Corporate governance Essay
This story begins with a brief history of Tyco, followed by an explanation of Tyco CEO L. Dennis Kozlowki’s rise to power. As Kozlowki rose to become the second-highest-paid CEO, some red flags pointed toward the impending disaster. Most notably, Kozlowski’s aggressive approach to business, his lavish lifestyle, his clashes with the former, more conservative CEO, and his ousting of those who criticized Tyco’s activities all acted as indicators of Kozlowki’s unethical behavior. (Tyco International: Leadership in Crisis (2003). Company History
Tyco was founded in 1960, by Arthur J. Rosenberg, Tyco initially an investment and holding company focused on solid-state science and energy conversion. It developed the first laser with a sustained beam for use in medical procedures, than shifted the focus to the commercial sector. In 1964, Tyco became a publicly traded company and rapidly acquired 16 companies by 1968. The expansion continued until 1982, between 1973 and 1982, the firm grew from $34 million to $500 million in consolidated sales. In 1982 Tyco was organized into three business segments: Fire Protection, Electronics and Packaging. (Tyco International: Leadership in Crisis, 2003). Tyco continued to grow though acquisitions through the 1990’s. The company changed its name to Tyco International, to signal its global presence. By the early 2000’s the company had acquired more than thirty major companies, including ADT, Raychem and CIT group (Tyco International: Leadership in Crisis, 2003). The Kozlowski Era
The story of the Tyco Corporation is nothing short of the type of drama you would watch on the movie of the week, money, power, lavish lifestyles. L. Dennis Kozlowski, armed with an accounting degree, joined Tyco in 1975, where he spent the next 27 years rising through the ranks as an exceptionally enterprising and effective manager (Dennis Kozlowski. (2013). The Biography Channel website). Kozlowski found a friend and mentor in then CEO Joseph Gaziano.
Kozlowski, he was impressed by Gaziano’s lavish lifestyle, company jets, extravagant vacation and country club memberships. Gaziano’s reign abruptly ended when he died of cancer in 1982. Kozlowski thrived under Gaziano. John F. Fort III was Gaziano’s successor, his management style was sharply different. Fort was analytical and thrifty. His Goal was to increase profits for shareholders and cut the extravagant spending characterizing Gaziano’s tenure, Wall Street responded positively to Tyco’s new direction (Tyco International: Leadership in Crisis, 2003).
Kozlowski focused on helping to achieve Fort’s vision of putting shareholders first. He soon gained Fort’s attention and was promoted to president of Grinnell fire Protection Systems Company, Tyco’s largest division. He reduced overhead, eliminated 98 percent of paperwork, slashed manager’s salary, but designed a bonus compensation package that gave them greater control over possible earnings. He publically recognized both high and low achievers at yearly banquets. He became the company’s president and later CEO (Tyco International: Leadership in Crisis, 2003). After disagreements with Kozlowski regarding, direction, speed of growth and rapid changes , Fort resigned as CEO in 1992 and later as Chair of the board, although he remained on the board of Directors until 2003. Kozlowski’s Tyco Empire
At age 46 Dennis Kozlowski, found himself at the helm of Tyco International. He owned many homes, lived a lavish lifestyle and worked in an aggressive management style. He recognized that one of Tyco’s major shortcomings was its reliance on cyclical industries, which tend to be sensitive to economic ups and downs. Because of this, he made even more acquisitions, such as in Kendall Company a manufacturer of medical supplies which had declared bankruptcy two years earlier. Kozlowski revived the business and doubled Tyco’s earnings.
Kozlowski, was rewarded with a $2.1 million dollar salary and company stock. Kozlowski began to hand pick a few trusted individuals and placed them in key positions. One of these individuals was Mark Swartz, he had strong financial background. The majority of the Board of Directors was made up of employees who had served for ten years or more. They were all familiar with Kozlowski’s management style and went along with it. After the arrest of Kozlowski and Swartz, investigations uncovered troubling relationships among board members, excessive loans, controlling ownership in firms, hundreds of thousands of dollars Tyco paid for aircraft and services, home purchases and a $2million payment for arranging acquisitions (Tyco International: Leadership in Crisis, 2003).
Between 1997 and 2002, Kozlowski’s charismatic leadership style combined with the firm’s decentralized corporate structure meant, few people, including members of the board of directors, accurately understood the firm’s activities and finances. Anyone who dared to suggest that there were red flags at Tyco were shot down. (Tyco International: Leadership in Crisis, 2003). The Kozlowski and his executives were consumed in a culture of greed and excess, Kozlowski secretly authorized the forgiveness of tens of millions of dollars of loans to dozens of executive to keep their loyalty (Tyco Details Lavish Lives of Executives (2002). The New York Times website.). The Fall of Dennis Kozlowski
On September 12, 2002, national television showcased Tyco International’s former CEO, L. Dennis Kozlowski and former CFO, Mark H. Swartz in handcuffs after being arrested and charged with misappropriating more than $170million from the company. At Mr. Kozlowski’s direction and without board approval, 51 Tyco employees received $56 million in bonuses and $39 million more to pay the taxes on the bonuses—that offset loans extended by the company (Tyco Details Lavish Lives of Executives (2002). The New York Times website).
