group 8 tyco
TRANSCRIPT
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Business Ethics and Corporate Governance
GROUP8
TYCOSubmitted to Dr. J. L. Gupta
Digvijay Singh
11PGHR16Garima Hans
11PGHR18
Tejas Karandikar
11PGHR23
Khusboo Gupta
11PGHR24
Puneet Sehgal
11PGHR45
Surender Singh11PGHR53
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Acknowledgm ent
We would like to express our sincere gratitude and appreciation to Prof. J.L
Gupta for his guidance, encouragement and advise throughout the project.Without his support this project would not have been possible. We would
also like to express our appreciation to the library team for their support
during the project.
Lastly, we would like to thank Management Development Institute, Gurgaon
for providing a platform to conduct disciplined research on the Tyco Fraud
case. This truly, has enhanced our knowledge of the ethics and corporate
governance and would serve us good in our careers.
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ContentsContents ......................................................................................................3
About TYCO .................................................................................................4
The Fraud .....................................................................................................6
The Rise of TYCO ..........................................................................................7
The Fall of Tyco 2002 ...................................................................................8
Executive lavish lives ..................................................................................9
Discovery of the fraud ................................................................................11Tyco investigation Timeline ........................................................................12
Charges laid: ..............................................................................................13
A different kind of corruption case .............................................................14
Ethical and Legal issues at Tyco .................................................................15
Theory Applicable: ...................................................................................16
Rebuilding Tyco ..........................................................................................17
Lessons Learnt ...........................................................................................20Conclusion .................................................................................................21
Bibliography ...............................................................................................22
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About TYCO
Tyco International is a diversified, global company that provides vital
products and services to customers in more than 60 countries around the
world. Tyco is a leading provider of security products and services, fire
protection and detection products and services, and industrial valves and
controls. Tyco International Ltd. was founded in 1960 by Arthur J.
Rosenburg.
With 2011 revenue of more than $17 billion, Tyco employs approximately
100,000 people across three business segments: Security Solutions, Fire
Protection and Flow Control. Since 1986, Tyco has claimed over 40 major
acquisitions as well as many minor acquisitions.
Kozlowski a long-time Tyco employee, starting in 1976 as an internal
auditor, worked his way up to CEO in 1992. With Kozlowski at the helm,
Tyco massively expanded during the late 1990s. He became the chair of
the board in 1993. He diversified the company, branching into health care.
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Tyco was affected by corporate scandal in 2002 when members of the
company's management used company's money improperly. Tyco's then
CEO was convicted in 2005 on 22 of the 23 counts he faced
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The Fraud
The company, Tyco manufactured a wide variety of products, from
electronic components to healthcare products .The conglomerate operatedin over a 240,000 people. During 2002, exchange and securities
commission began an investigation at Tycos top executives. Inquiry into
the accuracy of the companys book began in January. As investigation
continued, it uncovered that Dennis Dozlowski, Tyco former CEO, Mark
Swartz Tycos former CFO and Mark Belnick the companys chief legal
officer had taken over $170 million in loans from Tyco without receiving
appropriate approval from Tycos compensation committee and notifying
shareholders. For the most part these loans were taken with low to no
interest. Many of them were offset as bonuses without open approval.
Kozlowski and Swartz also sold seven and a half million shares of Tyco stock
for $430 million without telling investors. Formal charges were made by the
SEC September 12, 2002.
According to the Tyco Fraud Information Center, an internal investigation
concluded that there were accounting errors, but that there was no
systematic fraud problem at Tyco. Tyco's former CEO Dennis Kozlowski,
former CFO Mark Swartz, and former General Counsel Mark Belnick were
accused of
- Giving them interest-free or very low interest loans (sometimes
disguised as bonuses) that were never approved by the Tyco board or
repaid.
- Some of these "loans" were part of a "Key Employee Loan" program
the company offered.
- They were also accused of selling their company stock without telling
investors, which is a requirement under SEC rules.
- Kieslowski, Swartz, and Belnick stole $600 million dollars from Tyco
International through their unapproved bonuses, loans, and
extravagant "company" spending.
For a period of at least five years, while publicly claiming devotion to high
standards of corporate governance, Mr. Kozlowski regularly reached into
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Tyco coffers to finance his extravagant lifestyle and polish his image. All
told, it appears that more than $135 million in Tyco funds went to benefit
Kozlowski, largely in forgiven loans and company payments for real estate,
charitable donations and personal expenses.
The Rise of TYCO
For most of the 27 years that Kozlowski worked at Tyco, he was an
exceptionally enterprising and effective manager. He was the most prolific
corporate acquirer ever, gobbling up 200 companies a year, nearly one
every business day, at the height of his hyperactivity. The Wall Street sawTyco's seventyfold increase in market cap under Kozlowski as proof of his
genius. A BusinessWeek article described him as a corporate tough guy,
respected and feared in roughly equal measure. Kozlowski proclaimed his
desire to be remembered as the world's greatest business executive, as a
"combination of what Jack Welch put together at GE and Warren Buffett's
very practical ideas on how you go about creating return for shareholders."
