2. Tyco is the world’s largest fire and
security company with over three
million customers around the
Acquired AT&T Submarine
systems to gain R&D assets
Tyco Telecommunications is the
world’s first vertically integrated
global optical network supplier.
3. Prior to July
July 2001 Growth
Net Profits $95 million $5.1 Billion 54 times
Share price $4.3 $58 13.5 times
Began work at Tyco in 1976 and worked his way up through the company
to become the CEO in 1992.
Acquired 1000 companies in a decade.
In 1999, Tyco acquired two S&P 500 companies in a buyout;
In 1997, salary $ 8 million. In 1999, salary $ 170 million.
Within 5 years, cash in hand increased from $240 mil to $4.8 bil.
In 2002, EPS >40% growth.
4. Questionable business decisions and poor judgement.
Victim of corporate governance.
Took unauthorized pay and bonuses $600 mil, abusing loan
programs and selling company’s stock at inflated prices.
He was accused of using the company’s money to support an
5. Why acquisition strategy for growth
◦ Massively accelerate its rate of growth with an acquisition.
◦ Targeted non-cyclical industries which would be unaffected by economy.
Benefit for Tyco
◦ Bagged non-related sectors to enhance Tyco’s business and presence.
◦ Revenue doubled instantly.
◦ Diversifying risks
Benefit for Kozlowski
◦ Board rewarded Kozlowski with high rise in salary and increased
◦ Managerial risk aversion.
6. What leads to accounting manipulations by top management
◦ Hire trusted executives as board of directors in the organisation.
◦ Improper auditing through the organisation.
◦ Compensation of corporate executives is directly tied to the financial
◦ No whistle blower, organisation culture is such that people are afraid to
7. Why accounting firms did not catch the manipulations
◦ Scope of internal audits never included the headquarters function.
◦ Actual function at the headquarter is where the fraud occurred.
◦ These transactions where booked at the level below what the external
8. Why Kozlowski and Swartz engaged in behaviour that they did?
◦ Clearly they intended to live a lavish lifestyle like Gaziano.
◦ Tyco core competency was stated as; ability to party hard.
What motivated them to take such risks?
◦ No higher authority to oversee their activities.
◦ He grew up with company and thought company’s funds were his personal
◦ Raising economy and increasing growth of their aggressively acquired
How risky they thought their behaviour was?
9. This shows what happens when too much power is put into the hands of an
individual, it can lead to a decentralized corporate structure that makes it
difficult to detect misconduct.
Sarbanes-Oxley: the full-disclosure law passed in the US and used
internationally as a transparency benchmark for vested interests.
Board composition has seen structural shifts in the ratio of insiders to
Establish guidelines from a value standpoint along with delegation of
authority from a governance standpoint.
10. The final improvement on corporate governance came in the
Guide to Ethical Conduct.
The guide was produced to advise employees as to correct
procedures and warn of unethical practices and behaviour.
All employees are now required to take a brief ethics course
and sign an annual ethics statement.