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Tyco’s Corporate Governance Mechanisms
Tyco Inc. is a company that began in 1960 and dealt in investment and holding. Under the leadership of Arthur Rosenberg it grew steadily over the years. Joseph Gaziano, a trained engineer, took over in 1973 and he was aggressive in his leadership an often used hostile acquisitions. He wanted to change the $40 million dollar company to a $1 billion dollar company by 1985 using any means possible. This kind of leadership made Tyco to acquire more debts than necessary and this contributed to its failure. (Allen, 2007)
After Gaziano’s rein John fort took over and led the company using honest and thrifty means but this was short lived. Dennis Kozlowski took over and he became aggressive, he pursued acquisitions with vigor similar to Gaziano’s. When Kozlowski took over Tyco as CEO in 1994 the company produced a net worth of $1.3 billion but due to his aggressive acquisitions the company was producing a net worth of $214 million by 1998. 1n 194 the company was divided into four divisions: fire protection; valves, pipes and “flow control products”; electrical and electronic components; and packaging material, after the acquisitions were made by Kozlowski the company had two more divisions making the total count to six: fire protection, flow control, disposable medical products, Simplex Technologies, packaging material and specialty products.
Kozlowski’s acquisition strategy resembled the conglomerate strategy used in 1960 but stopped in 1980. Initially conglomerates would accumulate unrelated businesses to counter the business cycle movements preventing all businesses from straining during a downside of the business cycle. This ensured continuous cash flow in a company and enabled the company to overcome economic problems and continue acquiring more income generating businesses. (Allen, 2007)
Before the presidential contest between George Bush and Bill Clinton the Reform Tax Act did not allow firms to pay executives salaries that exceeded $1 million but during bush leadership the executives’ salary increased steadily. Although Clinton’s government supported the Tax Act, companies still paid the executives extra using incentives. One of the most attractive incentives was stock options. Tyco also used the incentives it loaded executives with stock options on their compensation packages. This made the CEO to earn way above the other employers; Kozlowski for example earned more than twice of what the second highest executive earned.
Tyco brought in an image consultant in the late 1990s to improve the CEO’s and the company’s reputation. In the stock market a CEO had to have good charisma for a favorable reaction. This charisma required a CEO to portray a larger than life appearance. The CEO spent the company’s money in fancy clothes, jets, expensive tastes and charity causes. Kozlowski handed out a lot of money to charity especially in southern Maine and New Hampshire. Most of the places he gave this donations were not for profit organizations making Tyco Inc. to generate less income than before. He was so philanthropic that he was described as the most engaging generous human being. (Michael, 2007)
Kozlowski spent corporate in purchasing lavish homes and furnishing them with very expensive stuff. He also used Tyco’s money and resources to entertain and help out people in his circle of executives, friends and family. One of the ways he did this is by giving the executives interest free loans; this benefited the executives but made the company lose a lot of millions.
The Key Employee Loan Program (KELP) that was established in 1983 enabled executives who had been compensated with stock incentives to receive loans to pay off federal and state taxes. Kozlowski used this loan program to borrow more than $18 million to acquire personal properties in four different states; Connecticut, New Hampshire, Nantucket and Boca Raton. This money was never reported in the director and officer questionnaire. Mark Swartz used his authority as Tyco’s chief financial officer to control the books of accounting and carry out loan forgiveness. Such decisions warded off potential investors reducing Tyco’s average stock value and hurting the average shareholder.
Tyco’s executives under Kozlowski’s watch misused funds, after the sale of shares the executives would distribute the monies among themselves with Kozlowski getting the largest share. Kozlowski did all these but did not document these bonuses instead he maintained a positive image to the press. He made the company look like its rising and achieving supernormal profits.
Despite the good press, rumors started going round in October 1999 that the company practiced illegitimate accounting. An analyst and mutual fund operator, David Tice wrote a newsletter that talked about Tyco’s unorthodox book keeping. He stated, “Tyco’s game plan is to buy bloated businesses, strip them of excess personnel and facilities and treat the costs as nonrecurring in the company’s income statement”. A week after this report was issued Tyco’s stock dropped by 20%. More reports were issued on the company’s acquisitions and stock continued dropping, by the end of 2001 the share price was similar to what it had been at the beginning of 2001. (Michael, 2007)
In lieu of this events Tyco’s CEO, Kozlowski resigned destroying shareholder confidence even more and in June 4 2002 he was led into a courtroom where he was charged with tax evasion.
References
Michael, M. J & Alison, V & Allen, K (2007) Tyco International: a Case of Corporate Malfeasance 20o7
