Evaluate the Price of Unethical Behavior

Abu Mohammed Fofana, Ph.D.
School of Business & Technology Management, Northcentral University. San Diego, California.

Introduction

The wave of unethical business practices seems to top the list of concerns among business stakeholders and communities everywhere. This concern is compounded by the absence of active ethical agents and vigilant corporate governance and the subsequent spate of corporate malfeasance in the 21st Century. Irrespective of the elusive search for a universal solution, educational institutions, and business stakeholders have begun to re-examine the perspective of business and its role in communities as well as evaluate the escalating costs that stakeholders and communities must pay for corporate unethical behavior.

Dennis Kozlowski, former CEO of Tyco International and the subject of this study, was revered and had the Midas touch. However, like corporate leaders of his ilk- Kenneth Lay (Enron), Bernard Ebbers (WorldCom), Richard Scrushy (HealthSouth Corporation), to name a few- he chose, as his primary goal, to focus on return on capital above everything else. He accumulated flashy accouterments of wealth- expensive homes, a yacht, and rare art, to name a few worth many millions. He learned the business from the bottom up, aggressively acquired and merged over 200 companies within a decade. He received handsome salary increases from $8 million, $67 million, to $170 million in 1997, 1998, and 1999 respectively. In 2005, the court indicted Dennis Kozlowski on a wide range of malfeasance charges, including tax evasion, grand larceny, perjury, pilfering, and falsification of Tyco financial records, deceiving shareholders. He is serving a jail term of up to 25 years in a NY penitentiary. The questions this paper seeks to answer are: What is the historical scenario surrounding Tyco International? How to evaluate the outcome of events? Was the punishment justified? Why or why not? And is it difficult for us to see our ethical breaches?

Briefly summarize the historical scenario surrounding Tyco International

Arthur J. Rosenberg founded Tyco International as an investment holding company in 1960. The company provides service in fire and security, electronics, healthcare, and engineering products and services. Four years later, Tyco became a publically traded company. Afterward, the company embarked on a series of ambitious expansion operations and acquisitions worth many millions making the company’s profit rise astronomically and become the envy of its competitors. In 1968, for instance, the company had acquired over 16 companies divided into three subsidiaries consisting of Fire protection, Electronics, and packaging.

After he joined Tyco International in 1967, Dennis Kozlowski worked under two CEOs, namely Joseph Gaziano and John F. Fort III. The two mentors had different management and leadership styles, persuasions, and convictions. While Joseph Gaziano was flamboyant and profligate, John F Fort III was parsimonious. Both CEOs kept a firm focus on maximizing shareholders’ interest. Though Dennis Kozlowski admired the leadership style of Joseph Gaziano more, he served both mentors with distinction. For instance, Kozlowski was instrumental in putting the interest of shareholders above everything else, and his expertise as an accountant made him very resourceful to the company. So when the opportunity arose to find someone to head Grinnell Fire Protection Systems Company, Tyco’s largest subsidiary, John Fort III, did not hesitate to promote Kozlowski to that division.

At the helm of Grinnell Fire Protection Systems Company, Kozlowski proved his competence. He reduced overhead costs, eliminated 98 percent of paperwork, revised the division compensation plan, designed a new bonus compensation package, and slashed employee salaries.

Between 1986 and 2000, the company continued to expand. It acquired 30 new companies. John Fort III was opposed to Kozlowski’s continued acquisition and mergers. Tyco’s Board of Directors, however, supported Kozlowski’s plan. He prevailed. The earnings of some of the newly acquired companies, like ADT Security Services, were generated in offshore subsidiaries to protect them from being taxed in the United States

Fort III resigned in 1992, and Kozlowski replaced him as CEO of Tyco International. At the helm of leadership of Tyco International, Dennis Kozlowski allegedly surrendered himself with allies.  Under Kozlowski’s leadership, the company revenue increased astronomically from $1.5 billion to $100 billion. He also continued to be rewarded in salary increases continually from $8 million, $67 million, to $170 million in 1997, 1998, and 1999 respectively. Though the company paid him more of his contemporaries, Dennis Kozlowski was found to use Tyco’s money for his aggrandizement and grandiose lifestyle. He bought homes, a yacht, and rare art, to name a few that were worth millions of dollars.

