Dennis Kozlowski and the Tyco International fraud scandal

¶ … ethical issues have been increasingly brought to the forefront. This is because a variety of challenges are impacting the way executives and employees are behaving inside the workplace. A good example of this can be seen by looking no further than Tyco. What happened is Dennis Kozlowski was the CEO of the company from the early 1990s until 2002. This is when a wide scale fraud was reported, as he used the company's funds to live a lavish lifestyle. (Hitt, 2009)

To help support the fraud he encouraged some of his closet executives to participate in covering up these issues. At the same time, he had a seat on the board of directors and was effective at preventing them from independently investigating these events. This helped him to live a celebrity lifestyle by showing to the world how he was new generation of CEOs. They were focused on creating large conglomerates that could take advantage of new opportunities inside the global marketplace. (Hitt, 2009)

However, once the economy began to slow, is when there was a change in the company's financials (with earnings declining). This lead to increased amounts of scrutiny about the practices he was embracing and the long-term impact on the firm's bottom line results. Once this occurred is when the fraud was discovered and Kozlowski was convicted. He was sentenced to prison for his role in these events. This is showing how unethical practices inside the workplace can eat away at the integrity of the largest firms. (Hitt, 2009)

To fully understand how ethical issues are impacting the behavior of employees and executives requires carefully examining current practices. This will be achieved by concentrating on a legal and ethical issue effecting employers. Together, these elements will highlight the way these factors are influencing behavior and the policies that are imposed inside a variety of work environments.

Legal and Ethical Issues Impacting Employers

A Culture of Acceptance Inside the Workplace

One of the biggest legal and ethical challenges impacting all employers is creating an environment where everyone is taking a sense of responsibility for their actions. This is because managers will often impose different policies and procedures that require everyone to follow select practices. (Bryce, 2004)

For instance, at Enron, Jeff Skilling (the former CEO) used the employee evaluation as a way to determine those individuals who were working within the company's ideals. This meant that they did not question the directives of managers. Instead, it focused on those people who did what they were told by their supervisors. (Bryce, 2004)

This created a situation where the firm could engage in illegal and unethical activities through imposing a culture of acceptance. During the California energy crisis, Enron was the largest trader of electricity and natural gas. To increase their overall returns, he encouraged employees to manipulate market prices by driving them higher. When this happened, consumers realized a 50% rise in their electric bills. This was taking place, while commodities prices (such as oil and gas) were trading at much lower levels in contrast with what the firm was charging. (Bryce, 2004)

The biggest factor that enabled the crisis occur, was to use the employee evaluation to weed out potential whistle blowers. Anyone who performed poorly in these areas was forced to leave the firm for not meeting the ideals of the organization. This is illustrating how the employee evaluation allowed these activities. In the future, this created a culture of acceptance inside the organization. (Bryce, 2004)

Moreover, Larson (1989) determined that this caused many employees to deflect responsibility for their own actions and mistakes. Evidence of this can be seen with him saying, "A culture of acceptance occurs where a poor performing employee regularly seeks informal praise from his or her supervisor at inappropriate moments. Often the feedback-seeker will get the praise they want, since they choose the time and place to ask for it. In effect, they 'ambush' the supervisor by seeking feedback at moments when the supervisor is unable or unprepared to give them a full and proper answer, or in settings that are inappropriate for a frank assessment. The supervisor may feel 'put on the spot', but will often provide a few encouraging words of support. The game seems innocent enough until appraisal time comes around. Then the supervisor will find that the employee recalls, with perfect clarity, every casual word of praise ever spoken! This places the supervisor in a difficult bind. Either the supervisor lied when giving the praise, or least, misled the employee into thinking that their performance was acceptable (in fact, this is the argument that feedback-seekers will often make). The aim of the game is that the feedback- seeker wants to deflect responsibility for their own poor performance. They also seek to bolster their appraisal rating by bringing in all the 'evidence' of casual praise. Very often the feedback seeker will succeed in making the supervisor feel at least partly responsible. As a result, their appraisal result may be upgraded." These elements are showing how appraisals and reviews can create a situation where everyone will have less responsibility and independence. When this happens, they will be able to avoid responsibility and pass the blame onto others. These areas are showing how potential abuses can take place inside the largest and most successful firms (based upon an effective evaluation procedure to control attitudes / beliefs). (Larson, 1989)

Power

A third factor that is creating a culture of acceptance inside the workplace is the desire for power. This happens when someone wants to achieve positions of higher authority. During the course of meeting various objectives, employees and managers will follow the company line in order to reach different benchmarks. Over the course of time, this will lead to situations where everyone will ignore various legal and ethical guidelines to attain these positions. (Barr, 2007) ("Wall Street's Role," 2008)

For example, during the housing boom of the early 2000s, many executives and employees wanted to have career advancement. In order to achieve these objectives, they focused on doing whatever was asked of them. This meant that a variety of subprime mortgages were sold to investors under the belief that they are risk free securities. The basic objectives were to obtain higher positions from these activities. The way that this occurred, was to have everyone meet different benchmarks (based on a series of guidelines that were provided to them by upper management). ("Wall Street's Role," 2008)

