TYCO ETHICAL SCANDAL: AN ANALYSISCreated in 1960 by Arthur J.
Rosenburg, Ph. D., Tyco International Ltd. remains one of the biggest names in the manufacturing industry.
The company currently handles five major business areas including fire protection services, metal and electrical products, flow control, safety products, and ADT Worldwide for commercial buildings security. Despite rapid growth, the company faced a serious ethical issue in more recent times.After Tyco closed at $59.76 per share on the New York Stock Exchange on December 5, 2001, the following year began what is to be a series of difficulties for the company.
Just a week after Tyco CEO Dennis Kozlowski publicly announced his intentions to divide the company in four independent industries in January 22, 2002, prices of Tyco shares significantly dropped. A day before, the company filed a proxy report to the Securities and Exchange Commission stating that CFO Mark Swartz received a fee worth $10 million from the CIT Group deal. At the same time, the report also indicates that another $10 million was donated to a charity where Swartz served as a director. On June 4 of the same year, Manhattan District Attorney Robert Morgenthau announced a criminal indictment against Kozlowski for conspiring to evade at least $1 million worth of city and state sales taxes for the purchase of fine art items (Timeline of the Tyco International Scandal, 2005).
The biggest blow against Kozlowski and Swartz came in September 12, 2002 after the Manhattan District Attorney’s Office announced a criminal indictment against the two. Both were accused of enterprise corruption for reportedly stealing at least $170 million from the company and another $430 million after fraudulent sales of company shares. Almost three years after, a Manhattan jury found Kozlowski and Swartz guilty of stealing at least $150 million from the company which is reason to possibly spend 25 years behind bars (Timeline of the Tyco International Scandal, 2005).As far as the case filed against the concerned individuals goes, Tyco International Ltd.
financially lost not more than $150 million. Another $75 million is lost from the Tyco funds for paying the sum to the defrauded shareholders who demanded for a class action settlement. The cost does not include the expenses involved during the length of the court hearings and trials. It also does not include the probable financial losses the company may face as a result of the scandal.
As business trust from its shareholders and stockholders may possibly decrease after the criminal charges, Tyco faces the risk of losing possible business deals in the future as well as the pull-out of on-going business transactions from investors. Although it is difficult to quantify in exact terms the financial losses connected to the loss of business confidence and trust, there is reason to believe its corresponding financial losses are highly possible.There are several factors and circumstances external to Tyco that provided the environment in which the scandal occurred. For one, the fact that former Tyco International director Frank Walsh was the director of a charity signifies that any move on his part to transfer funds from Tyco to the charity could raise suspicion.
In fact, Walsh divided the sum he received worth $20 million from assisting Tyco with the purchase of CIT Group between the charity and himself, each receiving $10 million (Ex-Tyco CEO Dennis Kozlowski Found Guilty, 2005).Another possible factor is the lifestyle of the persons involved in the case. For example, the prosecutors presented a toga party in Sardinia worth $2 million which Kozlowski gave to his wife as a birthday gift as evidence for the charges filed against him. The evidence indicates that Tyco paid at least $1 million for the said party.
Another evidence the prosecutors presented before the jury is a shower curtain worth $6,000 in the Manhattan apartment of Kozlowski. In total, the price of Kozlowski’s apartment reached approximately $30 million (Ex-Tyco CEO Dennis Kozlowski Found Guilty, 2005). These external factors—the lavish lifestyle and other existing avenues to redistribute undisclosed money they receive from handling company deals—among others, provided the environment for the concerned individuals to commit scandalous actions which eventually led to criminal charges and huge financial losses on the part of Tyco.There are also corporate internal factors which made the Tyco scandal possible.
For one, the fact that Swartz, Kozlowski and Walsh were able to receive huge sums with the authorization of Tyco’s board of directors suggests that there is something wrong with the professional business relationship among the company executives as far as business ethics is concerned. Looking at things from another side, the concerned individuals were also able to receive certain sums of money without the authorization of the board of directors, which suggests that transparency in internal corporate matters is not observed. From the facts of the case, the corporate culture of Tyco at the time appears to be fixated on purely technical grounds. For instance, a top Tyco executive can receive huge amounts of money for partaking in a business transaction involving the company without corporate ethical oversight.
