- Description of Organization and Product
Tyco International Ltd. is a corporation with official headquarters based in Pembroke, Bermuda but the company maintains operational headquarters in Princeton, New Jersey. Tyco has grown into a multi-billion dollar company (scattered in over 100 countries) — with revenue of $41.0 billion USD (2006) to boast.
Founded in 1960 by Arthur J. Rosenberg, Tyco was birthed when Rosenberg opened a laboratory intended for research and experimental works catered for government use. Incorporated by 1962 as Tyco Laboratories, it shifted its focus to developing scientific materials as well as energy conversion products, which now caters for the commercial sector.
Tyco is a manufacturing and service conglomerate which is involved in a variety of products ranging from electronics, fire and security services, healthcare, aerospace, and some industrial products.
For instance, its passive and active electronic components are found in computers, aerospace, automobiles, industrial machines, and household appliances among others. Under its fire protection and electronic security operations, it is responsible for designing, manufacturing, and installing products as well as providing services in these areas.
Part of Tyco’s Healthcare business involves medical, pharmaceutical, surgical, imaging, and respiratory products. The company also manufactures industrial valves, and fire sprinklers thereby giving services in residential and industrial settings (“Tyco: Our Business”).
It also provides services — consultation on engineering and construction management, including operating services. Through one of its subsidies, the company also has an integrated system used for the tracking and controlling public transportation system, tunnels, and bridges. Furthermore, Tyco is involved in the monitoring of systems of burglar & fire alarms, and on medical alert systems where 24-hour monitoring and response is necessary.
Tyco is also engaged in buying steel and resin in the United States, as well as copper, gold, zinc, brass, paper, ink, cotton, wax, chemicals and additives. Other products purchased by the group are foil, copper clad materials, adhesives, and cloth. As of 2005, Tyco is responsible for employing about 247,900 people in its company (“Company Research: Tyco International Ltd.”).
Tyco’s phenomenal growth can be traced back in the late 1980s when the company engaged in a number of acquisitions in some major companies such as ADT, Siemens Electrochemical Components, Thorn Security, and Mueller Company. But it was not until the 1990s and the subsequent years that Tyco became more aggressive in its acquisition strategy under Dennis Kozlowski as CEO. In a span of about eleven years (from 1991 to 2001), Tyco has reportedly acquired 1000 other companies.
It was in 1997 that Tyco made the controversial shift of headquarters from Massachusetts to Bermuda, after the company’s acquisition of ADT. ADT Limited has its origins which can be traced way back in the 1900s in the United Kingdom and by 1980s was restructured under the laws of Bermuda. Although part of the merger, since ADT was incorporated in Bermuda, it was still perceived as a shrewd move to avoid taxes. Shareholder and investors were later informed of this tax advantage.
A partial list of Tyco’s products and its brands:
- AMP for its electronic components and cables
- RAYCHEM for circuit protection devices
- Ansul, Total Weather, Skum & Sabo for fire fighting products
- Kendall, Monoject, Shiley for medical supplies
- Simplex Grinnell, Wormald for fire sprinklers
- OpenSky and EDACS for critical communications systems
- Violation / People Involved
During the 1990s, the company continued to show a stable and steady rise in income. But by 1999, rumors of accounting irregularities began to leak with charges directed against Tyco’s top executives: Dennis Kozlowski (former chairman and chief executive), Mark H. Swartz (former chief financial officer), and Mark Belnick (former general counsel). These accusations were vehemently denied by the company’s leadership.
It was not until January of 2002 that prosecutors found Kozlowski guilty of tax evasion for his art purchases. Investigators later followed a trail of lavish expenditures, thereby making Kozlowski’s tax evasion scheme a mere ‘tip of the iceberg’.
Eight months later, these three men were arrested and tried before the New York State Supreme Court. Kozlowski and Swartz were charged of robbing the company of about $600 million with the aid of Belnick. They were found guilty of treating Tyco as a personal bank account, stealing worth of $170 million through company loans and $430 million worth of fraudulent sales of securities without the company’s shareholders knowledge (“Three Tyco Execs Indicted for Fraud”).
