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Unethical issues or legal issues in Tyco International
The objective of this report is to identify whether there are any unethical issues or legal issues existed in Tyco International. Moreover, we should be able to describe relevant ethical issues and thus apply the concepts into the real life example. Throughout this report, we can aware of the consequences of the unethical behaviours and also help us to learn from the mistake done by the leader In Tyco International.
1.2 Summary of the case
Tyco Incorporated was founded in 1960 by Arthur J. Rosenberg, situated in Waltham, Massachusetts. In 1982, to strengthen the company, Tyco were divided into three business segments which are fire protection, electronics and packaging. Tyco reorganized the company again in the 1990s which included electrical and electronic components, health-care and specialty products, fire and security services, and flow control. By 2000 Tyco Inc., had acquired more than three major companies such as ADT, the CIT Group, and Raychem.
In 1992, Leo Dennis Kozlowski became the CEO after climbed up from executive, company’s president, and CFO position. Kozlowski used an aggressive approach to gain acquisitions and mergers during his period as a CEO. In choosing the Tyco Inc. board of directors, Kozlowski only picked his own crony and composed the firm’s corporate governance system.
In 1999, after a stock split, rumours began to spread about Tyco’s accounting habits. It was said that Tyco was producing irregular financial accounts, but it was denied by Tyco’s leaders. Throughout the years of Kozlowski’s leadership, Tyco merged and bought out several companies, making their profits grow beyond $30 billion.
The Tyco’s scandal was taken place in 2002 when the board of directors launched an investigation about their members’ incorrect behaviour. Kozlowski and his few “friends" were resigned and have been dragged to the court. Kozlowski and Swartz, the Chief Finance Officer (CFO) of Tyco Inc were alleged for stealing $170 million from the company and fraudulently selling an additional $430 million in stock options. Kozlowski and few Tyco’s board of directors also been accused in embezzling of Tyco fund for their private used and were cited for conflict of interest issues. This scandal has caused the shares value decreased drastically and made the workers breathless. After the resignation of Kozlowski, Tyco was led by Edward Breen and the firm have been saved.
2.0 Issue Identification and Analysis of Facts
2.1. Major Issue: Conflict of interest Issues
In the case study of Tyco International, the major issue that the case focusing are the issues of conflict of interest. A conflict of interest exists when a person holds a position of trust involves in a situation where his personal interests or obligations are incongruence with the interest of those who give him trust. Besides, conflict of interest also happens when a person give priority to self interest rather than the interest of the party they serve.
The leaders in Tyco International were caught for involving in various unethical deeds. While they were holding the position of trust as board of directors, they involved themselves in issues that conflict with their positions. All the crimes they did showed that they gave priority to self interest rather than the interest of the shareholders of the company. The following are the issues that involved with conflict of interest that were in the case study. These issues will be clearly explained below.
2.1.1: Leaders’ Embezzlement of Company Funds
Embezzling fund is a big issue which involved conflict of interest in this case study. Embezzlement is a kind of financial fraud. It involved the act of dishonestly appropriating assets by one or more individuals to whom such assets have been entrusted. This act is a conflict of interest in this case study as the leaders in Tyco International give priority to self interest rather than the interests of the shareholders and stakeholders. In order to fulfil self interest, luxurious life, the leaders embezzled the company funds that should be used to manage the company in the best interest of shareholders and stakeholders. The deeds of the leaders in the company were unethical.
The deed of embezzling company fund had breached the principle of ends. According to the principle of ends, we must never exploit others to achieve our own objective. In this case, Kozlowski had exploited the company by using company fund to fulfil his own desire of having a lavish lifestyle. From the case, we could identify that Kozlowski had exploited the right of his employees by taking a large amount from a program that could help the employees to buy company stock in order to buy himself luxury homes, yachts and fine arts. Besides Kozlowski, another director, Lord Michael Ashcroft also involved himself in misappropriating the company fund. He used Tyco funds to purchase a home. Their deeds were unethical; they should not exploit others for their own benefits.