In 2002 Kozlowski was indicted by the State of New York charged him for tax evasion. Further investigation revealed that Kozlowski had also taken un-authorized bonuses, appropriated company funds to make personal purchases, and lied about them in court. In 2005 he was found guilty and sentenced up to 25 years in prison. The court ordered him to pay back to Tyco $134 million and a fine of $70 million.

How do you think the spending and the loans were able to go on for so long?           

The spending and the unethical behaviors existed for a  long time undetected because of the absence or lack of any meaningful corporate culture, decentralization, and the absence of internal control.

The absence or lack of any meaningful corporate culture

The primary focus of Tyco’s corporate value was to reward those who were able to balance the books and maximize return on capital. Tyco’s corporate board paid Dennis Kozlowski handsomely in salary increases making him one of the best-paid CEOs of his time. He too rewarded and provided the golden parachute deals to associates. In doing so, the company got consumed in a conflict of interest violations for years. Frank E. Walsh, Jr. director of the board, for instance, received $20 million for helping the company to acquire the CIT Group. Walsh also received more than $3.5 million for aircraft and pilot services to Tyco between 1996 and 2002, and Mark H. Swartz, chief financial officer, would receive $63 million severance pay. The Board of Directors couldn’t fire Kozlowski except in the event of a felony conviction. Other board members who received exclusive business deals included Stephen W. Foss, who received $751,101 for aircraft services and Lord Ashcroft, who also bought a $2.5 million home with Tyco funds. Also, the fact that most of the board members had served the company over ten years and were close friends made it practically impossible to report unethical behavior or conflict of interest violations for fear of backlash or reprisals. Two people tried to express concern about Kozlowski’s excessive use of company funds, and each time Dennis Kozlowski used his power and influence to silence or suppress it. An analyst at Merrill Lynch who was not either impressed by Kozlowski’s aggressive leadership style nor his insatiable appetite for mergers and acquisitions was replaced after making a recommendation to investors not to upgrade Tyco’s stock.

A report also indicated that the CEO used corporate funds for personal satisfaction, communicated with employees by memoranda to save costs, and use social engineering to create a story to justify acts that ware unethical.

The first thing Kozlowski’s successor, Edward Breen, did when he took over the leadership at Tyco was terminate the services of 290 of Tyco’s 300 managers. This was indicative of how corruption and unethical behaviors had been institutionalized within the company.

Decentralization

Splitting the company into fire protection, electrical and electrical components, packaging materials, valves, pipes, and flow-control created a decentralized matrix organization within Tyco International. Besides Dennis Kozlowski, to whom division leaders and managers would communicate directly, the rest of the company’s governing body did not know about the finances and operations of the various subsidiaries. This constrained lower-level managers, including the board, to have a broader perspective and understanding of operations at the divisional level and the ability to coordinate or correct any conflict of interest.

Lack of Internal Control

The absence of genuine internal control and the decentralization of corporate structure created a fusion of responsibility and lack of checks and balances, especially between those who were involved in handling financial matters and the various corporate divisions. A practical and reliable internal control is mandated to hire a third-party auditor to come in from time to time to audit financial records, prevent errors, ensure desegregation of responsibilities, and prevent fraud. Until the District Attorney stepped in to investigate Tyco’s finances, Dennis Kozlowski and his cohorts continued to enrich themselves and to acquire expensive personal items, and make strategic investment decisions without consulting with the board as a whole.

Evaluate the outcome of events

Perhaps it wasn’t a good idea to split Tyco into four independent publically traded companies; several investigations ensued after that decision. Offering an IPO increases a company’s capitalization as well as the scrutiny of every facet of business operations and activities moving forward. Businesses that fail to put their houses in order before going public may face unexpected consequences-good or bad depending on how well they comply with federal, as well as local financial reporting procedures, including Sarbanes-Oxley Act and SEC standards. Americans and the world at large are wary of publically traded corporations’ investment management practices since the collapse of Enron, WorldCom, and Arthur Anderson, among others.

The $20 million commission that Dennis Kozlowski paid his friend, Frank Wash, prompted an internal investigation that found that Kozlowski used the company’s resources for personal aggrandizement.

