Questionable Actions by the Questionable Actions by the Chairman of Tyco Chairman of Tyco

International LimitedInternational Limited

Group 1: Rachel Alexander, Group 1: Rachel Alexander, Jonathan Crawford, Matt Kambic, Jonathan Crawford, Matt Kambic, You-Chen Lu, and Brittany SnyderYou-Chen Lu, and Brittany Snyder

OverviewOverview

Introduction and Summary of Situation – Introduction and Summary of Situation – Matt KambicMatt KambicBenefits and Harms – You-Chen LuBenefits and Harms – You-Chen LuRights Involved – Brittany SnyderRights Involved – Brittany SnyderEconomic, Legal, and Ethical Situation – Economic, Legal, and Ethical Situation – Rachel AlexanderRachel AlexanderMoral Solution and Conclusion – Jonathan Moral Solution and Conclusion – Jonathan CrawfordCrawfordQ & A – GroupQ & A – Group

Company Information for Tyco Company Information for Tyco International LimitedInternational Limited

Domestic ManufacturerDomestic Manufacturer ElectronicsElectronics Fire and Security TechnologyFire and Security Technology HealthcareHealthcare Engineered Products and ServicesEngineered Products and Services

Among market leaders in all industriesAmong market leaders in all industries

Global companyGlobal company

Company Performance HistoryCompany Performance HistoryPrior to July 1992Prior to July 1992 Net Profits = $95 millionNet Profits = $95 million Return on Sales = 3.1%Return on Sales = 3.1% Stock Price $4.30Stock Price $4.30

July 1992July 1992 Hired Dennis Kozlowski as CEO and President of Hired Dennis Kozlowski as CEO and President of

OperationsOperations

July 2001July 2001 Net Profits = $5.1 billionNet Profits = $5.1 billion Return on Sales = 13.8%Return on Sales = 13.8% Share Price = $58.00Share Price = $58.00

Kozlowski’s RewardsKozlowski’s Rewards

Praised for company performancePraised for company performance

Substantially rewardedSubstantially rewarded $25 million salary$25 million salary $86 million stocks options sales$86 million stocks options sales

First InvestigationFirst Investigation

SEC launched investigation in late 1999SEC launched investigation in late 1999FindingsFindings Overstated expected costs of new Overstated expected costs of new

acquisitionsacquisitions Made acquisitions appear financially unstableMade acquisitions appear financially unstable

ResultsResults Technically no laws were brokenTechnically no laws were broken Tyco agreed to restate earningsTyco agreed to restate earnings No fines assessed or penalties imposedNo fines assessed or penalties imposed

Second InvestigationSecond InvestigationJune 2004June 2004

CEO Dennis Kozlowski and CFO Mark CEO Dennis Kozlowski and CFO Mark SwartzSwartz

Tax EvasionTax Evasion

Improper use of company fundsImproper use of company funds See Next SlideSee Next Slide

Payoffs were paid to directors to cover upPayoffs were paid to directors to cover up

Undisclosed stock salesUndisclosed stock sales $430 million made by Kozlowski and Swartz$430 million made by Kozlowski and Swartz

Use of Company Funds for Private Use of Company Funds for Private PurposesPurposes

$13.8 million for paintings$13.8 million for paintings

$2.5 million for a home in Florida$2.5 million for a home in Florida

$9 million for additional property$9 million for additional property

$5 million for Massachusetts property$5 million for Massachusetts property

$900,000 for Connecticut property$900,000 for Connecticut property

$240,000 jewelry for Mrs. Kozlowski$240,000 jewelry for Mrs. Kozlowski

Many more…Many more…

Ethical QuestionEthical Question

How wrong were Kozlowski and Swartz?How wrong were Kozlowski and Swartz?

Totally “Wrong” ?Totally “Wrong” ?

Somewhat “Wrong”, still did good for Somewhat “Wrong”, still did good for company?company?

