Case Study: The Rise And Fall For Tyco Empire And Its CEO

Question:

Explain about a Case Study on The Rise and Fall of the Tyco Empire and its CEO?

Answer:

1: Tyco was founded in 1960 by Arthur J. Rosenberg, which began its working as an investment and holding company focused on the energy and solid state science conservation. It developed first sustained beamed laser for medical procedures and with the profits and growth model the company became public trading company (CAREY, 2000). The high technology development resulted in growth of sales, high profitability and created economies of scale in the market as more of the laboratories of experimentation and other managerial units were acquired in 1973. Tyco adopted the model of acquisition as its growth strategy by acquiring sixteen companies in 1982 with $500 million consolidated sales (Bianco, Symonds, Byrnes, & Polek, 2002). This absorption of the company increased its profitability and the volume of sales along with the growth model through acquisitions. The company restructured itself in the four major segments: Healthcare and Specialty Products, Fire and Security Services, Electrical and Electronic Components and Flow Control in 1990s and changed as Tyco International in order to reflect the global presence of Tyco (CAREY, 2000). The company acquired multiple global companies and regarded aggressive acquisition strategy for the expansion of Tyco. This acquisition supported Tyco’s innovation and growth strategies with end to end services, technology and retail analytical solutions. The strategies consisted of high tech solutions for protecting the high tech inventory which helped to increase the bottom line and enhance the smart service platforms. In the initial years under the leadership of Dennis Kozlowski in 1975, the leader acquired more than 100 corporate companies for expanding the operations of Tyco (Stephens, Vance and Pettegrew, 2012). The initiatives in development of research and development program in management, engineering and technology solutions, and enhancing the safety and security system in the organization including cloud enabled access, cost effective solution to its customers needs made Tyco more powerful and a largest pure play fire protection and security company. Thus the company focused on integration of advanced solutions in its system and data within Tyco architecture that included the third party products, software, services and protection data (Bianco, Symonds, Byrnes, & Polek, 2002). Tyco established various support systems, security protocols and policies for data protection, which enhanced system reliability, integrity and responsiveness (CAREY, 2000).

2: In 1970’s the company boomed the market with its consolidated sales that reached to $34 million and the stockholders equity increased to $15 million ("Tyco International Ltd", 2001). The growth continued with the high innovation and technology operations in the company and a start of the acquisition era for the company. During 1980s an aggressive acquisition strategy which developed the operation in the three major categories of business segment Packaging, Fire protection and Electronics and the implementation of the new products strategies globally to achieve the market share in new product lines (Talamo, 2011). The acquisitions were good as the growth strategy but the company’s policies and ethics were somewhere declining with the growing profitability and market share (CAREY, 2000). The commitment of the enterprise was to protect the businesses, property and people and hence the expansion over the 100 major global countries was its aim ("Tyco International Ltd", 2001). Tyco regarded as the major and largest innovated maker and service provider of electronic components and electrical in the early 80s made it grow and capture various markets ("Tyco International Ltd", 2001). The gradual powers of the management were seeing a decline in management control as Tyco absorbed many companies but witnessed unbalance between corporate and people ethics. The circumstances recognized were the enhanced diversification, increase in effectiveness of the new acquisitions and reduction in corporate risks strengthened the stability of the company gradually with its policies. The major players in the company at that time frame of 1990s were Dennis Kozlowsky as CEO and Board Chairman, Mark Belnick as Chief Legal Counselor and officer, and Mark Swartz as Chief Financial Officer, who contributed to this rising empire (Bianco, Symonds, Byrnes, & Polek, 2002). The strategies were implemented to achieve the market share. In the early years under the leadership of Dennis Kozlowsky taking the aggressive acquisition strategies to capture 1000 companies in a decade and reflected its global presence ("Tyco International Ltd", 2001). This rise was noticed from 1990 to 2000 which made the company and its management stands strong in the global market (PENDERS, PAVLIN & KAMERMANS, 2011). The Corporate governance system in the company was the strength for the company.

