A brief look at one of the most notorious scams of early 2000s, Tyco, and their strategy to turn the company around

1. A Corporate Governance Failure
Prepared By
Karan Bhagatwala : Roll No. 09
Harshit Bhinde : Roll No. 12
Meghana Bhogle : Roll No. 13
Sonali Gohil : Roll No. 35
Avinash Kadam : Roll No. 52
Snehal Kadam : Roll No. 53

2. September 12th 2002
Meghana Bhogle (13)

3. TYCO History
 Investment company focused on Science and Energy conversion.
 1964: Public Trading.
 1968: Acquisitions.
 1982: Re-organization of Business Segments.
 1986: Growth through acquisitions.
 Prior to scandal: $ 38 billion OR & 2,40,000 employees worldwide.
Meghana Bhogle (13)

4. Rise of Dennis Kozlowski
 1975: Assistant Controller
 1987: BOD
 1992: CEO
 1993: Chairman
Meghana Bhogle (13)

5. Robert Morgenthau : Sherlock Holmes
 In 1999, the SEC initiated an inquiry into Tyco's practices.
 In January, 2002, questionable accounting practices came to light.
 Robert kept digging into the record keeping of Tyco and Kozlowski.
 No individual whistleblower.
 Scandal had already spread extensively.
Snehal Kadam (53)

6. Courtroom Drama
 Kozlowski hired an attorney that defended his actions.
 Asking for lenient sentence citing his immense charitable donations.
 Owen Heimer asked the judge that no leniency be shown to Kozlowski.
 Citing his excessive spending spree and disregard for the shareholders of
the business.
Snehal Kadam (53)

7. TYCO: Corporate Governance System
Composition
 Kozlowski
 Firm’s board of directors including:
 Mark Swartz, CFO;
 Lord Michael Ashcroft, who joined with
the ADT merger;
 Richard S. Bodman, a venture
capitalist;
 Stephen W. Foss, CEO of a textile
concern;
 Frank E. Walsh, Jr.
Harshit Bhinde (12)

8. Key Details of Misconduct
 Frank E. Walsh, Jr. received $20 million commission.
 Walsh also held controlling interest in 2 firms that received >$3.5 million for
supplying aircraft and pilot services to Tyco.
 Stephen Foss received $751,101 for supplying aircraft and pilot services to Tyco.
 Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home.
 CEO and CFO had sold 100 million dollars' worth of shares, and then stated to the
public that they still owned them.
Harshit Bhinde (12)

9. Key Details of Misconduct
 Kozlowski received $81 million in unauthorized bonuses.
 Tyco forgave a $19 million, no-interest loan to Kozlowski .
 Kozlowski’s income taxes on the loan was paid by Tyco.
 Kozlowski used Tyco to avoid around $1 million import taxes after purchasing $14
million in rare artwork.
 $2.1 million for the birthday party of Kozlowski's wife was billed to Tyco.
 Kozlowski granted $106 million to employees through “loan forgiveness” and
relocation programs.
Harshit Bhinde (12)

10. Criminal Charges on CEO & CFO
 In all 38 felony counts.
 For:
 Allegedly stealing $170 million from Tyco.
 Fraudulently selling an additional $430 million in stock options.
 Taking $242 million from a program intended to help Tyco employees buy
company stock.
 Granting $106 million to various employees through “loan forgiveness” and
relocation programs.
 Falsifying documents in this loan program in the amount of $14 million.
Sonali Gohil (35)

11. Internal Control & Governance Failures
 Worst-practices included:
 Poor documentation.
 Inadequate policies and procedures to prevent the misconduct of senior
professionals.
 Inadequate procedures for proper corporate authorizations.
 Inadequate approval procedures and documentation.
 A lack of oversight by senior management at the corporate level.
 Aggressive accounting & improper auditing by auditors.
Sonali Gohil (35)

12. Damage Control
 Edward Breen appointed as new CEO.
 Company filed suit against Dennis Kozlowski and Mark Swartz for more than
$100 million.
 Breen launched a review of the company’s accounting and corporate governance
practices to determine whether any other fraud had occurred.
 Restate its 2002 financial results by over $2 billion.
 Management declaration about flaws in previous management style.
Karan Bhagatwala (09)

13. Corporate Governance Re-Boot
 Reorganized the company and recovered some of the
funds allegedly taken by Kozlowski.
 Elected a new board of directors.
 Voted to make future executive severance
agreements subject to shareholder approval.
 Voted to require the board chair to be an
independent person rather than a Tyco CEO.
 Hired Eric Pillmore as Vice President of Corporate
Governance.
Karan Bhagatwala (09)

14. Corporate Governance Re-Boot
 Implemented a corporate ethics program & replaced 90% of the HQ staff.
 Created the “Tyco Guide to Ethical Conduct”.
 An ombudsman position at Tyco who can mediate between employees and
management.
 Tyco published a confidential hotline, called ConcernLINE.
 Tyco now publishes a quarterly report based upon the concerns that employees
have brought up.
Karan Bhagatwala (09)

15. Conclusion
In 2004 CEO Edward Breen was listed as one of Businessweek’s “Best Managers.”
That same year Tyco won the Center for Corporate Change Award for
“Outstanding Improvement in Board Governance.”