Tyco

1. Put yourself in Wendy Lane's shoes in 1000 when she is considering Tyco's invitation to join its board. What due diligence would you conduct before accepting the offer? Were there any red flags you might have noticed?

Tyco International CEO Dennis Kozlowski was so impressed what she did during the executive training seminar at a University of Pennsylvania Wharton School program. And then he offered Wendy Land an interview for the Tyco Board. Wendy Lane has a solid background and the interview went well as it would be. She herself really wanted to work at Tyco because she also had interviews later on with three other directors but she still waited for the result from Tyco, “who would not be?” Tyco was a prestigious Fortune 50 company, a huge multinational in four businesses each of which was No.1 or 2 in its industry. Moreover, Wendy Lane, she is an independent thinker, she felt like she could bring something new and effective to the table. She had a huge advantage that no one had, a big Wall Street experience. She was still very much in tune with the capital markets, financial structures and M&A trends. She also was much younger at that time, and as a woman she felt she could bring age and gender diversity to the board.

She was very confident that she could get the job offer because she thought she had done well in the interview and I think so too but then she heard nothing for months and was crushed. She did not know that the company was focused on sorting through the allegations of David Tice, a Texas hedge fund manager who was recommending shorting Tyco’s stock and had accused the company of misleading accounting practices. Even though, she read research about Tyco, its management, its competitive, and the company’s future prospects. Lane also considered the Tice report and the questioned Tyco’s acquisition accounting practices. Although, she was aware that the U.S Exchange and Securities Commission had started an informal inquiry into Tyco’s accounting but Lane was told that the SEC did not intend to pursue a formal investigation. Therefore, when Dennis finally called back and she was delighted to be asked to join the board. Later on, she felt it was like being stuck with a cattle prod when she found out that two directors had read a draft of a proxy that CFO Mark Swartz prepared a few days before the Boca meeting. The proxy revealed that Tyco had paid $20 million to its lead director Frank Walsh for his role in an acquisition.

1. If you were Wendy's position as an audit committee director of Tyco in 2000. What can you do to reduce the likelihood that Tyco would face the kind of problems it faced subsequently?

In 2001, Tyco acquired CIT Financial Services for $10 billion. Kozolowski gave Frank Walsh $20 million in compensation for his helped to arrange the acquisition. Wendy lane did not like that, she was trying to be patient and no overreact, and she wanted to see if there might be some explanation. She had no idea if other board members knew about the payment and if they too found it inexcusable. She was also unsure whether she could trust the integrity of the other directors. She just did not know them very well or she did not have enough time to get to know them well. Things was even getting worse after the board raised the issue of whether the payment had required approval. The problem was that it happened before Lane agreed to join the board, she did not know about it so the only thing she could do right now is to start to investigate a number of things. In order to reduce the likelihood that Tyco would face the kind of problem it faced subsequently, Wendy Lane should have some certain strategies. Whenever the company issue or want to acquire something, it must be got the full board’s agreement, they should consider what are advantages and disadvantages if doing this. She should also improve the inter-relationship between board members and management in order to help the company more productive and profitable. She should also need to set up meetings with internal and external auditors, set up policies and practices to prevent such payment and expenses from happening in the future.