Kozlowski was found guilty of masterminding a series of ethical violations, by misusing corporate funds for relocation and executive loan programs. Since 1996 up to 2002, these two men awarded themselves hundreds of millions of dollars with low or no-interest loans usually from Tyco’s Key Employee Corporate Loan Program (KELP). The company explicitly defined the purpose of the program. Tyco’s KELP was designed to provide loan assistance for Tyco key employees to pay their taxes when investing upon Tyco’s common stock. Of the $270 million that Kozlowski took through KELP loans (from 1997 to 2002), about $29,000,000 only were used for taxes because of the result of the vesting of Tyco stock.
The rest of the money were improperly used for self-serving interests such as acquiring luxury apartments and estates, expensive artworks, estate jewelry, a yacht, and spending about $100 million for a lavish party for his second wife. Also, Kozlowski is now notoriously known for owning a gold-laced shower curtain worth $6,000 — a picture for his lavish lifestyle. He also used KELP funds to finance his own personal investments and other business ventures, deliberately violating the program’s purpose.
Swartz also misappropriated about $85,000,000 dollars from the company’s KELP loans during these same periods. Following from Kozlowski’s example, he too appropriated only about $13,000,000 dollars to cover taxes as a result from the vesting of Tyco stock. Swartz misappropriated the remaining $72,000,000 dollars for self-serving purposes such as financing his own business investments, and the purchasing of real estate holdings and trusts.
Kozlowski and Swartz were also guilty of deceitful acts by deliberately failing to disclose in their annual Director & Officer Questionnaire (“D&O Questionnaire”), which are given to Tyco’s senior executives, the information of these loans — much less the manner of which how these KELP loans were used. Tyco’s shareholders were deceived by Kozlowski and Swartz’s failure to reveal these important facts on the company’s Form 10-K and proxy statements.
The company also has a relocation loan program since 1995, to give assistance to its employees who were affected when it moved its offices to New York City from New Hampshire and later to Florida. Kozlowski and Swartz also enriched themselves by availing of relocation loans and spending it for purposes not covered by the program. Of the $46,000,000 dollars which Kozlowski amassed from the relocation loan, $18,000,000 was spent to buy a waterfront compound in Boca Raton and an estimated $7,000,000 Park Avenue apartment for his previous wife.
Swartz spent $6,500,000 to purchase an apartment on New York City’s Upper East Side; $17 M for a waterfront compound also in Boca Raton; and the rest of the funds were used in purposes not authorized by the program. They were also accountable for repeatedly classifying and reclassifying their debts to the company, and even moving on to authorizing transactions by which their millions of dollars of KELP and relocation loans were forgiven and written off the company’s books. They also instructed others to falsify the company’s books and records in order to conceal these violations.
Swartz also enriched himself by selling his New Hampshire real estate to a Tyco subsidiary for $305,000, but in which the Tyco subsidiary sold it at a far lower price about two years later from its purchase. Swartz purposely did not disclose this transaction from Tyco’s investors.
Both Kozlowski and Swartz abused company perquisites from Tyco — such as causing the company to purchase luxurious apartments and stay in it rent-free and made use of Tyco corporate aircraft in purposes unrelated to the company’s business. The former CEO also misused Tyco’s funds by releasing large amounts of charitable donations in his own name, and all the while failed to disclose and report these facts to investors, as mandated by the federal securities laws. While possessing material information, Swartz engaged in fraudulent sales of Tyco stocks through family business partnerships. Both men lied to Tyco’s auditors by signing management representation letters which avowed the absence of fraudulent acts from significant employees involved in Tyco’s internal control.
Belnick, Tyco’s former chief legal officer, amassed millions of dollars from Tyco through similar violations committed by Kozlowski and Swartz (T Newkirk, J Coffman, R Kaplan, D Frohlich, and J Weiner. U.S. Securities and Exchange Commission).