The Rise of Tyco: 1992-2000
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He began taking ambitious risks, launching a company- acquisition frenzy
that doubled the value of shares, and thereby increasing his own worth
from $950,000 in '92 to $137 million in '00.
The Fall of Tyco 2002
For a period of at least five years, while publicly claiming devotion to high
standards of corporate governance, Mr. Kozlowski regularly reached intoTyco coffers to finance his extravagant lifestyle and polish his image.
The Fall of Tyco: 2002
He inched along ethically, cheating a wee bit here, falling back on a useful
white lie there, and as the years went by, the cheating grew and the lies
multiplied. All told, it appears that more than $135 million in Tyco funds
went to benefit Kozlowski, largely in forgiven loans and company payments
for real estate, charitable donations and personal expenses.
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The year 2002 marked a downgrade in its credit rating and a significant
drop in its stock price. It suffered more than a $9 billion loss that year. To
add to the financial woes of the company, midway through the fiscal 2002
year, Tyco became embroiled in a massive scandal involving the excessesby its former chairman and CEO, L. Dennis Kozlowski, and his senior
management team. Kozlowski resigned and former Tyco CEO John F. Fort
(Tyco) became interim CEO until the board of directors completed a search
for a permanent replacement.
Executive lavish lives
A report prepared by Tyco says the firm uncovered systematic deception
and personal enrichment that spread throughout its management ranks.
According to the report conducted by David Boies, a lawyer representing
the government- Kozlowski systematically created a corporate culture of
greed and excess. He secretly authorized the forgiveness of tens of millions
of dollars of loans to dozens of executives to keep their loyality.
At Kozlowski's direction and without board approval, 51 Tyco employees
recieved $56 million in bonuses and $39 million more to pay the taxes on
bonuses.
Misuse of company funds in Kozlowskis lavish lifestyle:
Real Estate
Rye, N.H.: Home bought in 1996 for $875,000. Company funds may
have been used and repaid. (Photo of house below)
Nantucket, Mass.: Home bought in 1997 for $5 million. Company
funds may have been used and repaid.
Boca Raton, Fla.: Estate assembled between 1997 and 2001 for
$13.5 million. $19 million loan helped finance property and
construction; later forgiven by Tyco.
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Boca Raton, Fla.: Home bought by Tyco in 1997 for $2.5 million,
used while estate was being built.
New York: Corporate apartment bought in 2000 for $18 million.
More than $11 million in Tyco funds spent on furnishings.
Art
Paintings: Collection worth $13.1 million some paid for with Tyco
funds.
Charity
1996: Tyco donates $1.7 million toward Kozlowski Athletic Complex
for school attended by Mr. Kozlowski's daughters.
1997: Tyco pledges $5 million for building at Mr. Kozlowski's alma
mater, Seton Hall.
1992-2002: Tyco directed more than $35 million to Mr. Kozlowski's
favorite charities.
Entertainment
2001: Company meeting and birthday party for Mr. Kozlowski's wife
on Italian island of Sardinia. Tyco picks up half of the $2.1 million tab.
Hobbies
Team Tyco racing yachts: Owned by company and used for
competition.
Yacht: 130-foot racing yacht, bought in 2000. Mr. Kozlowski
financed the boat with his own money though investigators are
looking into whether some of its upkeep may have been paid by Tyco.
As many as 40 Tyco executives took loans that were later "forgiven" as
part of Tyco's loan-forgiveness program, although it was said that many did
not know they were doing anything wrong. Hush money was also paid to
those the company feared would "rat out" Kozlowski. Essentially, they
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concealed their illegal actions by keeping them out of the accounting books
and away from the eyes of shareholders and board members.
Discovery of the fraud
In 1999 the SEC began the investigation after an analyst reported
questioning the accounting practices in Tyco. This investigation took place
from 1999 to 2000 and centered on the accounting practices for the
company's many acquisitions, including a practice known as "spring-
loading."
In "spring-loading," the pre-acquisition earnings of an acquired company
are underreported, giving the merged company the appearance of an
earnings boost afterwards. The investigation ended with the SEC deciding
to take no action.
In January 2002, the accuracy of Tyco's bookkeeping and accounting yet
again came under question after a tip drew attention to a $20 million
disbursement made to Tyco director Frank Walsh, Jr. That payment was
later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002,
Kozlowski was being investigated for tax evasion because of his failure to
pay sales tax on $13 million in artwork that he had purchased in New York
with the company funds.