NOT WRONG AT ALL

SOMEWHAT WRONG

COMPLETELY WRONG

Benefit to SomeBenefit to Some

Company’s CEO Dennis Kozlowski, and Company’s CEO Dennis Kozlowski, and CFO Mark SwartzCFO Mark Swartz

Inside and outside directors who were Inside and outside directors who were involved involved

Company saves on taxesCompany saves on taxes

Company and employeesCompany and employees

CustomersCustomers

Harm to OthersHarm to Others

TycoTycoGovernmentGovernmentIntegrity of the company’s CEO and CFOIntegrity of the company’s CEO and CFOCompany’s reputationCompany’s reputation PerformancePerformance Stock priceStock price Employees and their families Employees and their families Executives that were not involvedExecutives that were not involved StockholdersStockholders

Rights ExercisedRights Exercised

Kozlowski’s right to live Kozlowski’s right to live lavishlylavishly

Board’s right to spend the Board’s right to spend the company’s money as it sees company’s money as it sees fitfit

Right to overestimate future Right to overestimate future costs costs

Right of the SEC to Right of the SEC to investigateinvestigate

Rights DeniedRights Denied

Right of the government to tax its citizensRight of the government to tax its citizens

Rights of the citizens of New York for fair Rights of the citizens of New York for fair taxestaxes

Rights of the company’s employees and Rights of the company’s employees and shareholders to fair, honest reportingshareholders to fair, honest reporting Spending of corporate dollarsSpending of corporate dollars AcquisitionsAcquisitions

Moral QuestionsMoral Questions

Is it right to make another company Is it right to make another company appear more unstable that it really is?appear more unstable that it really is?

Is it right to use corporate money for Is it right to use corporate money for personal use?personal use?

Is it right to bribe board members?Is it right to bribe board members?

Is it right to have undisclosed sales of Is it right to have undisclosed sales of stocks?stocks?

Economic OutcomesEconomic Outcomes

Pre Kozlowski: Pre Kozlowski: Stock - $4.30 per shareStock - $4.30 per share

Ten years later:Ten years later:Stock - $58 per shareStock - $58 per share

Post Kozlowski:Post Kozlowski:Stock – $16.05 per shareStock – $16.05 per share

Economic OutcomesEconomic Outcomes

Extravagant purchases helped to boost Extravagant purchases helped to boost economyeconomy

Purchases took away profit from Tyco Purchases took away profit from Tyco International Ltd., its employees, and International Ltd., its employees, and shareholdersshareholders

Legal RequirementsLegal Requirements

No law against overstating future costNo law against overstating future cost

Tyco would restate earningsTyco would restate earnings

June 2004: Tax evasion chargesJune 2004: Tax evasion charges

Personal purchases as companies Personal purchases as companies expenseexpense

““What is legal, is not always right!”What is legal, is not always right!”

Ethical DutiesEthical Duties

Public Company: Financial Statements – Public Company: Financial Statements – Overstating expensesOverstating expenses

AcquisitionsAcquisitions

Undisclosed sales of stockUndisclosed sales of stock

Company funds for personal expensesCompany funds for personal expenses

Special “bonuses” to keep quiet!Special “bonuses” to keep quiet!

Kozlowski, CEO – Tax EvasionKozlowski, CEO – Tax Evasion

Kozlowski and Social ResponsibilityKozlowski and Social Responsibility

Kozlowski falls between the Obstructionist Kozlowski falls between the Obstructionist and Defensive Approaches and Defensive Approaches

The Court’s Decision: The Court’s Decision: CONVICTEDCONVICTED

Fraud against shareholders of over Fraud against shareholders of over $400 million$400 million

22 counts of grand larceny for 22 counts of grand larceny for unauthorized bonuses totaling over unauthorized bonuses totaling over $150 million$150 million

Currently serving 8 to 25 years in prisonCurrently serving 8 to 25 years in prison

Moral SolutionMoral Solution

Support the Court’s decision Support the Court’s decision ““Superstar” status among CEO’s does not Superstar” status among CEO’s does not forgive ethical misconductforgive ethical misconductWas aware of the ‘fine print’ and knowingly Was aware of the ‘fine print’ and knowingly Cheated Cheated LiedLied Broke the lawBroke the law

Not isolated incidentsNot isolated incidents

ConclusionConclusion

Matt Kambic - Introduction and History of Matt Kambic - Introduction and History of CompanyCompanyYou-Chen Lu - Benefits and HarmsYou-Chen Lu - Benefits and HarmsBrittany Snyder - Rights Exercised / Rights Brittany Snyder - Rights Exercised / Rights DeniedDeniedRachel Alexander - Economic Rachel Alexander - Economic Outcomes/Legal Requirements/Ethical Outcomes/Legal Requirements/Ethical DutiesDutiesJonathan Crawford - Moral SolutionJonathan Crawford - Moral Solution

Q & AQ & A