A report from the New York State Bank Department and an investigation launched by the State of New York discovered Kozlowski’s complexity in a wide range of fraud, grand larceny, and transferring company funds to his accounts, $1 million tax evasion and appropriating $ 170 million of Tyco funds. Other malfeasance discovered included selling $430 million in stocks, converting into personal use $242 million from a fund that was earmarked to assist Tyco employees, and gave 106 million dollars on a program of loan forgiveness and relocation programs which was found to be bogus.

Was the punishment justified? Why or why not?

Dennis Kozlowski’s sixth amendment rights were protected. He had a time in court and was found guilty by jurors on 22 of the 23 counts. I, therefore, think the punishment was justifiable based on the laws of New York and the extent to which Kozlowski’s behavior impacted the community, especially stakeholders at Tyco International.

Some say that Dennis Kozlowski was a multidimensional and mischaracterized. But they found it impossible to deny the fact that he evaded sales tax payments or created an unsavory and unethical culture at Tyco. The court acquitted Mark Belnick of all charges. He indicated that Kozlowski never influenced him to commit acts that were unethical or illegal. Some Kozlowski sympathizers thought the verdict was unfair because before and after Kozlowski’s incarceration, Ebbers (WorldCom) and Richard Scrushy (HealthSouth Corporation), to name a few also committed crimes of similar magnitude and were not treated as harshly as Kozlowski. As an avid student of IT business management, I admire Dennis Kozlowski’s acumen, skills, and dynamism in acquisition and mergers management. I think he deserves a second chance and perhaps compassion. But what I find untenable is to believe that, like Scrushy, Kozlowski should be acquitted, worst of all, to think that the judge or the state of New York was wrong in throwing him in prison in the first place. Doing so, in my judgment, is not only counterproductive but casts a vote of no confidence in our jury system. Besides, Kozlowski’s conviction wasn’t based solely on inside trading malpractice, including on lying under oath, falsifying financial documents, stealing millions of company’s resources, as well as a host of others counts.

Moreover, we can agree or disagree on the proper role of business in our lives, but there is a boundary line that no business leader dare cross: refused to pay taxes. If Dennis Kozlowski could purchase a shower curtain for $6,000 and an art worth millions, why tried to evade sales tax payments? The law, the State of New York, Tyco International, and other stakeholders expected more from a man of his stature. Sadly, this is one of the prices that Kozlowski paid for unethical behavior.

Is it difficult for us to see the ethical breaches that we commit?

A breach of ethics can sap a business’s value and tarnish its reputation in communities. Violations of ethics may include lying about products and services, falsifying business documents, stealing property that belongs to others.

Individuals or business organizations that intend to keep their reputations intact must make it a priority to craft an organizational culture detailing shared values and beliefs. These values can influence everyone that has a vested interest in the business to behave according to those values and beliefs. Research in ethics has shown that these values and beliefs can make more impact if business leaders showcase or model them in the way they behave and deal with employees, customers, and the like. Reprimanding those who breach those values and rewarding those who model true corporate citizenship can also encourage employees to be active, instead of passive, in making the right ethical choices.

Ethical choices or dilemmas can be delicate and disturbing. It incorporates the mix of values that are rarely found in corporate leaders these days. These include maturity, altruism, courage, and generosity, etc. Wrong choices have consequences and can have a domino effect on our own lives and the lives of those with whom we live, interact, or work. That is why it behooves everyone primarily corporate and national and international leaders whose decisions affect organizations, communities, nations and the world to think through the effects of ethical judgment that they make by asking themselves: “Is this the right or wrong thing to do or not?”. And in the words of Blanchard and Pearle: “Is it legal?” “Is it balance?” and “How does it make me feel?” Laura Nash also teaches business leaders to ask themselves: “How would I view the issue if I stood on the other side of the fence?”

Unfortunately for Tyco International, under the leadership of Dennis Kozlowski, instead of helping consolidate and perpetuate a culture based on strong ethics, corporate citizenship, social responsibility, and respect for the laws and regulations, created a work environment that encouraged deceit, greed, conflict of interest and extravagant lifestyles.

Until corporate leaders can behave, the future of ethics ethically in business will be bleak, and the cost of unethical behavior will continue to escalate exponentially.

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