Money and Capital Market

Course Title: Money and Capital Market (FIN-439)

Scandal Company: Tyco International Ltd.

Discipline: MBA 3rd (A-p) Finance

Instructor Name: Sir Adnan Bashir

Submitted By: Iqra Shahzadi Date of submission 30-Jan-2012 10031920-052

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Tyco International Ltd.

Tyco International is a diversified manufacturer that had a big ambition in the late 1990s: to become the next General Electric. And the fast-growing conglomerate was well on its way until its top executives were engulfed in accounting scandals, ultimately facing a white-collar criminal prosecution that came to symbolize an era of corporate greed.

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Company Information
Tyco International Ltd. (Tyco) is a diversified company, which provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products. It operates in five segments: 1. ADT (American District Telegraph) Worldwide designs, sells, install, services and monitors electronic security systems for residential, commercial, industrial and governmental customers. 2. Flow Control designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for the water and wastewater markets, the oil, gas and other energy markets along with general process industries. 3. Fire Protection Services designs, sells, installs and services fire detection and fire suppression systems for commercial, industrial and governmental customers. 4. Electrical and Metal Products designs, manufactures and sells galvanized steel tubing, armored wire and cable and other metal products for non-residential construction, electrical, fire and safety and mechanical customers. 5. Safety Products designs, manufactures and sells fire protection, security and life safety products, including fire suppression products, breathing apparatus, intrusion security, access control and video management systems. In addition, Safety Products manufactures products installed and serviced by ADT Worldwide and Fire Protection Services.

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Company Separation:
In June 2007, Tyco concluded a corporate separation that split the company into three publicly independent companies: 1. Covidien Ltd. (formerly Tyco Healthcare) 2. Tyco Electronics Ltd. (now TE Connectivity Ltd.) 3. Tyco International Ltd. (formerly Tyco Fire & Security and Tyco Engineered Products & Services (TFS/TEPS))

Tyco Scandal:
Dennis Kozlowski worked all his life to get from the bottom to the top of Tyco International Ltd. And when he reached the CEO position he was often compared to other great CEOs in history like Jack Welch. However, he picked up a lavish lifestyle that would soon be his destruction and bring him behind bars. After purchasing many art pieces in 2002 the SEC (security and Exchange commission: is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry) started an investigation and accused him of failing to pay taxes of about $1 million dollars, but as the investigation proceeded the case became more complicated as it turned out that CEO Dennis Kozlowski and CFO Mark Swartz have been looting Tyco International of more than $600 million. Examples of how this was possible are following: -Over the years they have been giving themselves interest free loans from the company and then later on forgave themselves for it through Mark Schwartz falsifying documents. -Dennis Kozlowski gave himself bonuses to repay the debt. -They sold stocks at inflated prices. The biggest crime that happened here was that Kozlowski and Schwartz abused their power of control to steal from and lie to the stockowners. The journal Business Week posted Kozlowski as one of their TOP 25 CEOs in 2000. That is how good people thought he was. The money that was used to buy houses and silly things like $6000 shower curtains should have been used to push the company further or given to the shareholders. But bottom line is stealing is stealing. 4|P a ge

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Money and Capital Market

I believe Tyco has only did one thing wrong, trusting their CEO too much. They believed that Kozlowski was sharing the same ideas and goals that the company represents as he has proven to them many times when he closed up million dollar deals that made a fortune for them. Instead he used the company funds like a private bank and spent it like it was his money. I think Tyco did the right thing by replacing top management right away after the issue occurred. They hired Edward Breen as their new CEO, who invested a lot of time and money to communicate to the public that Tyco International is operating in many parts of the world and that they are trustworthy even though their former CEO failed to do so. It may be very far away from having the trust of investors again, but they took a step in the right direction.

