Tyco International Ltd. Research Paper

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Executive summary

Following the Enron and WorldCom scandals, Tyco International Ltd ‘s former chief executive (CEO) L. Dennis Kozlowski, former chief financial officer (CFO) Mark H. Swartz, and some directors were embroiled in a huge scandal due to their unethical behaviours. This resulted in massive financial losses for the company and its stakeholders. Announcement of the scandal saw Tyco’s stock price falling drastically from $60 in January 2002 to $18 in December 2002, along with a downward restatement of its 2002 financial results by $382 million. Both Kozlowski and Swartz were charged with seven years of imprisonment, plus $70 million and $35 million in fines respectively.

This report will discuss three main ethical compromises faced in relation to Tyco’s corporate culture: Firstly, key leaders embezzled company funds by abusing Tyco’s Key Employee Corporate Loan Programme (“KELP”). Secondly, the bribery involved in acquisitions and purchases to obtain personal financial gains, which cost Tyco more than $26 million[1] to settle. Lastly, Kozlowski, Swartz and Belnick falsified accounting and business records to conceal documentations for items such as loans, earnings, and compensations. We will also discuss how auditors’ negligence played an instrumental role in the process. Next, we analyse the moral reasoning behind the responsible stakeholders, such as the top management, board of directors, employees, and auditors. Finally, we then provide our reflections and discuss how such ethical compromises can be better managed in future situations.  

Tyco’s corporate culture

Kozlowski’s Internal Influence

Our analysis revealed that Tyco’s corporate culture was a contributing factor to asset embezzlement. In general, top management plays a critical role in cultivating corporate culture as employees are guided by “tone from the top”. This is evinced from the fact that Kozlowski was first influenced by former CEO, Joseph Gaziano to pursue a lavish lifestyle[4]. Similarly, when Kozlowski became the CEO, his unethical behaviour had become a model for others to emulate. Under Kozlowski’s leadership, Tyco was not keen in building an ethical culture. Rather, the culture probably generated a moral reasoning whereby executives rationalise that it is acceptable to ignore or even execute seemingly fraudulent activities in the company[5].

Further, during Tyco’s restructuring, Kozlowski appointed people whom he was closely associated with and trusted into key board positions. [5a] 

Being placed on the board by Kozlowski could encourage these people to succumb to motivated blindness, whereby they would overlook Kozlowski’s unethical practices and misappropriation of funds especially if it was in their interests to ignore and remain ignorant of them. An example would be the board’s approval of the opening of Manhattan office overlooking Central Park as the unofficial headquarters whereby Kozlowski utilised Tyco’s funds to purchase and decorate apartments for key executives and employees without duly notifying shareholders [5b]. This could be due to their mentality that their board positions were attributed to Kozlowski, and that confronting him about the accountability of these practices would possibly cost them their continued tenure on the board.