- Explanation of the Outcome
The two former top Tyco executives received 8 1/3 to 25 years of prison-sentence after being tried before a New York state court, after it’s first resulted in a mistrial. They were found guilty of siphoning and misappropriating company funds during their stint as Tyco’s top executives. This was considered as one of the biggest ethical violations in a series of white-collar crimes that has tainted and eroded public confidence in the US corporate landscape. As a result, Kozlowski and Swartz served their terms in New York state prison, a case which differs greatly from other convicted corporate executives.
Other convicted corporate executives such as Adelphia’s John Rigas, or Martha Stewart served their prison sentences in a federal prison. Often dubbed as “Club Feds” or “Camp Cupcake”, federal prison conditions could appear like a ‘boarding school’ —- there are no bars and some are even offering facilities like tennis courts.
In stark contrast, state prison do not offer such ‘luxuries’ and the gravest issue could boil down even to the inmate’s safety. It usually houses criminals convicted of rape, murder and other violent offenses —- one reason which explains its unsafe condition and which makes tight security a necessity.
While others may see this conviction too harsh for a white-collar crime, Kozlowski and Swartz cannot escape their fate since their case began as a state investigation for trying to evade about $1,000,000 dollars worth of tax payment for acquiring expensive artworks by Renoir, Monet and other celebrated painters.
Also, this has come upon the government’s stand of placing stricter measures on its effort of cracking down corruption in the corporate scene (K. Crawford. “For Kozlowski, An Especially Grim Future”).
According to a former SEC prosecutor, the sentences for white-collar criminals are getting tougher and judges’ former tendency to give them milder treatment is fast disappearing. While Kozlowski is credited for building up Tyco’s multi-billion dollar industrial empire, which used to give an impressive and illustrious career — rising from being an ordinary employee to become Tyco’s chief executive officer, his crime is also credited as the grandest (so far) in scale and amount of thievery in corporate history.
While some would protest about the usefulness of long prison sentences given to white-collar criminals, especially when they are towards the age of retirement. However, there is an inescapable trend among state and federal courts to give longer years of prison-conviction. Whereas in the early 1990s, when such crimes were new and few, a certain convicted salesman received eight years reduction in his 10-year term, an equivalent of 22 months in jail (L. Lazaroff. “Ex-Tyco Executives Get Up To 25 Years: Kozlowski, Swartz also to pay millions in restitution, fines”). Kozlowski is serving his prison sentence at Midstate Correctional Facility in Marcy, N.Y., located outside of Syracuse of N.Y.
Clearly, there has been a great shift of change.
- Opinion of the Outcome
In the aftermath of the Enron, Adelphia, Tyco and other high profile business scandals which prove that ethical violations can pose a serious and costly risk for a business entity’s ability to grow or thrive. As demonstrated by Kozlowski, Swartz and Belnick —- the collapse of integrity could cost hundreds of millions or even billions of dollars for its company to cover extra expenses such as litigation, fines, damage of company reputation, subsequent loss of client’s trust, decline in sales, and the process for damage-control.
While this indictment against Kozlowski and his accomplices seem severe when it received as much punishment as those who commit violent crimes, but given the substantial amount stolen, the consequent loss of wealth due to erosion of public trust, and costly lawsuits — the benefits of giving such harsh convictions would serve as a deterrent for future losses. It is also the government’s responsibility to restore confidence among investors towards corporate entities in order for these institutions to survive.
Kozlowski’s shot for “dizzying success” (even using fraudulent and criminal means) was fed in part by Wall Street’s hero worship of ‘rock star’ CEOs. However, in light of a string of corporate scandals, leaders must be emulated for their ability to ‘shepherd’ their company and provide examples of living up to ethical standards themselves.
This outcome also brings the much needed transformation on government (such as the Sarbeans-Oxley Act) and company policies pertaining to how business is conducted by those who serve them. While most of the focus is on the violators, the rippling effects of such crimes could threaten the financial security of millions of the company’s employees and their families.
