Unethical Behavior and its Costs

4 August 2013

Unethical Behavior and its Cost 1

The Fall of Dennis Kozlowski

Many leaders work hard and strive diligently to lead companies to success and wealth in an ethical manner. In doing so, the reputation of the company is enhanced as are the benefits to the shareholders and the public. That notwithstanding, some leaders have been identified with exhibiting poor judgement and gross unethical behavior (Stephens, Vance, Pettegrew, 2012). The underlying reasons for these failures on the part of individual leaders can be traced back to a lack of moral and ethical standards. The downfall of former Tyco International CEO, Dennis Kozlowski, is just one of many examples.
Background
Kozlowski reputedly came from a middle-class background. His parents were public service employees and sent their son to Seton Hall University, a Catholic school. Kozlowski graduated from Seton Hall University in 1968 and gained employment in auditing. Later, in 1975, Kozlowski gained a position with Tyco and had a phenomenal rise in the company. In 1989, his was promoted to President and Chief Operating Officer and three years later, he was promoted to Chief Executive Officer, only 17 years after joining Tyco. Somewhere along the way, the good Catholic education and standards provided by his second-generation Polish-American parents went astray (biography).
Undoubtedly Kozlowski excelled in his executive position raising Tyco's mergers and acquisitions to unprecedented levels and to vastly increasing revenues, up 48 % for four years in his last four years with TYCO. At the same time, Kozlowski dramatically increased his own wealth. Living lavishly, even extravagantly, Kozlowski lived an over-the-top lifestyle (Kaplan, 2009). There is no crime or sin in doing well in America, it's a capitalist country, but doing so in an illegal manner is a crime and doing so unethically is a sin. Kozlowski committed both crimes and sins.

Unethical Behavior and its Costs 2
The Sign of the Times
Part of the issue with the Tyco case came from the particular culture of the time. In the 1980s and 1990s, the culture in many businesses changed. Instead of the companies' boards being the arbiters, a new era of the “Imperial CEO” came about (Sweeney, 2002). Sweeney further opined “when the tone is set and totally controlled by the boss, the requisite checks and balances may be lacking.” Passivity at the board level prevailed which allowed situations like Enron, AOL, Lehman Brothers, Tyco and others to occur (Stephens, Vance & Pettegrew, 2012, p. 17). There was a lack of transparency, financial statements were not audited forthrightly, compensation committees were ineffective and other such egregious activities (Seewney, 2002). In essence, CEOs were given carte blanche to do as they pleased.
Actions such as these eventually had an impact on others in the workforce and the actions began to stair-step down to lower echelons of the companies. As others adopted this ethos, operating outside the normal moral and ethical boundaries, it became the standard for many of companies (Stevens, Vance, & Pettegrew, 2001, p.18).
Kozlowski's Outcome
Leonard Dennis Kowzlowski, born November 19, 1946, had to answer for his activities. He was tried and convicted on 38 felony counts. He received a prison sentence of eight to 25 years in a New York correctional facility. Some of the more egregious charges for which he was convicted: Evading $1 million in New York sales tax from purchases of $14.725 million of fine art. Misappropriating more than $400 million of Tyco corporate funds. Taking $81 million in unauthorized personal bonuses.
Not only did Kozlowsky get sentenced to jail, he lost his home which was sold by Tyco in 2004 to help recoup some of the money Kozlowski had taken illegally. His wife also divorced him.
Unethical Behavior and its Cost 3 You Do the Crime, You Do the Time
There are some people who believe Kozlowski's sentence was unjustified; David A. Kaplan is one of those people. Kaplan “argues that if greed alone were grounds for imprisonment, much of Wall Street would be in jail. He further argues that Michael Milken, who also was in the public eye for receiving hundred of millions of dollars nefariously, only received a two year sentence. (Kaplan, 2009, p. 14). This line of thinking makes no sense! Kaplan might as well say “throw all morals and ethics out the window and do what you want as long as you make lots of money.”
Kozlowski, Milken, Madoff and others who were caught have been brought to trial and sentenced to jail; all had their days in court. They had the right to face their accusers, they had the best lawyers money could buy, they could present their evidence, they could challenge the prosecutors evidence, and they could appeal their convictions under the law. Another point, there are sentencing guidelines established that are constantly reviewed to determine the efficacy of those rules. The court makes sentencing rulings based on those guidelines.
Kaplan needs to remember the stakeholders when discussing clemency for Kozlowski. Kozlowski's unauthorized bonuses of $81 million would be called embezzlement in most cases and just old-fashioned stealing in the remainder of cases. Again, this embezzled money came out of the stakeholders pockets as did the $6,000 shower curtain and the $2,200 waste basket (Pillmore, p. 96). It is really difficult to believe a man in Kozlowski's position and having the personal wealth he had, did not know these actions were wrong, unethical and illegal. As the CEO of Tyco, “top management plays a significant role in promoting ethical behavior” (Stephen, Vance & Pettegrew, p. 21). Kozlowski failed miserably in that area. However, the courts held Kozlowski accountable and responsible for his unethical actions.