Furthermore, the principles of duty were also breached by the board of directors in Tyco International by embezzling company fund. Principles of duty apply that each person has his or her own duty or obligation that he or she should fulfil as a human being. In this case, Kozlowski and other directors had their duties to manage the company well. However, they did not manage the company well as they had misappropriated the funds. Embezzling fund had caused them did not fulfilled their duties and violated them. This is again proved that they had been wrong in their deeds.
Why is embezzling fund happened in Tyco International and almost all the directors were involved in it? According to our analysis towards the case, corporate culture played important role. Thorsen (n.d.) explained that corporate culture is an energy field that determines how people think, act, and view the world around them. Culture is automatically created out of the combined thoughts, energies, and attitudes of the people in the group. In another word, culture will shape people’s attitude that are come from the same group. Tyco International did not emphasize an ethical corporate culture during the empire of Kozlowski. Gaining personal interest than on the interests of the company had became the corporate culture of Tyco International.
Cultivation of this culture created assumption to the directors that embezzling fund is correct and is a normal thing to apply in the company. Unethical corporate culture could not maintain the sustainability of the company. In this case, Tyco International was nearly corrupted or ruined because of the unethical corporate culture. However, new management team had saved the company by promoting ethical conducts. Hence, corporate culture is the reason caused embezzling fund among the boards of directors.
Corporate culture shaping can be seriously influenced by leadership. Leader is important in shaping the corporate culture as most of the employees were guided by ‘tone at the top’. Leader’s behaviour, personality, acts in the company would always been set as example in the company. The unethical corporate culture in Tyco International was due to the unethical leadership of CEO of the company, Kozlowski. The example set by Kozlowski to misappropriate the fund of company had been followed by the other directors. Hinrich (2007) mentioned that the subordinates could be influenced by the leaders to engage in crime if they act as a follower to their leaders. On the other hand, Kozlowski he himself was also influenced by his former mentor and leader, Joseph Gaziano. Kozlowski admired Gaziano’s lavish lifestyle and later during his empire in Tyco International, he imitated the lifestyle of Gaziano. He gave himself luxurious lifestyle by using company fund.
Hence, embezzling fund is an unethical issue in the case study.
Another ethical issue under conflict of interest in the scandal of Tyco International is bribery. Bribery involves offering or accepting something of value in a situation where the person who accepts the bribe is expected to perform a service which goes beyond his or her normal job description. In many regions of the world, bribery is considered a crime, and it can be severely punished. This issue is a conflict of interest because the directors of Tyco have used their position of trust in the company to fulfil their personal interest rather than the shareholders interest which is to manage the company well.
In this scandal, two major bribery cases were occurred. The first case is Frank E. Walsh Jr., the director of Tyco International had received $20 million for helping the arrangement of the acquisition of CIT Group without the knowledge of the rest of the board of director. Next, the second case is Stephen W. Foss, the member of Tyco’s board of director received $751 101 for supplying a Cessna Citation aircraft and pilot services.
Bribery is an unethical behaviour because it violated the Utilitarianism Theory. According to Bellevue College (n.d.), utilitarianism is a moral theory that applies to particular actions and takes an action to be morally right if and only if it produces the highest utility of any available alternative action. It also can be said that we should act in ways that bring most pleasure or happiness to the greatest number of people affected by our actions or else the action is wrong.
As mentioned above, Foss received “commission" for supplying aircraft and pilot services to Tyco International. It is unethical because Foss have failed to consider all the consequences to all parties that effected. He should also consider for other companies that intended to supply the services to Tyco International. By doing this also, he was undermining the bidding system if Tyco using this system to choose the supplier.
Besides principles of utilitarianism, this company also had abused the principle of rights. Principle of rights is the duty-based principle. In this principle, one should not make decisions based upon the consequences but should observe his or her duties as human being rights. The employees and the shareholders have the rights to know the company actual activities. Based on what Frank E. Walsh Jr., he should disclose the information to the management group and the shareholders about the fees that he received from the arrangement of the acquisition of CIT Group. Ironically, Walsh has refused to do so and he took all the “fees" for his personal use. With this kind of act, he had broken the rules and it is an unlawful behaviour.
