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Tyco

In the article Tyco: I’m Sure That It’s a Really Nice Shower Curtain (Stanwick & Stanwick, 2009), the author warns the readers against the dangers of leaders becoming too powerful. The author argues that the company’s CEO Dennis Kozlowski and CFO Mark Swartz ran Tyco as a personal property. The company’s board of directors also failed to their jobs because they had poor working relationship with each other and also engaged in conflict of interest through personal dealings with Kozlowski. In addition, certain board members themselves engaged in illegal activities for personal gains.

There are several important issues that have been mentioned in the case. First of all, one cannot overestimate the importance of organizational culture in shaping the behavior of the management as well as the subordinates. Corruption took place at Tyco at all levels such as company’s leadership using company’s funds to pay for real estate and other personal purchases, employees claiming car allowance while also using company’s cars, and board members not disclosing conflict of interest and engaging in personal dealings with the company’s CEO. The level of corruption was high at Tyco because it had become acceptable in Tyco’s culture to pursue personal interests at the expense of the company’s interests.

The article also demonstrates the importance of accountability and taking steps to minimize abuse of power. CEO Kozlowski and CFO Swartz were answerable to no one and were easily able to manipulate accounting statements as well as company’s compensation policies to suit personal interests due to lack of monitoring system. The board of directors also failed to do its job properly and their high compensation levels encouraged them to turn a blind eye to the management’s unethical conduct. Similarly, some board members were chosen without proper screening and they were more focused on benefitting their respective companies or employers instead of protecting Tyco’s interests.

The article also demonstrates the importance of external regulators such as auditors and government regulatory agencies to ensure that the companies present their financial picture in the accounting statements as truthfully as possible. Tyco’s fraud went undetected for so long because regulatory agencies failed to recognize the financial engineering done by different subsidiaries and the company’s auditor PWC also did nothing to correct inaccurate accounting treatment of economic events. The Chief External Auditor at PWC for Tyco, Richard Scalzo didn’t exercise independent judgment and accepted management’s inadequate explanations in treating many material events as immaterial.

The article also reminds us that organizations have different stakeholders and not just management and employees. The success of the organization depends upon how effectively it meets the needs and expectations of all stakeholders. Tyco failed because the management and the employees failed to live up to their duties to other stakeholders. The company’s leadership unlawfully evaded taxes and it manipulated financial statements to take advantage of inflated stock prices. The outcome was not only the ousted of several management and board members but also the imprisonment of CEO and CFO. In addition, the company’s market cap declined by a huge margin.

The article also demonstrates the importance of a well-designed compensation plan. The compensation policies at Tyco also led to corrupt policies such as stock options that were tied to short-term performance and encouraged executives to manipulate accounting statements to support inflated stock prices. Similarly, other compensation policies such as loan forgiveness, relocation compensation, and tax expense coverage in case of exercising stock options etc. also rewarded employees for unethical business conduct including covering corrupt practices by the company leaders.

Tyco’s case also proves that some government regulation is necessary in the economy because greed increases the probability of unethical conduct. Some people may argue that markets can regulate themselves and government intervention only introduces inefficiencies. Such critics could not have been more wrong as Tyco and several other cases prove that markets do not always do a good job of regulating themselves. Unethical conducts at Tyco went undetected for quite a long time and if it were not for Kozlowski’s unsuccessful attempt to evade taxes on paintings purchase, the accounting fraud and other corrupt practices might still not have been discovered until years later. The punishments handed to Kozlowski and Swartz sent a strong message to Corporate America that unethical business practices could also qualify as criminal activities.

Tyco’s case also demonstrates the importance of giving incentives and protection to potential whistleblowers. Kozlowski and Swartz bought out several employees who had been aware of the pair’s corrupt practices. The employees probably chose to remain silent because they realized that the cost of exposing the pair may be significantly higher than any potential benefits. Thus, there should be some incentive system within the marketplace to encourage people to stand for what is right and report any unethical conduct they may witness.

A1. As we read the case, it is apparent that Kozlowski was always careful not to leave track of his corrupt activities. Besides the obvious desire to save money by avoiding taxes, Kozlowski also wanted to hide the fact that he used corporate money to purchase the paintings. Since the paintings were purchased with corporate money, they were corporate assets but Kozlowski treated the paintings as personal assets and didn’t want to alarm the board or a regulatory authority. This is another example of Kozlowski’s failure to honor his obligations towards the firm’s stakeholders. Tyco’s assets belonged to the shareholders but Kozlowski treated them as his own and his attempts to cover his tracks demonstrate that he knew he was engaging in unethical business practices.

A2. Commingling assets could be understood as a failure to distinguish between personal assets and assets of another party. Kozlowski and Swartz treated Tyco as their personal property and purchased several personal properties using corporate money. They even awarded bonuses and other rewards to the employees without board’s authorization and not for high work performance but for loyalty to the company’s leadership and staying silent on the leaders’ unethical conduct. The pair modified several company programs to suit their needs such as changing a program to help executives pay taxes on stock options to include personal loans and purchase of property. When Kozlowski held a birthday party for his wife, he also charged it to the company on the pretext that the trip was meant for the board meeting.

In addition to the company’s executives, other internal stakeholders also exploited the company for their personal interests. Board member Frank Walsh Jr. accepted a finder’s fee for Tyco’s acquisition of CIT Group even though board members usually perform such roles without any compensation and he didn’t let the board know due to the fear that the payment might not have been approved. Even the company’s General Counsel Mark Belnick used Tyco’s money to buy properties in Utah and New York. Similarly, the company’s secretary Barbara Jacques got her $1 million load forgiven due to personal relationship with Kozlowski.

A3. There is no reason why the board of directors should not have been able to discover the adjustments taking place in the many different programs at Tyco. First of all, board member Richard Bodman who was also member of oversight committees audit, corporate, governance, and nominating had oobjected to unauthorized payment to another board member Frank Walsh. Incidents like these should have prompted board to launch comprehensive internal investigation to determine whether such incidents might have been happening elsewhere in the company as well. Birthday bash for Kozlowski’s wife’s birthday party should also have raised suspicions that the leadership might be stealing Tyco’s money in other ways as well.

In addition to their failure to their job properly, the board members might also have turned a blind eye because individual board members were themselves engaged in corruption and any investigation or clash with the leadership might have exposed their personal violations as well. Kozlowski’s personal relationships with several board members such as his investment in Richard Bodman’s investment fund, his finder’s fee payment to Frank Walsh, and Tyco’s purchase of companies in which a particular board member may have a stake ensured that the leadership faced minimum oversight by the board.

Reference

Stanwick, P. A., & Stanwick, S. D. (2009). Tyco: I’m Sure That It’s a Really Nice Shower Curtain. In Understanding Business Ethics (pp. 389-402). Upper Saddle River, NJ: Prentice Hall.

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