Case Scenario: Under the leadership of Dennis Kozlowski, who became CEO of Tyco in 1990, the company's revenues expanded from $3.1 billion to almost $40 billion. Most of this growth was due to a series of acquisitions that took Tyco into a diverse range of unrelated businesses. Kozlowski was initially lauded in the business press as a great manager who bought undervalued assets and then enhanced their value by imposing tight financial controls at the acquired companies. Certainly both profits and the stock price advanced at a healthy clip during much of the 1990s.

Tyco financed the acquisitions by taking on significant debt commitments, which by 2002 exceeded $23 billion. As Tyco expanded, some questioned the company's ability to service its debt commitments. Others claimed that management was engaging in "accounting tricks" to pad its books and make the company appear significantly more profitable than it actually was. Tyco's defenders pointed out that its accounts were independently audited every year, and the outside accountants had detected no problems. These criticisms, which were ignored for some time, were finally shown to have some validity in 2002 when Kozlowski was forced out by the board and subsequently charged with tax evasion by federal authorities. Among other charges, authorities claimed that Kozlowski treated Tyco as his personal treasury, drawing on company funds to purchase an expensive Manhattan apartment and a world-class art collection that he obviously thought were befitting of the CEO of a major corporation.

Kozlowski even used company funds to help pay for an expensive birthday party for his wife-which included toga-clad ladies, gladiators, a naked-woman-with-explodingbreasts birthday cake and a version of Michelangelo's David that peed vodka! Kozlowski was replaced by a company outsider, Edward Breen. In 2003, after a special audit requested by Breen, Tyco took a $1.5 billion charge against earnings for accounting errors made during the Kozlowski era (i.e., Tyco's profits had been overstated by $1.5 billion during Kozlowski's tenure). Breen also set about dismantling parts of the empire that Kozlowski had built, divesting several businesses. After a lengthy criminal trial in June 2005, Dennis Kozlowski and Mark Swartz, the former chief financial officer of Tyco, were convicted of 23 counts of grand larceny, conspiracy, securities fraud, and falsifying business records in connection with what prosecutors described as the systematic looting of millions of dollars from the conglomerate (Kozlowski was found guilty of looting $90 million from Tyco). Both were sentenced to jail for a minimum of eight years. As for Tyco, in 2006, CEO Ed Breen announced that the company would be broken up into three parts, a testament to the strategic incoherence of the conglomerate that Kozlowski built.40

Case Discussion Questions

1. Under the leadership of Dennis Kozlowski, Tyco grew rapidly for a decade. Why do you think Kozlowski pursued his growth through acquisition strategy? How did it benefit Tyco? How did it benefit Kozlowski?

2. What do you think leads top managers to engage in accounting manipulations to pad earnings, as apparently happened at Tyco?

3. During the period when Tyco's profits were apparently overstated to the tune of $1.5 billion, its accounts were audited every year by a major independent accounting firm that signed off on them. Why do you think that the accounting firm did not catch the manipulations at Tyco?

4. Why do you think Kozlowski and Swartz, both bright successful businessmen, engaged in the behavior that they did? What motivated them to take such risks? How risky do you think they thought their behavior was?