Group 8 Tyco

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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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http://www.tyco.com/2010annualreview/downloads/gec.pdf

http://knowledge.insead.edu/Tyco-corporate-governance-100318.cfm?

vid=396

http://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/ind

ex.htm

http://web.ebscohost.com/ehost/

http://www.happinessonline.org/InfectiousGreed/p1.htm

http://www.businessweek.com/magazine/content/02_51/b3813001.htm

http://www.newyorker.com/archive/2003/02/17/030217fa_fact_stewart#ixzz

1pTb3cXjQ

http://en.wikipedia.org/wiki/Tyco_International
http://www.tyco.com/2010annualreview/downloads/gec.pdfhttp://knowledge.insead.edu/Tyco-corporate-governance-100318.cfm?vid=396http://knowledge.insead.edu/Tyco-corporate-governance-100318.cfm?vid=396http://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/index.htmhttp://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/index.htmhttp://web.ebscohost.com/ehost/http://www.happinessonline.org/InfectiousGreed/p1.htmhttp://www.businessweek.com/magazine/content/02_51/b3813001.htmhttp://www.newyorker.com/archive/2003/02/17/030217fa_fact_stewart#ixzz1pTb3cXjQhttp://www.newyorker.com/archive/2003/02/17/030217fa_fact_stewart#ixzz1pTb3cXjQhttp://en.wikipedia.org/wiki/Tyco_Internationalhttp://www.tyco.com/2010annualreview/downloads/gec.pdfhttp://knowledge.insead.edu/Tyco-corporate-governance-100318.cfm?vid=396http://knowledge.insead.edu/Tyco-corporate-governance-100318.cfm?vid=396http://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/index.htmhttp://money.cnn.com/2005/06/17/news/newsmakers/tyco_trialoutcome/index.htmhttp://web.ebscohost.com/ehost/http://www.happinessonline.org/InfectiousGreed/p1.htmhttp://www.businessweek.com/magazine/content/02_51/b3813001.htmhttp://www.newyorker.com/archive/2003/02/17/030217fa_fact_stewart#ixzz1pTb3cXjQhttp://www.newyorker.com/archive/2003/02/17/030217fa_fact_stewart#ixzz1pTb3cXjQhttp://en.wikipedia.org/wiki/Tyco_International

Group 8 Tyco

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