Business Ethics and Corporate Governance

TYCO
Submitted to Dr. J. L. Gupta

GROUP 8

Digvijay Singh 11PGHR16 Garima Hans 11PGHR18 Tejas Karandikar 11PGHR23 Khusboo Gupta 11PGHR24 Puneet Sehgal 11PGHR45 Surender Singh 11PGHR53

Acknowledgment
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.

Contents
Contents......................................................................................................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................................................................................11 Tyco 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...........................................................................................20 Conclusion.................................................................................................21 Bibliography...............................................................................................22

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.

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

The Fraud
The company, Tyco manufactured a wide variety of products, from electronic components to healthcare products .The conglomerate operated in 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

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 saw Tyco'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

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 into Tyco 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.

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 excesses by 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.

 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

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 "springloading." 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.

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 to shareholders.

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. John fort is made the temporary CEO.

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 for breach 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, 2002Kozlowski 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. Belnick is 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

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 case

The 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

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.

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.

We can find the relevance in this case as the CEO thinks of his personal interest rather than of the organization and its stakeholders. Decisions made were not for the good of the entire industry but for the good of own individual interest. Ethical leaders are concerned about issues of fairness and justice. As a rule, no one should receive special treatment or special consideration except when the situation demands it. Kozlowski proved he was not an ethical leader because he received special treatment himself with all of the luxuries he had the company pay for as well as all of the bonuses he would give himself and his CFO Mark Swartz. Kozlowski argues that he did not lie or misrepresent any data, nothing was hidden.

Virtue Ethics:
Virtue ethics is a broad term for theories that emphasize the role of character and virtue in moral philosophy rather than either doing ones duty or acting in order to bring about good consequences. A virtue ethicist is likely to give you this kind of moral advice: Act as a virtuous person would act in your situation. Since the three executives of Tyco did not have virtue ethics, they could not act in the right way. Virtues are like habits; that are once acquired they become characteristic of a person. Moreover, a person who has developed virtues will be naturally disposed to act in ways consistent with moral principles. The virtuous person is the ethical person.

Rebuilding Tyco
Against the dismal backdrop of corrupted ethics and failed governance, Ed Breen, Tyco chairman and CEO began the process of ethical reform when he joined the company in the middle of 2002.

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:

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. GMI highlighted the company as one of the most dramatically improved.

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 crossfunctional leaders. They made headlines in magazines as the highestpaid 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,

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 the environment 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 shows what 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 of conduct 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

Bibliography
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