During this process, everybody was encouraged to ignore these standards. When this happened, it meant that a variety of Wall Street investment firms were marketing these securities as safe investments. Yet, they were extremely volatile and subject to sudden increases in interest rates. Once this took place, is when it was difficult to value and sell these assets. Over the course of time, this created a situation where the financial system was flooded with toxic paper. ("Wall Street's Role," 2008)

Evidence of this can be seen with observations from Paul Mulolo (an author on the financial crisis) who said, "Wall Street had the big gasoline can of what we call "money," lending to these non-bank subprime lenders who in turn lent to consumers. Wall Street's end game here was to more or less take over what we call the non-prime mortgage industry and take all these loans, create bonds, make fees all along the way, and sell these bonds to investors overseas and in the U.S. If you take Wall Street out of the equation, this crisis is much, much smaller. They saw dollars in and went after it. Someone who is a freelancer, might work out of their house, or for a small loan brokerage company. He only or she only gets paid if they bring a loan to Countrywide and Countrywide closes that loan. They're not on the books of Countrywide. They're a freelancer. And there's -- literally, there must have been 100,000, 200,000 of these independents out there. There's a lot less now. But, I mean, that was the structure. And it worked OK for many years on these A-paper, good credit quality loans. But in the subprime, they got to charge extra points. No one was really policing them. And, again, Wall Street was fueling them through these wholesale lenders, like Ameriquest, Argent, Countrywide. And that's how the system worked. There weren't a whole lot of checks and balances. Everyone believed that the good times would last forever. And, you know, Wall Street didn't have much skin in the game here, because they'd package the loans, sell them off to someone else." ("Wall Street's Role," 2008)

This is illustrating how the desire to achieve positions of prominence and power fueled the housing crisis. When this happened, they allowed a number of individuals to work with very little oversight. The reason why is because they believed that the risks were passed on to others. As a result, this helped to create an atmosphere of irresponsibility and compliance inside the workplace. ("Wall Street's Role," 2008)

Moreover, a variety of mortgage brokers and loan officers were encouraged to underwrite as many loans as possible. This is because the top producers were given praise for going above and beyond their sales quotas. To reach these goals, they did not verify income standards, credit history or if the borrower could afford the monthly payments. ("Wall Street's Role," 2008)

To make matters worse, they represented them as a way for low, middle and upper middle class families to purchase a house that was in their price range. Yet, they did not tell them how their monthly payments could double after interest rates were rising. This is considered to be illegal, as they have to disclose everything surrounding the mortgage to the buyer. It is also unethical by tricking them into qualifying for loans that could destroy their credit and lead to foreclosure when the economy is slowing. (Barr, 2007)

Evidence of this can be seen with observations from Barr (2007) who said, "The subprime mortgage crisis has re-ignited scrutiny of the industry and people who broker home loans, with some critics arguing that hidden fees and other dubious practices have contributed to the surge in delinquencies. The main problem is that, counter to common perception, mortgage brokers do not represent the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers. A controversial fee called a Yield Spread Premium, which is paid by the lender to the broker, has come in for particular criticism and is the subject of a class-action lawsuit against NovaStar Financial, one of the largest subprime mortgage originators. The case is set to go to trial in May." (Barr, 2007)

This is illustrating how the desire to obtain power and gain additional financial incentives are what fueled the tremendous amounts of underwriting in these securities. These activities were occurring based upon a willingness to gain positions of power and notoriety in the process. Subprime mortgages were the quickest way that loan officers and brokers could achieve these goals by increasing their sales. In the case of most firms, this represented an opportunity for the individual to benefit from these activities. (Barr, 2007)

As a result, this is showing how within a number of organizations the desire to obtain positions of power and authority are what fueled a culture of acceptance. This is taking place by offering individuals with the opportunity to receive greater rewards and more prominence. When this happens, no one is willing to question the legality or the ethics of the tactics they are utilizing. For many employers, they have to be aware of how they are motivating staff members and ensure that there is proper oversight. The challenge is maintaining a balance in motivating someone and encouraging them to engage in activities that are considered to be illegal or immoral.

Conclusion

Clearly, a wide variety of firms will use their evaluations to create a culture of acceptance inside the workplace. This tells everyone what kind of behavior is most acceptable. At the same time, employees and executives will be influenced to the point that they will seek out some kind of praise in achieving the larger objectives. When this happens, the firm will establish an atmosphere where they are willing to ignore ethical and legal challenges. This allows these kinds of activities to continue until some kind of disaster is taking place.

Moreover, greed and power will work in conjunction with one another to make the underlying situation worse. The way that this occurs is through everybody focusing on receiving some kind of personal benefits. While the firm, is establishing different benchmarks that will increase its profit margins and dominance inside the marketplace. This is problematic, as it will allow unethical and illegal activities to take place (with little to no oversight).

After more people become involved in these transactions, is when they are so rampant that a major crisis will occur. In a modern day operating environment, these challenges will influence the activities of staff members. As a result, all employers need to create procedures that will balance out reaching various organizational and personal goals. While at the same time, they are following the highest ethical and legal practices. When this happens, the organization will reach its objectives and ensure they are protecting the interests of different stakeholders.