Companies, in lieu of the scandal, have now placed greater importance of training its employees to make ethical decisions which would cultivate a corporate culture founded on trust and integrity.
This case also helped to strengthen greater consciousness for the need to fight corruption in a global scale. The United Nations signed a new treaty in its bid to fight corruption worldwide. This covers not only government officials but is applied to the private sector as well (“United Nations Convention Against Corruption”).
- The Organization Today
Rebounding from the moral crises that swept its top executives, along with other companies, there has been greater commitment for transparency among the new management performers in Tyco and other companies. These are corporate leaders who have built a track record of excellent performance and who have been practicing high ethical standards. All efforts are geared toward rebuilding the company’s reputation, public and investor’s trust.
When Edward D. Breen became Tyco’s new CEO in July 2002, he took a bold step in his sweeping reform to re-establish credibility and faith to the company, which included firing the Board of Directors that hired him. Of the 500 employees in Tyco’s Princeton, N.J. headquarters, as much as 480 are newly hired since Breen breezed in to Tyco’s management scene.
Although at first, Breen found the company in confusion, low morale among its employees, and about to face a cash shortage because of an $11 billion debt due a year after, Tyco has a good foundation due to Tyco’s acquisition of a number of stable businesses (S. Lohr. “New Strategies Changing Face of Corporate Scandal”). This separates Tyco from much of the companies who suffered the same fate from dishonest dealings by its top executives most of which filed for bankruptcy. Tyco was able to recover from the crisis.
According to a public announcement made last January 13, 2006, Tyco International is divided into three business segments: Tyco Healthcare, Tyco Electronics, and Tyco Fire & Security, and Tyco Engineered Products & Services (TFS/TEPS). Each has operations separate from each other and possesses their own set of board of directors, executives, and financial structure. By February 6, 2007, Tyco has revenue of $41 billion and currently employing about 250,000 people in different countries.
Despite being in the process of splitting into three major companies, Tyco International Ltd. still saw an increase of net earnings of up to 43 % or a profit rise of about $793 million due to great demand especially for its electronics and security devices. Company profit taken from continuing operations is up on 37 cents per share – a performance which proved better than Wall’s Street’s forecasts.
Among Tyco’s four divisions, three reported an increase in sales and better operating profits for the first quarter of this year; with its heal-care the only segment which handed in a lower yield in profit due to the company’s restructuring measures.
Tyco is preparing to push on its health-care and electronics divisions by the second quarter. It is gearing up for more aggressive measures as it sees a favorable global economic environment for this year, being optimistic to avail a rise of 6 to 7 percent in sales.
Tyco’s shares have even achieved more than 30% over the previous year, twice than the rise of Standard & Poor’s 500 index. Another measure of its success- Tyco’s stock price rose to $33.21 on the New York Stock Exchange from its $8 value just right after the scandal (“Tyco’s Net Earnings Jump 43%”).
- “Tyco: Our Business”. http://www.tyco.com/
- “Company Research: Tyco International Ltd.”. The New York Times. February 16, 2007.
- “Three Tyco Execs Indicted for Fraud”. CNN.com/BUSINESS.
- Newkirk T, Coffman J, Kaplan R, Frohlich D, Weiner J. S. Securities and Exchange Commission. http://www.sec.gov/litigation/complaint/complr 17722.htm
- Crawford, K. “For Kozlowski, An Especially Grim Future”. CNNMoney.com
- Lazaroff, Leon. “Ex-Tyco Executives Get Up To 25 Years: Kozlowski, Swartz also to pay millions in restitution, fines. Chicago Tribune. September 20, 2005.
- “United Nations Convention Against Corruption”.
- Lohr, S. “New Strategies Changing Face of Corporate Scandal”. New York Times News Service. June 4, 2005.
- “Tyco’s Net Earnings Jump 43%”. February 6, 2007.