The report itemized tens of millions of dollars in personal spending that Mr. Kozlowski made with company money. They include his $16.8 million apartment on Fifth Avenue along with a $14 million in renovations and furnishing — and a $7 million apartment on Park Avenue for his former wife. Along with the infamous $2million party thrown on the Italian island of Sardinia to celebrate his wife, Karen’s 40th birthday(Tyco Details Lavish Lives of Executives (2002). The New York Times website). There was unbelievably, gross neglect and misuse of funds. I like to compare these middle aged men and women to unsupervised children playing in a candy shop. The Rebirth of Tyco International
The report is a result of a four-month internal investigation conducted by David Boles, the lawyer who represented the government in its antitrust case against Microsoft. The extensive review helped the company move beyond the scandal and show that the new management has ended such excesses and now stands behind the company’s financial reports. (Tyco Details Lavish Lives of Executives (2002). The New York Times website). Edward Breen replaced Kozlowski as CEO.
The company filed suit against Dennis Kozlowski and Mark Swartz for more than $100 million. To hold Kozlowski accountable for his misconduct , Tyco sought not only full payment for the funds he misappropriated but also punitive damages for the serious harm he did to Tyco and its shareholders (Tyco International: Leadership in Crisis, 2003). Breen launched subsequent multiple reviews of the company’s accounts and corporate governance practices, but did not find any further fraud. To restore investor’s faith, Tyco’s new management team reorganized the company and recovered of the funds allegedly taken by Kozlowski. The shareholders elected a new board of directors.
A corporate ethics program was implemented and 90 percent of the headquarters staff was replaced. Tyco now publishes a quarterly report which is based upon concerns the employees have surfaced. (Tyco International: Leadership in Crisis, 2003). In 2004 Edward Breen as listed as one of Business Week’s “ Best Managers”. Two years later Tyco was split into three entities Tyco Healthcare, Tyco Electronics and Tyco Fire and Security and Engineered Products & Services. Tyco survived doomsday predictions, bringing in over $40 billion in revenue before the split, preserving employee and pensions. (Tyco International: Leadership in Crisis, 2003). George R. Oliver is the current CEO of Tyco Corporation. Tyco remains a leader in innovation, steady growth and finding smarter ways to save lives, improve businesses and protect where people live and work. (www.tyco.com/about/leadership). How did it happen:
Dennis Kozlowski, is a very intelligent man, he obviously was charismatic and had the ability to convince even the brightest men and women to take corrupt action. He was able to manipulate and pay off his executives. He must have believed that greed and excessive spending of company money could go undetected and everything would be “ok”, I would say he is mentally ill. He was able to increase revenues to record levels, which gave him credibility. Kozlowski also understood that decentralization of operations, made it difficult to detect misconduct. Kozlowski, really bought into his own “hype” he made an announcement in 2002, of how stellar the company was; at the same time it was crumbling beneath him. Once the board of directors found out the Kozlowski made a major payment of $20 million commission to Frank Walsh, they launched an investigation.
The probe uncovered numerous expense abuses (www.danitalethics.mgt.unm.edu/pdf/Tyco%20Case.pdf) . If I was an employee I would go to the media, any and every media agency who would listen and share the details I know, the media would come to its own conclusion. Kozlowski, who is currently in prison serving a 8 to 25 year term, to this day he claims he is innocent and does not regret his dishonest behavior.
I just watched a Fox News interview with Kozlowski and in my mind, Kozlowski is one of those really corrupt people, who would try to convince you that “you’re immature and don’t understand how business works and you don’t really “get it”. He said in the interview he didn’t get parole because, people didn’t know the facts and the financial climate might be the reason, again he takes no responsibility for his actions. In his mind, he didn’t do anything wrong. This type of economic sociopath is no different than a murderous sociopath, ending the financial lives of others, due to his excessive greed, narcissistic personality and sense of entitlement.
1.Dennis Kozlowski. (2013). The Biography Channel website. Retrieved 01:33, Sep 10, 2013, from http://www.biography.com/people/dennis-kozlowski-234610. 2.Tyco Details Lavish Lives of Executives (2002). The New York Times website. Retrieved 11:10am, Sep 11, 2013, from http://www.nytimes.com/2002/09/18/business/tyco-details-lavish-lives-of-executives.html 3.Tyco International: Leadership in Crisis (2003). Daniels Fund Ethics Initiative University of Mexico Retrieved 11:11am Sep 11, 2013 http://danielsethics.mgt.unm.edu/pdf/Tyco%20Case.pdf 4.Tyco Leadership; (2013) Retrieved 1:51pm Sep 11 2013 http://www.tyco.com/about/leadership