Ethical violations are not reported without first having the consequences of corporate actions. In the case of Swartz and Walsh, they were given big payments for handling significant corporate actions with the board of directors not predisposing themselves into ensuring that no violations will be committed as far as the law is concerned.Another aspect of the professional business relationship—or the lack thereof—in Tyco is the allegation that the $56 million Kozlowski authorized to distribute to at least 11 employees is part of his schemes to buy the silence of the employees as far as Kozlowski’s lavish spending and lifestyle are concerned (Tyco Details Illegal Bonuses, 2002). It only signifies that some top Tyco executives lack ethical considerations when it comes to dealing with their subordinates and in securing their personal welfare.
On a general note, the alleged action of Kozlowski that stretched for almost five years prior to his resignation from Tyco also signifies that top executives are willing to tolerate internal illicit activities for as long as they are benefitting from such activities. There is reason to believe that Tyco lacks a system that facilitates anonymous reporting of perceived ethical violations which can overturn the illicit benefits that can be derived from the internal and illicit workplace activities.As a result of the cases filed against the concerned Tyco executives, the company has been reorganizing its management (Ex-Tyco CEO Dennis Kozlowski Found Guilty, 2005). It is certain that the cases now stand as precedents not only for Tyco but also for companies when dealing with bonuses and other financial payments to their top executives.
As for Tyco, the company previously signed for a 5-year training program under The Legal Knowledge Co. which is aimed at enhancing the legal and ethical understanding of its 260,000 employees from around the world.As far as the law is concerned, the case stands as a reaffirmation in the principle of equal justice before the law. The high profile of the case that involved several Tyco top executives goes to show that such a case will be treated accordingly in much the same way as other crimes are treated before the court of law.
Whether a case is a white-collar crime or any other illegal activity, it is only fitting and proper to expect all cases to be given equal treatment before the law.Several actions on the part of Tyco could have prevented the scandal. A properly implemented code of ethics is enough to at least prevent employees from committing certain actions out of the presumption of ignorance or of being unaware of the consequences of such actions. From the internal corporate perspective, it is not enough to simply have a set of codes that define and prescribe the ethical behaviors for Tyco’s employees regardless of rank in the corporate hierarchy.
The more important—if not the most important—thing is that codes of ethics are figuratively “toothless” if they are not properly executed or observed in real-life situations. Had Tyco’s code of ethics been fully functional and properly observed, its employees would have resisted the cash offer of Kozlowski in order to silence them, so to speak. Had Tyco’s code of ethics been fully implemented, its board of directors would have decided to carefully consider an oversight of the possible courses of actions that the recipients of cash bonuses and other financial payments may take upon receiving the amount.As for the external aspect of the possible actions that could have prevented the scandal, Swartz and Walsh should have not chosen to use the charity as a venue to execute their illicit activities.
In the first place, the act of redirecting certain undisclosed amounts of money just to avoid the law is already a crime and is purely unethical to begin with. Moderation on the part of the expenses of Tyco’s executives as far as their lifestyle is concerned should also be a part of their concerns as top executives in the company. Their actions will surely serve as examples for their subordinates and other employees in Tyco. There is reason to believe that what they did will be done by other employees in the company because their thinking is that they can do the same because their bosses can.
ReferencesEx-Tyco CEO Dennis Kozlowski Found Guilty. (2005). Retrieved May 17, 2009, from http://www.msnbc.
msn.com/id/8258729/Scandal-ridden Tyco Gets Serious About Ethics. (2003). Retrieved May17, 2009, from http://www.
accountingweb.com/cgi-bin/item.cgi?id=98335Timeline of the Tyco International Scandal. (2005).
Retrieved May 17, 2009, from http://www.usatoday.com/money/industries/manufacturing/2005-06-17-tyco-timeline_x.htmTyco Details Illegal Bonuses.
(2002). Retrieved May 17, 2009, from http://news.bbc.co.uk/2/hi/business/2264822.stm