Performance and Corporate Governance - A Business ethics Case Study

1. Kunal Patil PP15198
Tabish Siddquie PP15200
Swapnil Bakde PP15206
Akshay SG PP15210

2.  Tyco is the world’s largest fire and
security company with over three
million customers around the
world.
 Acquired AT&T Submarine
systems to gain R&D assets
 Tyco Telecommunications is the
world’s first vertically integrated
global optical network supplier.

3. Prior to July
1992
July 2001 Growth
Net Profits $95 million $5.1 Billion 54 times
Share price $4.3 $58 13.5 times
 Began work at Tyco in 1976 and worked his way up through the company
to become the CEO in 1992.
 Acquired 1000 companies in a decade.
 In 1999, Tyco acquired two S&P 500 companies in a buyout;
 In 1997, salary $ 8 million. In 1999, salary $ 170 million.
 Within 5 years, cash in hand increased from $240 mil to $4.8 bil.
 In 2002, EPS >40% growth.

4.  Questionable business decisions and poor judgement.
 Victim of corporate governance.
 Took unauthorized pay and bonuses $600 mil, abusing loan
programs and selling company’s stock at inflated prices.
 He was accused of using the company’s money to support an
extravagant lifestyle.

5.  Why acquisition strategy for growth
◦ Massively accelerate its rate of growth with an acquisition.
◦ Targeted non-cyclical industries which would be unaffected by economy.
 Benefit for Tyco
◦ Bagged non-related sectors to enhance Tyco’s business and presence.
◦ Revenue doubled instantly.
◦ Diversifying risks
 Benefit for Kozlowski
◦ Board rewarded Kozlowski with high rise in salary and increased
incentives.
◦ Managerial risk aversion.

6.  What leads to accounting manipulations by top management
◦ Hire trusted executives as board of directors in the organisation.
◦ Improper auditing through the organisation.
◦ Compensation of corporate executives is directly tied to the financial
performance
◦ No whistle blower, organisation culture is such that people are afraid to
speak up.

7.  Why accounting firms did not catch the manipulations
◦ Scope of internal audits never included the headquarters function.
◦ Actual function at the headquarter is where the fraud occurred.
◦ These transactions where booked at the level below what the external
auditors checked.

8.  Why Kozlowski and Swartz engaged in behaviour that they did?
◦ Clearly they intended to live a lavish lifestyle like Gaziano.
◦ Tyco core competency was stated as; ability to party hard.
 What motivated them to take such risks?
◦ No higher authority to oversee their activities.
◦ He grew up with company and thought company’s funds were his personal
funds.
◦ Raising economy and increasing growth of their aggressively acquired
companies.
 How risky they thought their behaviour was?
◦ Machiavellianism.

9.  This shows what happens when too much power is put into the hands of an
individual, it can lead to a decentralized corporate structure that makes it
difficult to detect misconduct.
 Sarbanes-Oxley: the full-disclosure law passed in the US and used
internationally as a transparency benchmark for vested interests.
 Board composition has seen structural shifts in the ratio of insiders to
outsiders.
 Establish guidelines from a value standpoint along with delegation of
authority from a governance standpoint.

10.  The final improvement on corporate governance came in the
Guide to Ethical Conduct.
 The guide was produced to advise employees as to correct
procedures and warn of unethical practices and behaviour.
 All employees are now required to take a brief ethics course
and sign an annual ethics statement.

11.  http://knowledge.insead.edu/responsibility/turning-around-
tyco-how-corporate-governance-saved-the-day-1168
 “Taking down the lion”-
http://www.denniskozlowskibook.com/
 http://www.forbes.com/sites/realspin/2013/12/09/former-tyco-
ceo-dennis-kozlowski-was-one-of-the-great-all-time-value-
creators/#7b3a5561583f
 https://hbr.org/2014/01/dennis-kozlowski-was-not-a-thief
 Daniels Fund Ethics Initiative-
https://danielsethics.mgt.unm.edu/pdf/Tyco%20Case
 Corporate strategy- Collins / Montgomery, McGraw-Hill