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At the same time, Kozlowski resigned from Tyco "for personal reasons" and
was replaced by John Fort. By September of 2002, all three (Kozlowski,
Swartz, and Belnick) were gone and charges were filed against them for
failure to disclose information on their multimillion dollar loans toshareholders.
Tyco investigation Timeline
The following time line outlines the progress of investigation and indictment
against Dennis Kozlowski, Mark Swartz and Belnick.
January 2002- Question rose about the accuracy of Tycos bookkeeping
and accounting. Stock value drops 19 percent.
January 29, 2002- Kozlowski explains that the $ 20 million paid to Frank
Wolsh was a finders fee for the acquisition of CIT.
January 30, 2002- Kozlowski announces that he and Mark Swartz( Tycos
then CFO) will each purchase 500,00 Tyco shares on open market .This
move is made as an assurance of the value of Tyco stock.
April 25, 2002- Kozlowski explains 96 percent loss share for the quarter
ending on March 31, 2002 and outlines unusual cost that affected earnings.
June 3, 2002- Kozlowski resigns as CEO of Tyco for personal reasons. Johnfort is made the temporary CEO.
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June 4, 2002- Kozlowski is attempted for attempted tax evasion.
June10, 2002- Belnick who was hired in Tyco 1998 as the chief legal
officer is fired.
June 17, 2002- Schiller and Flexner, begins the process of suing Belnick forbreach of fiduciary duty and fraud. Belnick maintains that he acted with
integrity as Tycos chief legal officer.
August 1, 2002- CFO Swartz resigns from Tyco
September 12, 2002- Civil charges are filed against Kozlowski, Swartz
and Belnick by the SEC for the failure to disclose of shareholders
information on the multimillion dollar loans they borrowed from Tyco. The
SEC asked Kozlowski, Swartz and Belnick to restore funds they took from
Tycos various forms of undisclosed loans and compensation.
September 19, 2002-
Kozlowski is freed on $100 million bail. The bail is paid with a $1oo
million bond and secured with $10 million in asset from kozlowskis ex wife.
Swartz is freed on $50 million bail. The bail is paid with a $50 million
and secured with 500,00 of Swartz personal Tyco stock.
Belnickis freed on a $1 million bond.
Tyco continues operation and has replaced many members from its board
of directors. Edward Breen the former Motorola executive has replaced
kozlowski; David Fitzpatrick, who worked in number of blue firms, has
replaced Swartz and William Lytton the former international paper
executive has replaced Belnick.
Charges laid:
Kozlowski and Swartz were charged with :
- Corruption
- Conspiracy
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- Grand larceny: Larceny is a crime involving the wrongful acquisition
of the personal property of another person
- Falsifying records.
- The losses they caused Tyco are estimated as $ 600 million.
Belnick is charged with:
- Falsifying business records.
- Failing to disclose loans to made himself (for the purchase of his
Manhattan apartment and Utah home) to investors and Tyco
compensation committee.
A different kind of corruption caseThe Tyco case differs in a few key respects from other recent high-profile
trials involving once-powerful corporate executives.
While all of the cases contain elements of self-dealing, Kozlowski and
Swartz were not charged with accounting fraud -- unlike WorldCom's
Ebbers, Scrushy's HealthSouth, and Enron's Lay.
The trial of Kozlowski and Swartz was solely about the improper use of
company funds -- in other words, greed.
Analysis of Kozlowskis Mindset
Friends of the former CEO Kozlowski claimed that
- He couldnt tell the difference between his own money and
company's money". Apparently, he felt entitle to take riches
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from the company and bestow them on himself and his
associates.
- "He lost track of the fact that there was a distinction between
him and the company."- "He lost sight of where his money ended and where the
company's money began."
Ethical and Legal issues at Tyco
The ethical and legal issues at the Tyco International ranged from
- discrimination,
- accounting fraud,
- Grand larceny.
The issues involved cohesion on part of the CEO, and members of his team.
In addition, they had placed great emphasis on placing their personal
values and interests ahead of what was good for the organization.
The corporate culture at Tyco was driven by the CEO, Dennis Kozlowski who
admired the extravagant & lavish lifestyle of the former CEO, Joseph
Gaziano. He took an assertive approach to mergers and acquisitions, which
helped Tyco, maintain the 14 year growth within the business units.
The Boards of Directors were responsible for protecting Tyco's shareholders
interest. According to the reports, in few cases, some of the board members
were not aware of the fraud, and other unethical dealings that were going
on behind the scenes. The rest of the board members that were aware, did
not bring the issues to the other members of the board, therefore, they
were just as guilty of hiding the unethical behaviors as the CEO and his
direct reports. The reason this transpired could be probably due to the
majority of board members being on the board for more than 10 years, and
the strong relationships that had been established over time.
