Tyco International - Case Study

Tyco International - Case Study

Tyco International grew into a conglomerate under Kozlowski's ruling. The executive's goal was at all times to maximize profits, regardless of the means. As such, he was the mastermind behind numerous and dubious acquisitions and mergers. The CEO implemented unorthodox practices to purchase other companies and he also misused the corporation's funds. He used enormous sums of money to buy other companies, he eliminated all those that didn't register the desired profits and caused numerous job losses. Furthermore, the leadership policies implemented by Kozlowski proved poor transparency and the CEO repetitively removed those individuals that questioned his strategies. However, the corporate board at Tyco was extremely satisfied with the performances achieved by the chief executive officer that were quantified in the massive profit increases. Proof of their content was the CEO's continuously growing salary.

Aside from the legal issues of the case, Tyco's former CEO proved to be a man of questionable ethics. Following the example of mentor Joseph Graziano, Kozlowski indulged in personal eccentric spendings which he financed from the corporation's revenues. His actions were both illegal and imoral.

2.b) However the management board at Tyco was formed of several individuals who were supposedly solely actioning in the best interst of the share holders, rumour had it the board was not as innocent as they said. On September 2002, former CEO Dennis Kozlowski and former CFO Mark Swartz were arrested and accused of misusing $170 million of the corporate funds and also of having secretly and illegally sold company shares of $430 million. After their arrest, other fraudulent actions of the corporate board were revealed to the public.

As such, the board members were involved in loan-forgiveness programs; had invested millions of dollars in private stock funds; had received bribes of millions of dollars for arranging acquisitions; held controlling positions within other companies, which they financed from Tyco's funds; or had used the corporation's funds in their personal interest.

The scandal first broke out when the corporate board became aware of a $20 million payment made to board member Franck E. Walsh for his contribution in a previous merger (CIT). The discovery led to the resignation of Walsh and the further questioning of CEO Kozlowski. The following investigations revealed the existence of dubious transactions, fund misappropriation as company funds had been transferred into the CEO's personal bank accounts and tax evasion. On June the 2nd, 2002, Kozlowski resigned his position within the Tyco management board. Subsequently, CFO Mark Swartz resigned himself. On September of the same year, both former Tyco executives were charged with 38 felony accounts.

2.c) Once the scandal had broken out, the management board at Tyco pressured the executives facing criminal accusations to resign. Furthermore, the company filed lawsuits against several former board members, including Swartz and Kozlowski. The new CEO was appointed Edward Breen. The new executives had observed and criticized the business behavior of their predecessors and had sworn to not follow in their footsteps. The new restructured board decided to implement a transparent policy and to promote a more conservative accounting system.

The recent actions implemented by the new board are aimed to restore the population's confidence in Tyco. Currently, the strategies developed and the promises made are clearly insufficient to regain the lost trust; and the public's reticent response to the measures taken is understandable. The new board is charged with the difficult task of repairing the damage done by their predecessors, clearing the company's name and proving their worth.

2.d) Aside from a complete restructuring of the board and of the accounting systems used, Tyco has to implement other strategies to regain the trust of employees, investors, partners, clients and the general population. First of all, they should implement a better control of the executives' actions by limiting their rights and access to corporate funds. No major decision regarding future mergers, acquisitions or investments should be taken by a single executive. All significant activities and fund usage should be approved by the Tyco board during general meetings. The number of these meetings should be of at least one or two per week.

The conglomerate should also analyse and re-establish their priorities. In this order of ideas, they should place decreased emphasis on profit maximization and focus on actions that give the company a good reputation. As such, they should place increased emphasis developing and implementing programs in the benefit of the investors, the employees, the stock holders and the consumers.

2.e) the Sarbanes-Oxley Act of 2002 was developed as a response to the multitude of accounting scandals that were tormenting American companies, such as Enron, WorldCom or Tyco. The act is aimed to "To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes."

In the case of Tyco, the implementation of the Sarbanes-Oxley Act will reduce the possibility of further scandals because it will provide appropriate audit controls; it will strictly define the rights and responsibilities of the board members and other managers; it will implement better financial disclosures; it will forbid conflicts of interest; and it will install new rules and penalties regarding fraud and the company's taxes.

2.f) Given the recent management history at Tyco, as well as the past leadership of Joseph Gaziano, a tendency towards excessive spendings of corporate funds for personal benefit becomes obvious. As such, the United States Securities and Exchange Commission might find it difficult to trust the new board at Tyco. On the other hand, given their precarious status, the new executives should present an impeccable business behavior. In other words, the critical situation at Tyco could be the actual guarantee of appropriate actions, accurate accounting, adequate investments, mergers and acquisitions, and also a transparent management.