil (35)
  11. 11. Internal Control & Governance Failures Worst-practices included:  Poor documentation.  Inadequate policies and procedures to prevent the misconduct of senior professionals.  Inadequate procedures for proper corporate authorizations.  Inadequate approval procedures and documentation.  A lack of oversight by senior management at the corporate level.  Aggressive accounting & improper auditing by auditors. Sonali Gohil (35)
  12. 12. Damage Control Edward Breen appointed as new CEO. Company filed suit against Dennis Kozlowski and Mark Swartz for more than $100 million. Breen launched a review of the company’s accounting and corporate governance practices to determine whether any other fraud had occurred. Restate its 2002 financial results by over $2 billion. Management declaration about flaws in previous management style. Karan Bhagatwala (09)
  13. 13. Corporate Governance Re-Boot Reorganized the company and recovered some of the funds allegedly taken by Kozlowski. Elected a new board of directors. Voted to make future executive severance agreements subject to shareholder approval. Voted to require the board chair to be an independent person rather than a Tyco CEO. Hired Eric Pillmore as Vice President of Corporate Governance. Karan Bhagatwala (09)
  14. 14. Corporate Governance Re-Boot Implemented a corporate ethics program & replaced 90% of the HQ staff. Created the “Tyco Guide to Ethical Conduct”. An ombudsman position at Tyco who can mediate between employees and management. Tyco published a confidential hotline, called ConcernLINE. Tyco now publishes a quarterly report based upon the concerns that employees have brought up. Karan Bhagatwala (09)
  15. 15. ConclusionIn 2004 CEO Edward Breen was listed as one of Businessweek’s “Best Managers.” That same year Tyco won the Center for Corporate Change Award for “Outstanding Improvement in Board Governance.”

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