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The CEO, CFO and legal counsel, due to their self interest were not honest
and transparent with the stakeholders concerning the issues relating to the
accounting fraud and conflicts of interest. They all engaged in an enterprise
of corruption and collusion.The indented strategy of these executives had been more focused on
personal gain rather than on the best interests of the company and its
shareholders. They ignored their responsibilities to the laws governing
corporate management and to their investors and employees and other
stakeholders.
Theory Applicable:
Ethical egoism:
Ethical egoism is the normative ethical position that moral agents ought to
do what is in their own self-interest. It differs from psychological egoism,
which claims that people can only act in their self-interest. It claims that
each person has but one ultimate aim: her own welfare. The ethical egoist
will rank as most important duties that bring her the highest payoff.
Therefore, under this theory, it is understood that humans should act
selfishly if they wish to live healthy and meaningful lives.
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Among his first moves was election of a totally new and independent board
of directors only three months after joining the company. Breen also got rid
of 220 of Tyco's 250 managers.
As one of his chief priorities, Breen set the goal of meeting the highest
standards of corporate governance.
In this climate of distaste and distrust, Pillmore carved out his governance
strategy for Tyco. One of the first things we did was establishing guidelines
from a value standpoint. That, along with delegation of authority from a
governance standpoint were foundational to whatever else we were going
to do, he says. Then we had this huge communication effort to try to calm
the storm. That involved sending out the corporate message to Tycos
240,000 employees in 100 different countries in 16 major languages
videos, print materials, town meetings, in-person visits.
Tyco's corporate culture is built on the premise that every employee is
responsible for the conduct and success of the company. Breen worked
hard to ingrain ethical business practices and personal integrity deep into
the organisation.
The specifics of Tyco's desire to rank as best-in-class for corporate
governance are contained on its website and quoted here. These details are
important to management accountants and financial managers as an
example worthy of replication.
Tycos Vital Values are:
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One demonstration of Tyco's progress is the considerable improvement in
its governance rating by consultants Governance Metrics International
(GMI). In December 2002, Tyco's rating by GMI was 1.5 out of 10. As a
result of the company's governance efforts, it rose to 9.5 in June 2006. GMIhighlighted the company as one of the most dramatically improved.
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Lessons Learnt
Strong functional leadership and mentoring are critical to the
ongoing development of high-integrity leaders and
employees: Absolute power tends to get corrupt. Top leaders need
strong functional leaders who can push them back. There must be
some mentoring in their functions. Mark Swartz at Tyco, Scott
Sullivan at WorldCom, Andy Fastow at Enron were not broad cross-
functional leaders. They made headlines in magazines as the highest-
paid CFOs. It allows an intimidating leader to do what he needs to do
to get things done. At Tyco, Kozlowski took the company from $300
million to $36 billion with essentially the same leadership team. The
board member had remained the same for around 10 years and
hence strong relationships were built amongst them. Hence no one
questioned or reasoned on the basis of accountability to the other
members.
Functional leaders of HR, finance, legal, marketing, and other areas
playing a strong functional role and can temper the ambitions of the
top leader.
Leaders must have a "web of accountability" surrounding
them, with process disciplines in place to hold them
accountable: Leaders at the companies that ran into trouble had
few systematic constraints on their actions. Any CEO is doomed to fail
without an accountability structure around them. It might be a case
that they think well, or they possess integrity of character. At
HealthSouth, five CFOs came into the company in a 10-year period
and all five went to jail. Hence leaders in the company should be held
accountable. Structures and processes should be set in place to
ensure that they are called to task.
Boards and senior leadership teams must develop and
implement sophisticated means to evaluate senior
management character: In the companies that got into trouble,
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managers were evaluated based on their ability to hit their numbers,
but there wasn't much assessment of their character. Tyco now
evaluates 10 character traits of top managers annually. It looks for
qualities such as "managerial courage." "Leaders create theenvironment that makes it comfortable to be courageous."
Conclusion
In the case of Tyco International, we have seen what corporate greed can
eventually lead to. It is important to understand, however, that people with
so much pride and ambition often have no limits, and to them, nothing is
ever enough. Their greed often gets in the way of their honesty and loyalty
to the people around them, resulting in scandals like the one described and
demonstrating the need for ethics in business and more acts of government
intervention.
The Tyco scandal offers major lessons for the business world, particularly in
areas of corporate conduct. Above all, the story of Dennis Kozlowski showswhat happens when too much company power is put into the hands of an
individualit can lead to a decentralized corporate structure that makes it
difficult to detect misconduct. Tycos story also reveals the decreasing
tolerance todays government and investors have for misconduct in any
form, as even members of Tycos board of directors faced consequences for
their unethical behavior. Ethics are standards of behaviours that indicate
how we should behave the moral goals and Laws are the minimum code ofconduct to which the group has agreed to adhere. Corporate governance
should be based on ethics and must abide by the laws. It is important to
foster a culture for promoting good governance, voluntary compliance and
facilitate effective participation of different stakeholders
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