3: Between the years 1997 and 2001 the revenue of the company climbed up to 49 percent annually with the profit margins increasing up to 21 percent (Pride, Hughes & Kapoor, 2012). In 2002 February, the company spent $8 billion over an acquisition of around seven hundred companies who were dissatisfied from this arrangement of merging and the outcome was not that profitable (Research, 2016). The leadership style which was more of charismatic for Dennis Kozlowsky has decentralized the structure of the organization with the few people in the board accurately understanding the finances and other operational activities of the firm (CAREY, 2000). The split of the four divisions were done under 13 percent of electrical and electronic components, 53 percent of fire protection, packaging material of 11 percent and the other flow control devices of 23 percent into the independent public trading company ("Tyco International Ltd", 2001). This led to the complicated structure of the company and the inefficiency of the management with this division. In 2002, the large sums of money were noticed to move in the New York State Bank Account of Tyco. The unusual happening was that the funds were transferred in the Dennis Kozlowsky’s personal bank account. The authorities discovered that Dennis Kozlowsky ignored the import taxes of around $1 million (Nyse.com, 2016). The purchasing done in the rare art work of around $14 million made it a big question for all the stakeholders. The increase in the luxury and the fixed costs soon exhausted the economies of scale (Collins, 2012). The fraud of sending the empty painting box at the apartments of Dennis Kozlowsky to the New Hampshire with invoices was caught by the authorities. The tax evasion, the fraudulence practice in the organization by selling additional stock options of $430 million and allegedly stealing $170 million from Tyco all were proven and were against  Dennis Kozlowsky, CEO of Tyco who had to resign from this position after this scandal (Tyco.com, 2016). These were not just the crime rather scandal had just begun and so was the downfall of Tyco International. In 2005 the two, Swartz and Kozlowsky, were found guilty on twenty two grand conspiracies, larceny and falsifying of the business records and violation of the business law ("Tyco International Ltd", 2001).

4: After the resignation of Dennis Kozlowsky, the new CEO Edward Breen replaced him and the first step taken was re-examining the financial in order to examine the effective tax rate for the year 2002 (Collins, 2012). The financial results were restated after the review (Benoit, 2016). The new management team of Tyco and after a year of prospection there were no more frauds found and the company had to repeatedly restate the financial results as the previous management was into the aggressive accounting and increased its reported earnings and if the conservatism GAAP principles were adopted the results would not had been same (CAREY, 2000). The company filed a suit against Swartz and Kozlowsky and the insiders were sued for the profited selling and buying of stocks of the company. Edward Breen had launched the corporate governance practices and company’s accounting review in order to determine the area from where the fraud occurred. Secondly the new CEO hired the Vice President of Tyco’s corporate governance, Eric Pillmore who incorporate the elements of corporate culture in the organization which were broadly three stated as- accountability, strong and ethical corporate leadership and behavior tracking processes, all these lacked in leadership of Dennis Kozlowsky, by incorporating these ethical tools in the organization and the effective management contribution done on ethical programs (Cannon, 2012). Edward Breen was awarded as the best manager by Business Week that enhanced the corporate governance and business ethics of the company (Bartos, 2012). The strategies suggested by the new CEO, Edward Breen, had separated the three companies into its parent company, setting the standards in accordance with the business goals for each department and level of employees, which helped in restoring the sources and achieve economies of scale (CAREY, 2000). The fundamental steps were taken for the company and management for developing long term sustainability and corporate culture as the aim of the leadership of Edward Breen (Stephens, Vance and Pettegrew, 2012).