Tyco Internationals Improvements:

A high-profile corporate scandal at Tyco has eroded investor confidence and led to sweeping new federal regulations. And for leaders of firm, they have posed the question: How can we scandalproof our own corporate governance to avoid such disasters? Eric Pillmore, senior vice president of corporate governance at Tyco, who helped to rebuild the company's governance, examined insights from his experiences during a recent session. The CEO Ed Breen appointed Pillmore to fill a new position as senior vice president of corporate governance. Tyco actually had a strong underlying business, so there was an opportunity to turn around the company. But how could Tyco restore the credibility of the board and leadership in the eyes of shareholders? Before he was hired, Breen had asked every member of the board if they would be prepared to resign if asked. They all agreed. Ultimately, they installed a new board within the first year of Breen's tenure. Breen's bold actions were key to turning around the company. "He succeeded as CEO because he was decisive," Pillmore said. "He made a lot of decisions very rapidly. When you are in crisis, you can be paralyzed by itor you can act."

Governance challenges:
Strong functional leadership and mentoring are critical to the ongoing development of high-integrity leaders and employees:
Absolute power tends to corrupt. Top leaders need strong functional leaders who can push back. Functional leaders can temper the ambitions of the top leader.

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According to Pillmore, There was little mentoring in their functions. Mark Swartz was a deal guy. He was not broad cross-functional leader. He made headlines in the CFO (Chief Financial Officer) magazines as the highest-paid CFOs. At Tyco, Kozlowski took the company from $300 million to $36 billion with essentially the same leadership team. According to Pillmore, Kozlowski made structure of loyalty around him with little accountability.

Leaders must have a "web of accountability" surrounding them, with process disciplines in place to hold them accountable:
Leaders at the companies that ran into trouble had few systematic constraints on their actions. Pillmore said."Any CEO is doomed to fail without an accountability structure around them. I don't care how good they think they might be, or how strong their integrity. With pressures to make earnings forecasts, you are asking for trouble without that structure in place." How leaders in company are held accountable? What structures and processes ensure that they are called to task? Even if systems are working well with current executives who have high integrity, how could they be open to abuse in the future by less ethical leaders?

Boards and senior leadership teams must develop and implement sophisticated means to evaluate senior management character:
In the companies that got into trouble, managers were evaluated based on their ability to hit their numbers, but there wasn't much assessment of their character. "The boards had little idea of the character of these people that ran their companies, "Pillmore said. Tyco now evaluates 10 character traits of top managers annually. It looks for qualities such as "managerial courage." "You want people in the grassroots of the organization who are empowered to be courageous," Pillmore said. "Leaders create the environment that makes it comfortable to be courageous." Does company evaluate the character of its senior leaders or merely track their contributions to financial performance? Does the firm encourage people to be courageous? What aspects of character are most important to the long-term success of firm?

Rebuilding Tyco:
How did Tyco go about turning around its own governance? To transform itself, the company changed leadership, policies, and communications. To strengthen leadership, Breen brought in a new board of directors and a new corporate team. He also established Pillmore's position and an ombudsmanboth reporting directly to 6|P a ge

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the board. The company also created policies to support good governance. The guiding principle: If Dennis Kozlowski were dropped back into the company, where is the structure that could prevent wrongdoing? Policies included board guidelines and committee charters, delegation of authority, a guide to ethical conduct for every employee around the world, proactive responses to shareholder concerns, and a new compensation plan. Finally, the organization concentrated on improving employee communications, so the values and policies were disseminated broadly throughout the organization. Among other vehicles, it distributed a Passport for Ethical Leadership to employees, outlining prevention techniques, how to recognize risk factors, and how to handle issues when they arise. The passport helps employees to recognize and prevent bribery, discrimination and harassment, conflicts of interest, and environment, health, and safety issues. Pillmore said that Tyco has a real mechanism for follow-up. The company receives about 4,000 calls annually to its hotline, of which 400 serious cases are investigated. This has resulted in more than 200 terminations in the company each year. The cases are publicized to all 250,000 employees "in living color" so other employees can identify the lessons learned. "We are trying to create a culture where a quarter-million employees are on watch trying to protect shareholders' assets, "Pillmore said. The impact of these changes has already been recognized by shareholders, employees, and outside experts. For example, the company's ranking on the governance index by Governance Metrics International jumped from a dismal 1.5 (on a scale of 1 to 10) in December 2002 to 9.5 in June of 2006. Even so, the biggest lesson of past corporate scandal is that company has to keep raising the bar. "We have made tremendous progress; but this is a marathon, not a sprint," Pillmore said.

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