Turning around Tyco: how corporate governance saved the day

two million dollar toga parties $6,000 shower curtains and another six hundred million dollars in corporate pilfering well that's what led to the arrest in the spring of 2002 of Tyco CEO dennis Kozlowski and his chief financial officer TECO's board of directors finally realized that not everything that they saw was gold one of the new team installed after kozlovsky ouster was Eric Pell more he was Tycho's vice president for corporate governance from 2002 till 2007 he now runs his own consulting company and he's here to speak to INSEAD students welcome Eric thank you all right where was the whistleblower how come nobody figured this out before the SEC finally looked at it yeah you know the this is the one scandal that really didn't have a whistleblower which I think speaks to the culture of the company at the time which I think the tone clearly set by the CEO was a very intimidating culture where people were very unwilling to speak up because love ski had been with Tyco from 1976 until he left under a cloud in 2002 that's a long time yes it is um was it a question of his going bad I mean I realize you kind of came in at the tail end of all of this but no I think you know he grew up in the company he he started actually as an internal auditor and and became CEO about 10 years before the the problem actually surfaced I believe that he he thought he was part of the company and that the assets of the company were his and as a result you know some abuse occurred which you know it's pretty well known now and I think there was clearly though a mixing of what he felt were his personal funds and what he believed to be is the company fund he kind of saw them as one it seems as though there could have been an internal and an external failure here of I mean shareholders looking at what was really going on or internal auditing clearly they pushed the auditing laws to the limit found every loophole was this intense intentional fraud was it was it fraud light in that clearly was a fraud I mean both both mr. Kozlowski and mr. Schwartz a CFO were found guilty of larceny the theft of six hundred million dollars from the company and that came really in the form of some stock trades that were not authorized as well as some loans that they granted themselves without the approval of the board and turn auditors were not involved in reviewing that and the the level of materiality that these transactions were booked at the holding company happened to be at a level below the level that the external auditors checked you were brought in to clean up the mess correct what did they say what made you take the job and what was it what did you find when you got there well you know it's interesting I actually asked for the CFO job I had worked for Edie burying the CEO and it asked him if if I could become the CFO of the company this was about three days after he had accepted the job and when was that exactly it was that was first week of August of 2002 so quite quickly this old yeah he arrived July 28th 29th and on Wednesday of that week we sat down and had dinner and and I basically told him I wanted to join he he said I'd like to have you on the team but you're not going to be the CFO by the end of the dinner tell me what job you want and I had to think fast on my feet you know at the time sarbanes-oxley was being passed corporate governance was a hot issue Enron had fallen WorldCom had fallen so at the end of the dinner I said why don't I come in and be your corporate governance guy the way I look at governance there's there's really probably three aspects to it there's the people so the makeup of the board to make up the management team the character of those individuals the role definition of those individuals then secondly the set of policies and processes that govern what those people are responsible for doing to govern the company and in the simplest form you know the board typically has a set of guidelines the board has a set of charters that govern the activities of each committee and then the company has policies internal to it that govern the accounting the compensation you know all the processes that create exposure for any company from a governance standpoint there'd be policies now as we and then last but not least the communication of all that – in the case of Tyco it's two hundred forty thousand employees a hundred different countries six major languages so even if you get the policies right if you have the right leaders in place getting the word out to that complex and organization is a big big task coincidentally I had just come from a small start-up where it had to create a lot of these documents and here we stepped into a thirty-five billion dollar company where the same thing was required at the holding company level now there were good controls in the businesses the five businesses but at the holding company where the fraud actually occurred the processes were very weak it's one of the very first things we did was establish you know guidelines from a value standpoint that along with the delegation of authority from a governance standpoint were foundational to whatever else you're gonna do and and how did you do I mean it'd be a terrible way to raise money and with nobody really believing in the company I mean how they could well it was you know was a process where we had to work very quickly in the first hundred days to build a set of new procedures to run the company and that's why I say the the level of priority on trying to stabilize the company was huge if we were gonna rear in the trust in the first hundred days he's basically had two books closed and then you had to meet with key investors who were gonna buy the debt they had to believe that this couldn't happen again so what made them believe that well we went to them you know in meetings and shared pretty openly in a very transparent way what the status was of you know the accounts and records the processes and what progress we had made in in getting things fixed it leads me to really the state of the business I mean Enron was a complete fraud there was nothing there but there there was a business there is a business psycho and not all of kozlov sqeeze acquisitions were bad no no this is what ADT that's the center part of one of the businesses right no he did a great job of building a set of core businesses that are very healthy today and and we're very healthy then I mean the company in 2002 generated roughly 600 million dollars of cash in 2004 we generated close to 5 billion in cash and that's based on what he had done with it based on those businesses he had built did you have board support yes we did I the the obviously one of the things that had to happen in the first nine months was getting the old board to step down to restore trust in the minds of investors how hard was that that was difficult Edie Breen asked this question when he interviewed each one of them when he interviewed for the job he asked them you know will you be willing to resign should the company have to go in that direction where the entire board has to step down and to a person they all said yes so when it came time to do that we were able to do that what you replaced 90% of the headquarter staff as well how many bodies was that inhale hard well it was roughly 300 people at headquarters and those people were spread between three locations at the time New Hampshire Florida and New York so when we talk about the the downsizing of the corporate staff many of those people did not want to move to Princeton New Jersey where we set up the new headquarters so that was a very significant chunk and then obviously the people at the top of the company Edie felt that to move the company forward as quickly as we needed to that we needed a new team to come in and take responsibility for driving the company forward and and to allow you know take care of those people that were there and give them a soft landing so they could move on to their next corporate experience and what kind of costs do you think there is to business in terms of the lost reputation the public trust just the kind of the investigations that restructuring charges I mean these are all things that add up you know in terms of the cost oh gosh us you know you add all that up it's it's in the billions of dollars I mean just the just the shareholder lawsuit was two and a half a billion liability for the company when and you also share some of your knowledge with students what you did today yes what was the key point that you made or what do you think the key thing is that they took away with theirs you know there's three big lessons that I take away from this experience one is you know the first one is is to look at their own organizations or if they're looking at a potential career change and make sure in those organizations that there's a healthy level of mentoring and coaching going on particularly in what I'll call the accountability functions you know finance HR legal the second thing is this idea of building a web of accountability around yourself as a leader so if you're a I think it's really critical you have some people that hold you accountable should you be tempted and guaranteed every leader ultimately is going to be tempted should you start to go the wrong direction do you have people around you that are willing to push back and challenge you and really question where you might be headed and then last but not least this whole idea of character I think as future board members these folks are in jobs as general managers they're going to be serving as board members the whole idea of being able to evaluate character in the people that they hire if they're serving on a board you know the character of the senior leadership team monitoring what's the true character of leadership on an ongoing basis and how do you do that it's basically taking the values of the company translating that into some behaviors that you can you can coach train people on mainly coaching and training leaders to evaluate their people so those are those are kind of the three takeaways I get and that's every chance I get to talk to students here that's those are the things I communicate to them great I hope you'll come back and do it again and maybe talk to us too thanks thanks very much Eric thank you

Maurice Vega

2 Responses

  1. I just wanted to thank you for making this interview happen, for posting it on YouTube, and for the information it has provided regarding the Tyco scandal. It is a wonderful supplement that helps to understand what had happened. It is a great piece of history.

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