Unethical Behavior and Its Cost 4
The Way Ahead
In simple, less complicated everyday life, it is easy to stand proud and assume one never commits an unethical act or does something morally wrong. When receiving change from a store clerk that's obviously too much, do you give it back or walk out the door? If someone you know has a new dress do you say it looks great when that's not actually the truth? On a personal level the lines are clearer and not so blurred but on the business level the normal chaos and diverse demands on an employee, lines get muddied quickly. To remedy that muddy water, one needs to go back to the basics of ethics and moral values along with a resurgence in corporate governance. Tyco has (and continues to) made significant reforms in the wake of the Kozlowski scandal.
In order to rebuild it public reputation, customer interest, employee satisfaction and shareholder confidence, Tyco wiped the slate clean by overhauling the executive ranks first. The board chose a new CEO who came with vast experience. The new CEO decided the entire corporate management team needed to go and new blood, untainted by the old regime, was brought in from the outside. To determine what had gone wrong in the previous regime, audits were conducted from both inside and outside the company and at all levels (Pillmore, 2003, p.96-97).
Additionally, the new leader made it crystal clear from the very outset that he expected the highest standards of business practices and ethics. To that end, Tyco developed a corporate Guide to Ethical Conduct. Unlike most other guides of this nature, Tyco's guide is 17 pages long and covers a multitude of topics such as gifts and business expenses, promoting the environment, conflicts of interest, doing business with integrity, raising concerns and reporting issues, and more. Very unique is the Q & A section that answers questions such like, “one of my suppliers offered me tickets to a ball game. Can I go?” Tyco encourages employees to speak up and address problems or situations that appear wrong so they can be addressed (Guide to Ethical Conduct, 2003).

Unethical Behavior and Its Cost 5
The Way Ahead
After selecting a new CEO, positioning an entirely new Board of Directors, hiring 60+ new senior executives, auditing all the books, and developing a Guide to Ethical Conduct, Tyco was ready for reform in its governance.
Common wisdom stated that a strong Board of Directors was all the safeguard needed—Tyco wanted something stronger. While the Board would be central to company governance, governance would go beyond the board to “ensure that management acts consistently in the best interest of shareholders and in sociably responsible ways.” But to aid this governance, Tyco drew a line between financial management and operations management, each with a different reporting chain, which had not existed before. This was important as each entity had a distinctive role in the company and provided much needed checks and balances to preclude breakdowns. If both were in the same chain, objectivity would be difficult to maintain, and one could leverage power over the other. To further aid in governance, for the first-time ever Tyco appointed a senior vice president of corporate governance. (Pillmore, 2003).
Lastly, while Tyco is still pushing forward with other reforms, one reform welcomed by all parties, was a new compensation structure putting an end to the Kozlowski era. Everyone is clear on the company's policy and can focus on the work at hand. A few of the new policies are: (1) established a cap on bonuses, (2) made adjustments to director compensation, (3) capped the total stock-option-equity award, and (4) put a cap on severance payments for senior executives. (Pillmore, 2003).
Dennis Kozlowski is no longer in prison; he's in a halfway house and has a job he goes to on work release (Byrne, J., 2012). While he is making progress, Tyco is, too. Tyco has come far with its reforms and new guidelines. From all accounts, Tyco appears to have accomplished a remarkable feat bringing the company back to solid ethics and is making its way forward, full steam ahead.

Unethical Behavior and Its Cost 6

References
Byrne, J. (2012). Dennis Kozlowski's out of jail! Here's what his new life is like. Business Insider
Kaplan, D. A (2009). Koz makes his case. Fortune 160 (11), 14-16
Kaplan, Don (2013 ). Ex-Tyco CEO Kozlowski spotted outside minimum-security prison where he'll serve remainder of sentence. New York Post
Pillmore, E. (2003). How we're fixing up Tyco. Harvard Business Review, 81 12, p.96-p+, 9p
Tyco Guide to Ethical Conduct (2012). Tyco International Ltd. www.tyco.com/uploads/files/Guide_to_Ethical_Conduct_2012
Stephens, W., Vance, C., & Pettegrew, L. (2012. Embracing ethics and morality. CPA Journal 82 (1), 16-21
Sweeney, P. (2004). The Travails of Tyco. Financial Executive, p.42