5: The case study of Tyco and its scandal offered major learning lessons for the business world which is particularly in the area of business ethics, corporate culture and conduct.  The strategy of aggressive acquisitions were at a continuous growth which resulted in $28 billion revenue in 2000, in fiscal year 2001 the New York Stock Exchange closed Tyco shares which were priced as $59 and the 2002 prices were plummeted due to the scandal as there was loss of more than $7 million on that year (Nyse.com, 2016). According to Stephens, Vance and Pettegrew (2012) the causes of the fraud were not just the business ethics violation of laws but also the accounting frauds where CEO Dennis Kozlowsky with Mark Swartz as Chief Financial Officer and prior General Council were allowing the loans as the bonuses, low interest loans and free interest practices, the unauthorized pay and abusing the program of Key Employee Loan. They had also been charging the personal purchased within the company and practiced illegal selling of stocks of worth $450 million (Tyco.com, 2016). The bribery was given to the other employees of the company and the large amounts to not to disclose the suspicious accounts. In 2002, after the frauds were uncovered for both the CEO and CFO, they were charged with Conspiracy, Corruption, Falsifying records and Thievery (CAREY, 2000). The main focus of the case study is to how one could control this from happening and the new CEO Edward Breen enforced strategies for Tyco International’s Cultural sustainability. External auditors, providing regular monitoring and check on the financial statements so the company must hire second auditing company (Duska, Duska & Ragatz, 2011). Internal Auditor is the person at higher power, the CEO is the one who also needs to be monitored by the corporate governance authority stated by Stephens, Vance and Pettegrew (2012). The policies and programs to be incorporated for training and education about the corporate ethics and culture to all the employees and enforcing standards and ensuring the ethics and morals are being practiced by one and all. The Generally Accepted Accounting Principles were violated that consisted of Principle of Conservatism where the company value accounted to $500 million due to attempt of boosting their earnings, there was no transparency on the financial accounts so the full disclosure principle was violated and the violation of economic entity assumption was violated as the CEO took advantage of being the person at highest authority however they spent on the luxurious items and purchased personal item with the stolen money(Abor, Graham & Yawson, 2010).

References

Abor, J., Graham, M., & Yawson, A. (2010). Corporate Governance and Restructuring Activities Following Completed Bids. Corporate Governance: An International Review, 19(1), 61-76. https://dx.doi.org/10.1111/j.1467-8683.2010.00833.x

Baggini, J. (2012). Ethics. London: Quercus.

Bartos, J. (2012). Corporate corruption. Detroit: Greenhaven Press.

Benoit, D. (2016). Dow, DuPont Deal Cements Activists’ Rise. WSJ. Retrieved 17 January 2016, from https://www.wsj.com/articles/dow-dupont-deal-cements-activists-rise-1449882586

Bianco, A., Symonds, W., Byrnes, N., & Polek, D. (2002). The rise and fall of Dennis Kozlowski. Business Week, 23.

Cannon, T. (2012). Corporate responsibility. New York, NY: Pearson.

CAREY, D., 2000. Snaring A Suitor Want your company to be acquired? Learn to think like a buyer. Financial Executive, pp.20-22.

Collins, D. (2012). Business ethics. Hoboken, N.J.: John Wiley & Sons.

Duska, R., Duska, B., & Ragatz, J. (2011). Accounting ethics. Chichester, West Sussex: Wiley-Blackwell.

Nyse.com,. (2016). The New York Stock Exchange | NYSE. Retrieved 17 January 2016, from https://www.nyse.com/index

PENDERS, A., PAVLIN, G., & KAMERMANS, M. (2011). A COLLABORATIVE APPROACH TO CONSTRUCTION OF LARGE SCALE DISTRIBUTED REASONING SYSTEMS. International Journal On Artificial Intelligence Tools, 20(06), 1083-1106. https://dx.doi.org/10.1142/s021821301100053x

Pride, W., Hughes, R., & Kapoor, J. (2012). Business. Mason, OH: South-Western Cengage Learning.

Stephens, W., Vance, C. and Pettegrew, L., 2012. In Focus Embracing Ethics And An Analytic Essay for the Accounting Profession. THE CPA JOURNAL, January 2012, pp.16-21.

Talamo, G. (2011). Corporate governance and capital flows. Corporate Governance: The International Journal Of Business In Society, 11(3), 228-243. https://dx.doi.org/10.1108/14720701111138661

Tyco International Ltd. (2001). World Pumps, 2001(415), 5. https://dx.doi.org/10.1016/s0262-1762(01)80116-4

Tyco.com,. (2016). Home - Advancing safety and security worldwide |  Tyco. Retrieved 17 January 2016, from https://www.tyco.com/