This document summarizes the corporate governance failure at Tyco International that occurred in the early 2000s. Key events include: - Dennis Kozlowski became CEO in 1992 and oversaw rapid growth through acquisitions but also misused company funds for personal expenses. - An SEC investigation in 2002 found Kozlowski and CFO Mark Swartz had committed tax evasion, improperly used company money, and undisclosed stock sales totaling $430 million. - Both executives were convicted and sentenced to 8-25 years in prison. A new management team was installed and reforms to Tyco's governance were implemented.

1. A Corporate Governance Failure
-Palak Jain-158
-Anubhav Agrawal-28
-Naman Rastogi-463

2. COMPANY HISTORY
• Founded in 1960 by Arthur J.Rosenburg.
• Initially supported by government research contracts.
• In 1964 it became a publicly owned company.
• It was in control of 16 companies by 1968.
• In 1974 its stock was listed on the NYSE.
• Between 1982 and 2000 it undertook several subdivisions.

3. COMPANY OVERVIEW
• It participates in several different industries:
• Electronics
• Fire & Security
• Healthcare
• Plastics & Adhesives
• Engineered Products & Services
• It employs over 267,000 people
• Its services and products are provided worldwide.
• Among market leaders in all industries
Leading
Provider

4. PRIOR TO
JULY 1992
JULY 2001 GROWTH
NET PROFITS $95 MILLION $5.1 BILLION 54 TIMES
RETURN ON
SALES 3.1% 13.8% 4.5 TIMES
SHARE PRICE $4.30 $58.00 13.5 TIMES
COMPANY PERFORMANCE HISTORY
• June 1991
• Hired Mark Swartz, who went on to become the CFO in 1995.
• July 1992
• Hired Dennis Kozlowski as CEO and President of Operations.

5. DENNIS KOZLOWSKI • Graduate of Seton Hall University, New Jersey
• Began work at Tyco in 1976. Kozlowski's job was to fix
up some of the floundering acquisitions of the company
at that time.
• Worked his way up through the company, becoming
CEO in 1992.
• Was key in an $850 million dollar purchase of an under
seas fiber-optic cable business from AT&T.
• Previously worked for Deloitte & Touché.
• Started working at Tyco in 1991.
• In 1995 he became the CFO.
• He was nominated for a CFO Excellence
Award in 2000.
MARK SWARTZ
KEY MANAGEMENT PERSONNEL

6. 1986
Restructure to 4 core
segments
1990s
Named Tyco
International
Early 2000s
> 30
acquisitions, 4
segments trade
independently
1996 – 2001
$ 240 mil - $ 4.8 bil
1992 Fort resign as
CEO
Assisted by CFO,
acquisition escalated,
operating margin
+22.1%
2002, spent $ 8 bil on
>700 acquisitions in last
3 yrs.
SEC investigate on
amending Tyco’s EPS
during 1999-2000
TYCO‟S GROWTH UNDER DENNIS KOZLOWSKI
2002 EPS >40% growth
1992 CEO:
Kozlowski, 46yrs
Acquired Kendall &
doubled earning
Increase salary $
2.1 mil
1997 CEO salary $
8 mil
1999 CEO salary $
170 mil

7. FIRST INVESTIGATION
• SEC launched the first investigation in late 1999.
• Findings
• Overstated expected costs of new acquisitions.
• Made acquisitions appear financially unstable.
• Results
• Technically no laws were broken.
• Tyco agreed to restate earnings.
• No fines assessed or penalties imposed.

8. SECOND INVESTIGATION
• SEC launched the second investigation in
early 2002 against CEO Dennis Kozlowski
and CFO Mark Swartz.
• Tax Evasion.
• Robert Morgenthau aka Sherlock Holmes.
• Improper use of company funds.
• Payoffs were paid to directors to cover up
improper use of funds.
• Undisclosed stock sales. $430 million made
by Kozlowski and Swartz.
• No Whistle Blower.

9. CHARGES
• Inflated operating income by $567 million.
• Improper acquisition accounting by undervaluing acquired assets
and overvaluing acquired liabilities.
• Used reserves to make adjustments and smoothen its publicly
reported results to meet earnings forecasts.
• Failure in disclosure of executive compensation, indebtedness
and related party transactions of its former senior management
in annual reports.