2.1.3: Accounting Fraud
The third ethical issue in Tyco case that relate to conflict of interest is accounting fraud. Accounting fraud can be described as any act or attempt to manipulate the financial statement for financial gain. It can be one of the legal issues in this case because it consists of fraud which is unlawful in written law. The conflict of interest arises in this case because the auditors, accountants, and executives of Tyco International erode trust and their personal interest has greatly varied with the interest of shareholders and the stakeholders in Tyco. They tend to sacrifice the quality of financial reporting information for their personal interest.
In this case, Tyco International failed to give true financial picture for several years. Dennis Kozlowski, Mark Swartz and Mark A. Belnick were those Tyco’s executives who committed fraud by charged with falsifying business record to conceal a great amount of loan without approval. Besides, it had been found out that Tyco engaged in “financial gimmicky" to deliberate and manipulating its earnings. Jerry Boggess, the president of Tyco Fire and Security is the one who involved in bookkeeping fraud that affected the earning per share in Tyco in this case. Besides, Dennis Kozlowski also indicted on tax evasion for avoiding just over $1 million in New York State and local sales tax (Andrew and Alex, 2002). In addition, Scalzo (Tyco’s former auditor) who audited Tyco's financials from the years 1997 until 2001, found that he failed to conduct sufficient steps in audit procedures which related to certain executive benefits, executive compensation, and related party transactions. Furthermore, he also engaged in improper professional conduct (Taub, 2003).
The act of those executives violated the principle of utilitarianism. Based on this theory, we should act in a way that produces the greatest happiness to the greater number of people affected by our action. The executives failed to consider certain persons who may be affected by their actions. Because the company's true value is unknowable, the investors cannot evaluate and analyst the company’s performance which indirectly will cause wrong decision making. Not only that, tax evasion of the company will cause the government lose the chance to invest the money for development process. Moreover, the company does not has the opportunity to use those extra expenses that concealed by the executives in other areas. In addition, top management could not compare their company performances with other company as their financial statement does not provide true picture.
It is also unethical based on the principle of rights which is the right that are the result of particular roles and special relationship. The government, shareholders and creditors have the right to know the accurate figures of the financial statement and true position of the company’s performance. Any act that violated the human rights is deemed unethical.
On the other hand, accountants and auditors in this case have breached their fiduciary duty. They failed to provide an accuracy and reliability of financial statement and failed to act in best interest of shareholders and stakeholders (creditors, bankers and the users of financial information). They involved in earnings management and tried to overstate the earning to show a more favourable statement. It is also called as deception because they provided false statement and created untrue position.
As a conclusion for the issues discussed for conflict of interest, the company had taken some actions. The actions taken include enhanced corporate governance practice, applied more conservative accounting to replace the pattern of aggressive accounting that adopted previously, replacing a completely new board of directors and more. These actions bring good effects to the company and increased ethical conducts of the company.
2.2 Minor Issue: Inappropriate discharge of employees
Inappropriate discharge of employees is a minor ethical issue in this case. Inappropriate discharge of employees means that the employees were forced to be terminated by the employer without justice. In this case, Dennis Kozlowski had discharged the employees without any notice when he found out that some of the merged company did not perform well in producing the revenue. Apart from that, those who give unfavourable review to Tyco will be dismissed by Kozlowski including David, a short seller who only expressed his opinion on the acquisition of Tyco by using large reserves. Besides, Jeanne Terrile (stock analyst of Tyco) was fired because of giving adverse opinion on Tyco rapid acquisitions and mergers.
The CEO of Tyco International, Kozlowski cannot victimize their employees without appropriate reason. He failed to follow two basic principles under discharge of employees. He fired the employees without looking at their related job performances. It has violated the principle of just cause. Besides, Kozlowski does not refer to the fairness of procedures used to discharge the employees also contravene to the principle of due process. He failed to give the notice to the employees and failed to make compensation and pension to the employees that have been discharged by him. In this case, he does not treat his employees fairly and justly.
