The Tyco, Case Study Example

There were several reasons why Kozlowski wanted to avoid paying taxes on his art purchases. First of all, there was the money reason as it allowed him to avoid paying taxes and internet research does indicate that it is a common practice among art collectors who do not like New York’s high tax rate (O’Brien, 2004). But even more than money, it was probably Kozlowski’s intention to hide use of Tyco’s money to pay for the paintings. Kozlowski could have indicated the purchase of art on his personal income statement in which case he would have to personally pay for the taxes or he could have indicate it as a corporate purchase. If he had indicated it as a corporate purchase, the board might have required the paintings to be hanged in corporate headquarters because paintings would be considered corporate property and not Kozlowski’s personal property. Thus, the best solution to both avoid paying taxes as well as hide the fact that corporate money was used to purchase the painting, was to ship paintings out-of-state and prevent any kind of disclosure to the government or the company’s board.

Commingling assets means to mix funds belonging to one party with funds belonging to the other party (LaMance). As far as Tyco in concerned, commingling assets became a routine for CEO Dennis Kozlowski and his CFO Mark Swartz. First of all, Kozlowski used corporate money to purchase his $18.5 million apartment in New York. Kozlowski and Swartz paid bribes to Tyco board member and other employees to stay silent on fraudulent activities through disbursement of stock awards and bonuses that had not been authorized in the first place.

Kozlowski and Swartz also took personal loans from the company that were never paid and even modified the program that was meant to help executives pay taxes on stock options. The new program allowed Kozlowski, Swartz and others to obtain loans for literally any purpose and Kozlowski used the loans to purchase paintings, real estate, yacht, and personal jewelry. Similarly, Kozlowski and Swartz borrowed $78 million from Tyco’s real estate relocation program to purchase real estate and meet other personal expenses even though the program was designed to help employees relocate from New Hampshire office to Boca Raton office. When Kozlowski held birthday celebration for his wife, he used corporate money under the pretension that the funds were being used to hold a business function including board of directors meeting. Swartz even modified the Key Employee ReLocation Program to also pay for private school tuition of executives’ children as he had school aged children at the time.

Kozlowski also paid $20 million to board member Frank Walsh Jr. for helping Tyco buy CIT Group even though board members were not supposed to be compensated for helping the company with acquisitions. Kozlowski and Swartz were not the only people who mixed personal expenditures with corporate funds. Tyco’s legal counsel Mark Belnick bought residences in New York and Utah with corporate money. Many employees at Tyco had company cars yet they continued to receive car allowance payments.

Kozlowski and Swartz were not the only ones to obtain loans from the company’s Key Employee Loan Program that was intended to help employees pay taxes on exercising their stock options. Company’s secretary Barbara Jacques also took $1 million from the program which Kozlowski forgave. Kozlowski also used his loan account to pay for restaurant bills, his $8.3 million investment in the New Jersey Nets, and buy Porsche Carrera car for his future wife. He didn’t stop here and even used the loan account for purchasing a $5 million diamond ring for his wife.

Kozlowski and Swartz even introduced the Tyco Bonus program without board’s approval under which both executives received loan forgiveness of $33 million and $16.6 million, respectively. Similarly, 48 other employees also received forgiveness of about $50 million approximately.

The board of directors did have some opportunities to detect the adjustments taking place in many different programs at Tyco if they were properly doing their job and not just assuming formal roles.If they had kept their eyes and ears opened, they might have gotten clues of potential wrongdoings. For example, use of corporate funds by Kozlowski to organize private party for wife under the pretext that the event was a business function should also have alarmed the board of directors about other potential misuse of corporate funds and persuade them to launch an internal investigation.

But on the most part, it would have been very difficult for board of directors to detect adjustments taking part in many different programs at Tyco because Kozlowski and Swartz were running the company just as criminal syndicates run their organizations. The top executives made rules and modified programs as they saw fit, often without the knowledge of the board of directors. One of the reasons why board of directors failed to do their jobs properly was also the instances of corruption by individual board members who didn’t let their colleagues know of their personal wrongdoings.

Boca Raton home was owned by Tyco’s board member Lord Michael Ashcroft who didn’t sell the home directly to Tyco but indirectly by selling the home to his wife first who then sold the home to Tyco Vice President Byron Kalogerous. Similarly, Kozlowski and Swartz approved bonuses to employees to buy their loyalty without board approval and board is not involved in day-to-day operations so it would have been difficult for them to find about unauthorized bonuses. Kozlowski and Swartz also used the loan programs such as the one intended to help executives pay taxes on stock options exercise, for personal use without board’s knowledge.

Other examples of corruption within board included board member David Boies who admitted paying $20 million to legal counsel Mark Belnick without disclosing the payment to the board. Board member John Fort didn’t disclose to his colleagues that he was an investor and advisor for a company which bought Tyco’s flow-control products division. Similarly, another board member Stephen Foss had a business relationship with the leasing of an airplane to Tyco which was a clear conflict of interest. Another board member Richard Bodman accepted $5 million investment from Kozlowski in an investment fund Bodman ran. When Frank Walsh accepted a finder fee of $20 million from Kozlowski for helping Tyco acquire CIT Group, Walsh also failed to disclose the payment to his colleagues.

It is clear that not only Kozlowski and Swartz hid their activities from the board of members but even individual board of members also failed to disclose required information to their colleagues or didn’t take steps to prevent conflict of interest. One cannot blame board for activities that Kozlowski and Swartz engaged in without seeking board’s approval but board’s members also lacked integrity and didn’t take their job of protecting shareholders’ interests seriously. With little effort, they should have gotten clues of wrongdoing by the management which could have persuaded them to engage in more thorough investigation, the kind they did only after Kozlowski and Swartz had been fired from the company.

References

LaMance, K. (n.d.). Commingling Property in Divorce. Retrieved from http://www.legalmatch.com/law-library/article/commingling-property-in-divorce.html

O’Brien, T. L. (2004, May 9). Corporate Art Lovers Who Hate That Big Tax Bill. Retrieved from http://www.nytimes.com/2004/05/09/business/corporate-art-lovers-who-hate-that-big-tax-bill.html?pagewanted=all&src=pm