10. • Evading $1 million sales tax
• Failure to disclose forgiven loans of
$19 million
• Misappropriating funds of $170 million
• CEO sold 5.5 million shares receiving
$280 million dollars. CFO sold 2
million shares earning $125 million.
None of the sales disclosed to the
public.
CEO and CFO

11. Received hush
money of $17
million as
bonus from
CEO,
unapproved by
BOD to
conceal
corporate
wrong doings.
CLO-Mark Belnick

12. PUNISHMENTS
• TYCO- $50 million civil penalty
• CEO & CFO
• 8-25 years of prison
• $240 million fine
• CLO-Acquitted of all charges

13. WHERE DID THE MONEY GO ?
• $106 million to employees through Loan forgiveness and relocation program
• $2.1 million for the birthday party of Kozlowski's wife was billed to Tyco.
• Kozlowski used Tyco to avoid around $1 million import taxes after purchasing $14
million in rare artwork
• $2.5 million for a home in Florida, $9 million for additional property, $5 million for
Massachusetts property, $900,000 for Connecticut property and $240,000 jewelry
for Mrs. Kozlowski.
• Kozlowski received $81 million in unauthorized bonuses
• Stephen Foss received $751,101 for supplying aircraft and pilot services to Tyco.
• Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home
• Frank E. Walsh, Jr. received $20 million commission

14. • Pre Kozlowski was made CEO:
Stock - $4.30 per share
• Ten years later:
Stock - $58 per share
• Post Kozlowski:
Stock – $16.05 per share
STOCK PRICE 1999-2005

15. • Worst-practices included:
• Poor documentation.
• Inadequate policies and procedures to prevent the
misconduct of senior professionals.
• Inadequate procedures for proper corporate authorizations.
• Inadequate approval procedures and documentation.
• A lack of oversight by senior management at the corporate
level.
• Aggressive accounting & improper auditing by auditors.
Internal Control & Governance Failures

16. • Public Company: Financial Statements – Overstating expenses
• Acquisitions
• Undisclosed sales of stock
• Company funds for personal expenses
• Special “bonuses” to keep quiet!
• Kozlowski, CEO – Tax Evasion
ETHICAL DUTIES NOT COMPLIED
• Company‟s CEO Dennis Kozlowski, and CFO
Mark Swartz
• Inside and outside directors who were involved
• Company saves on taxes
• Company and employees
• Customers
BENEFIT TO SOME HARM TO OTHERS
• Tyco
• Government
• Integrity of the company‟s CEO and CFO
• Company‟s reputation
• Performance
• Stock price
• Employees and their families
• Executives that were not involved
• Stockholders

17. REBUILDING
• Company filed suit against CEO and CFO for
more than $100 million. It fired a total of 9
executives on their board.
CEO- Edward Breen
CFO- David J. FitzPatrick
• New management team recovered some of the
funds taken by CEO and CFO hence restored
investors faith.
• New board of directors voted to make future
executive agreement and board chairman to be
an independent person rather than TYCO CEO.
• Eric Pillmore was hired as VP of Corporate
Governance.

18. NEW CORPORATE GOVERNANCE MODEL
• Installation of corporate ethics programme
and new ethical guide was distributed to all employees.
• 90% of headquarters staff were replaced.
• An Ombudsman position at Tyco who mediated between
employees and management.
• Published confidential hotline „Concern LINE‟.
• In 2004, CEO Edward Breen was listed as one of the
Business week‟s „Best Managers‟.
• In 2008, Tyco was named Corporate Citizen of the year for
helping the homeless.

19. LEARNING/PRECAUTIONS
• Companies should more closely monitor their employees for unethical
conduct
• The government should monitor accounting practices of companies more
closely
• Any executive of companies who exhibit suspicious behavior should be
closely watched
• Is it right to make another company appear more unstable that it really is?
• Is it right to use corporate money for personal use?
• Is it right to bribe board members?
• Is it right to have undisclosed sales of stocks?
MORAL QUESTIONS TO BE CONSIDERED