Tyco Case

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Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu

Tyco International: Leadership Crisis
INTRODUCTION On September 12, 2002, national television showcased Tyco International’s former chief executive officer (CEO) L. Dennis Kozlowski and former chief financial officer (CFO) Mark H. Swartz in handcuffs after being arrested and charged with misappropriating more than $170 million from the company. They were also accused of stealing more than $430 million through fraudulent sales of Tyco stock and concealing the information from shareholders. The two executives were charged with more than thirty counts of misconduct, including grand larceny, enterprise corruption, and falsifying business records. Another executive, former general counsel Mark A. Belnick, was charged with concealing $14 million in personal loans. Months after the initial arrests, charges and lawsuits were still being filed—making the Tyco scandal one of the most notorious of the early 2000s. This case begins with a brief history of Tyco, followed by an explanation of Tyco CEO L. Dennis Kozlowki’s rise to power. As Kozlowki rose to become the second-highest-paid CEO, some red flags pointed toward the impending disaster. Most notably, Kozlowski’s aggressive approach to business, his lavish lifestyle, his clashes with the former, more conservative CEO, and his ousting of those who criticized Tyco’s activities all acted as indicators of Kozlowki’s unethical behavior. This analysis also shows how a decentralized corporate structure can make it difficult, even for the board of directors, to effectively monitor a firm’s dealings and finances. Kozlowski’s fall and the repercussions of his dirty dealings (financial penalties and jail time) are also detailed. Finally, an explanation of how Tyco survived the scandal is provided, along with safeguards the company has put into place to ensure that similar misconduct does not occur in the future. TYCO’S HISTORY Founded in 1960 by Arthur J. Rosenberg, Tyco began as an investment and holding company focused on solid-state science and energy conversion. It developed the first laser with a sustained beam for use in medical procedures. Rosenberg later shifted his focus to the commercial sector. In 1964, Tyco became a publicly traded company. It also began a series of rapid acquisitions—sixteen companies by 1968. The expansion continued through 1982, as the company sought to fill gaps in its development and distribution networks. Between 1973 and 1982, the firm grew from $34 million to $500 million in consolidated sales. In 1982, Tyco was reorganized into three business segments: Fire Protection, Electronics, and Packaging. By 1986, Tyco had returned to a growth-through-acquisitions model and had restructured the company into four core segments: Electrical and Electronic Components, Healthcare and Specialty Products, Fire and Security Services, and Flow Control, which Tyco maintained through the 1990s. During this time, the company changed its name to Tyco International, in order to signal its global presence to the financial community. By the early 2000s, the firm had acquired more than thirty major companies, including well-known firms such as ADT, Raychem, and the CIT Group. This material was developed by Rob Boostrom under the direction of John Fraedrich, O.C. Ferrell, and Linda Ferrell. It is provided for the Daniels Fund Ethics Initiative at the University of New Mexico and is intended for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management. Users of this material are prohibited from claiming this material as their own, emailing it to others, or placing it on the Internet. Please call O.C. Ferrell at 505-277-3468 for more information. (2011)

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THE RISE OF DENNIS KOZLOWSKI In 1975, armed with a degree in accounting, Dennis Kozlowski went to work for Tyco, following brief stints at SCM...
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