In addition, the way of Kozlowski treated his employees is one kind of abuse of official position. He abused his power as CEO by treating the employees unfairly and unjustly and discharged them as he like without any appropriate reason.
On the other hand, employees have the right to speak and have the right to be treated fairly and justly. The employer in this case had violated the employee’s right. For example, it is the duty for the Jeanne Terrile, stock analyst to comment the actual performance of Tyco International, he has the right to speak out the true picture of Tyco. Kozlowski should respect his opinion.
Moreover, based on the principle of universalizability, we should treat others the way you want to be treated. In this case, Kozlowski must put herself as an employee of the company, he may don’t want his employers fired him without any appropriate reason.
Apart from that, based on principle to ends, we must respect humanity and never exploit others to achieve our objectives. In this case, Kozlowski who behave in profit oriented exploited the employees by eliminated anyone that did not produce revenue to the company. His act is unethical.
3.0 Recommendations and Conclusion
After the analysis of problem issued from case study, we would like to give some recommendations in order to improve the situation of the company.
Conflict of interest was the major issue in this case. The new management in the company had elected a completely new board of director and assigned an independent person to be the chairman, rather than a CEO to avoid the conflict of interest to happen again. The actions taken by the company could be effective.
However, in our opinion, the company should also cultivate an ethical corporate culture. To do so, code of conduct should be set by the company. International Labour Organization (n.d.) mentioned that code of conduct is a company’s statement to explain ethical standards and applications that should be apply by the employees. Code of conduct could promote ethical and moral deeds among the employees in the company. By following the code of conduct, the employees could avoid themselves from convicting in conflict of interest. The guidelines to the code of conduct should be given to employees so that employees could further understand it.
Besides the set of code of conduct, the company should also organize seminars and training for the employees in order to teach the employees to deal with issue that related with conflict of interest for example the issue mentioned in the analysis before, which are embezzling fund, accounting fraud, bribery and etc. Whistle blowing culture should be encouraged to the employees during the training and seminars.
Whistle blowing is an act that raises concern towards the person who involved in wrong doing. While promoting the whistle blowing, the company should also set up protections towards the whistle blower to protect them from the possibility of being boycott by the colleagues. The protections given could at the same time enable the whistle blower to raise the wrong doing of others without any fear. The example of the protection that can be given by the company includes keep the information of the whistle blower confidential. With a whistle blowing culture, the fraud that may happen could be reduced.
Just as what had been mentioned in the analysis, leadership plays important role in shaping corporate culture. The top management should have ethical leadership so that the subordinates could have a good role model to follow. ‘A right tone at the top’ is important to be set by the leaders to encourage the ethical conduct among the employees. A leader who is responsible and honest can help promote and transfer his or her ethical and moral value to the subordinates. Hence, while recruiting new manager or promoting an employee to become a manager, the criteria that company should consider and emphasize not only the ability but also the personality and ethical view of the person.
For the issue of inappropriate discharge of employees, we suggest that Tyco International should provide sufficient notice and pay sufficient compensation to the employees who have been discharged. The company should set the fairness procedures in the process of discharging employees. The executive of Tyco should know that employees are primary stakeholder in the company. They should protect the employee’s right and respect them.
In every business, the company will always facing such ethical dilemmas and then raise the ethical issues. Most of the ethical issues in the Tyco International related to conflict of interest. Embezzling fund, bribery, accounting fraud were all the issues that we had mentioned in the paragraphs before which relate to conflict of interest. All these issues were also unethical in other perspective besides from the perspective of conflict of interest. These issues had also breached other ethical theories which we had further explained.
Due to the unethical issues that rose in the company, Tyco International had faced the problem of sustainability. The company was nearly ruined by the unethical leaders. From this point of view, we could conclude that ethics played crucial role in sustaining the company. A company without ethical conducts will not last longer than a company which has high and good ethical conduct.
As a conclusion, the company should play their roles by properly managed their company by following the code of conduct and effectively controlled in all division. By doing that, the company will run their businesses in ethical way and those unethical issues such as embezzlement of fund, inappropriate employees discharge, giving or receiving bribes, and also accounting fraud will not happen again or at least will be decrease.