Questionable Actions by the Chairman of Tyco International Limited

1
Questionable Actions by the Chairman of Tyco
International Limited

• Group 1 Rachel Alexander, Jonathan Crawford,
  Matt Kambic, You-Chen Lu, and Brittany Snyder

2
Overview

• Introduction and Summary of Situation Matt
  Kambic
• Benefits and Harms You-Chen Lu
• Rights Involved Brittany Snyder
• Economic, Legal, and Ethical Situation Rachel
  Alexander
• Moral Solution and Conclusion Jonathan Crawford
• Q A Group

3
Company Information for Tyco International Limited

• Domestic Manufacturer
• Electronics
• Fire and Security Technology
• Healthcare
• Engineered Products and Services
• Among market leaders in all industries
• Global company

4
Company Performance History

• Prior to July 1992
• Net Profits 95 million
• Return on Sales 3.1
• Stock Price 4.30
• July 1992
• Hired Dennis Kozlowski as CEO and President of
  Operations
• July 2001
• Net Profits 5.1 billion
• Return on Sales 13.8
• Share Price 58.00

5
Kozlowskis Rewards

• Praised for company performance
• Substantially rewarded
• 25 million salary
• 86 million stocks options sales

6
First Investigation

• SEC launched investigation in late 1999
• Findings
• Overstated expected costs of new acquisitions
• Made acquisitions appear financially unstable
• Results
• Technically no laws were broken
• Tyco agreed to restate earnings
• No fines assessed or penalties imposed

7
Second Investigation

• June 2004
• CEO Dennis Kozlowski and CFO Mark Swartz
• Tax Evasion
• Improper use of company funds
• See Next Slide
• Payoffs were paid to directors to cover up
• Undisclosed stock sales
• 430 million made by Kozlowski and Swartz

8
Use of Company Funds for Private Purposes

• 13.8 million for paintings
• 2.5 million for a home in Florida
• 9 million for additional property
• 5 million for Massachusetts property
• 900,000 for Connecticut property
• 240,000 jewelry for Mrs. Kozlowski
• Many more

9
Ethical Question

• How wrong were Kozlowski and Swartz?
• Totally Wrong ?
• Somewhat Wrong, still did good for company?

NOT WRONG AT ALL
SOMEWHAT WRONG
COMPLETELY WRONG
10
Benefit to Some

• Companys CEO Dennis Kozlowski, and CFO Mark
  Swartz
• Inside and outside directors who were involved
• Company saves on taxes
• Company and employees
• Customers

11
Harm to Others

• Tyco
• Government
• Integrity of the companys CEO and CFO
• Companys reputation
• Performance
• Stock price
• Employees and their families
• Executives that were not involved
• Stockholders

12
Rights Exercised

• Kozlowskis right to live lavishly
• Boards right to spend the companys money as it
  sees fit
• Right to overestimate future costs
• Right of the SEC to investigate

13
Rights Denied

• Right of the government to tax its citizens
• Rights of the citizens of New York for fair taxes
• Rights of the companys employees and
  shareholders to fair, honest reporting
• Spending of corporate dollars
• Acquisitions

14
Moral Questions

• Is it right to make another company appear more
  unstable that it really is?
• Is it right to use corporate money for personal
  use?
• Is it right to bribe board members?
• Is it right to have undisclosed sales of stocks?

15
Economic Outcomes

• Pre Kozlowski
• Stock - 4.30 per share
• Ten years later
• Stock - 58 per share
• Post Kozlowski
• Stock 16.05 per share

16
Economic Outcomes

• Extravagant purchases helped to boost economy
• Purchases took away profit from Tyco
  International Ltd., its employees, and
  shareholders

17
Legal Requirements

• No law against overstating future cost
• Tyco would restate earnings
• June 2004 Tax evasion charges
• Personal purchases as companies expense
• What is legal, is not always right!

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Ethical Duties

• Public Company Financial Statements
  Overstating expenses
• Acquisitions
• Undisclosed sales of stock
• Company funds for personal expenses
• Special bonuses to keep quiet!
• Kozlowski, CEO Tax Evasion

19
Kozlowski and Social Responsibility

• Kozlowski falls between the Obstructionist and
  Defensive Approaches

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The Courts Decision CONVICTED

• Fraud against shareholders of over 400 million
• 22 counts of grand larceny for unauthorized
  bonuses totaling over 150 million
• Currently serving 8 to 25 years in prison

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Moral Solution

• Support the Courts decision
• Superstar status among CEOs does not forgive
  ethical misconduct
• Was aware of the fine print and knowingly
• Cheated
• Lied
• Broke the law
• Not isolated incidents

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Conclusion

• Matt Kambic - Introduction and History of Company
• You-Chen Lu - Benefits and Harms
• Brittany Snyder - Rights Exercised / Rights
  Denied
• Rachel Alexander - Economic Outcomes/Legal
  Requirements/Ethical Duties
• Jonathan Crawford - Moral Solution

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Q A