A closer look at one of the biggest corporate scandals in 2002: Where did this company go wrong? [Tuesdays: Return Driven Strategy]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
As CEO of MBO Partners, I’ve been getting a lot of helpful business insights from Professor Joel Litman and Dr. Mark L. Frigo’s Return Driven Strategy.
This framework, which is discussed in detail in the “Driven” book, has 11 tenets and 3 foundations that will lead you towards ethical wealth and value creation for your firm.
Let’s first focus on Tenet One of the Return Driven Strategy framework: Ethically maximize wealth.
In today’s article, I’ll be highlighting a relevant case study and discuss the implications and importance of ethics in this particular business’ operations.
Check out the article to get an idea of the real-life application of Return Driven Strategy’s first tenet. I also hope you’ll take away some important insights and lessons from the case study below.
Return Driven Strategy
Tyco International was a security systems company incorporated in the Republic of Ireland in 1960.
One of the notable things about this firm was that it grew through numerous acquisitions of several businesses, such as:
- Armin Corporation
- Ludlow Corporation
- ITT Grinnell Corporation
- Mueller Company
- Wormald International Ltd.
… and more.
However, there was a problem with Tyco’s internal systems and practices.
In 2002, the company got involved in a corporate scandal due to UNETHICAL business practices of a number of its high-ranking officers.
Tyco’s CEO, Dennis Kozlowski, was one of those people!
According to reports from the investigation, Kozlowski had questionable and suspicious financial transactions that weren’t included in Tyco’s financial reports. He enlisted the help of other top officers and lower-ranking employees to cover up his illegal activities.
Furthermore, he made the issue worse when investigations showed his second wife received money diverted from the company. Court proceedings proved Kozlowski stole millions of dollars from Tyco.
Because of that, he and Chief Financial Officer Mark Swartz were imprisoned in 2005. Afterwards, Tyco’s business performance declined and many investors lost their trust and confidence in the company.
Ethical Issues in Tyco’s Case
What happened to Tyco shows that issues related to ethics can occur in various aspects of a firm or organization. As for the company’s case, there were 3 main issues:
- Unethical Leadership
Kozlowski was at the center of all the unethical activities in the company. He used his position as CEO to persuade other officers and employees to turn a blind eye to his illegal practices.
… and although there were still other factors that contributed to this scandal, leadership was a critical factor that led to the downfall of the entire company.
Never use your position or status for any malpractice. If you’ve been entrusted with a distinct job or a notable position in a company, make sure everything you do is for the good of the entire firm. Keep your personal motives out of the way.
- Unethical Business Practices of Subordinates
Aside from Kozlowski, CFO Swartz and some members of Tyco’s board of directors played a significant part in the case.
For example: A board member kept silent about Kozlowski’s purchase of a mansion using money from Tyco. In exchange, that board member received financial benefits.
Other lower ranking employees also stayed quiet about their CEO’s illegal practices in exchange for receiving financial benefits.
Lesson: Integrity is a crucial part in establishing, running, and being part of a business. This character will help you stay upright, just, and honest when doing something in public or in private.
Even if you’re offered a huge sum of money in exchange for your silence, having integrity will give you the conviction to not participate in any illegal activity.
- Questionable Auditing Practices
During the time when unethical practices inside Tyco were at their peak, the auditing firm responsible for verifying the company’s financial reports failed to identify Kozlowski’s illegal transactions.
As a result, the CEO’s unethical business practices continued and even led to the involvement of various personnel. These activities became difficult to stop because they got bigger and there was no constraining influence from the auditing firm.
The key takeaway from this?
A bad habit or practice, if not pointed out early on, becomes harder to stop once it takes root and grows bigger. Someone must be brave enough to step up and pay attention to this matter so that necessary changes can be quickly implemented.
The business ethics case of Tyco shows how a large organization could suffer from the unethical and illegal actions of internal and external parties.
… and while Tyco had an impressive improvement in its earning power from 1997 to 2000, the corporate scandal in 2002 caused irreparable damages to the firm’s reputation.
The quality of the firm’s offerings, the work of its employees, and the loyalty of its customers could do little to reverse the impacts of the violations of Return Driven Strategy’s Tenet One, which is ethically maximizing wealth.
Additionally, Tyco’s earning power levels fell by more than half, its growth collapsed, and its valuation fell by over USD 100 billion dollars after the scandal.
In the book “Driven,” Valens Research President and CEO, Professor Joel Litman, and Kellstadt Graduate School of Business Professor, Dr. Mark L. Frigo, said that ethical creation of wealth happens by:
“… placing the firm in a position to facilitate the activities of investors, customers, employees, and business partners as they exchange their time, money, or resources in return for the fulfillment of their needs.”
However, if the only intention of those in a company’s leadership positions is to fulfill their ulterior motives and not the needs of their constituents, then that doesn’t equate to ethical creation of wealth. In the end, that would only lead to the downfall of the firm and all the parties involved.
The bottom line?
Cheating, lying to, or stealing from any of a business’ major constituencies―customers, employees, investors, managers―raises the risk of financial failure. That’s why being ethical is necessary to be in the game AND stay in the game.
After all, when a company has good work ethics and ethical business practices, the higher the chance that it’s constituencies will trust and stay loyal to it.
… and when customers, employees, investors, and managers have confidence in a firm, that business will generate great returns while fulfilling its constituents’ unmet needs.
We hope you’ve learned a lot from today’s case study!
Stay tuned in the coming weeks because we’ll highlight a few more cases that are relevant to the tenets of Return Driven Strategy.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Tuesdays: Return Driven Strategy”
In the book, “Driven,” authors Professor Joel Litman and Dr. Mark L. Frigo said that the goal of every long-term successful business strategy should incorporate the combined necessity of “making the world a better place” and “getting wealthy.”
That is why they created Return Driven Strategy and Career Driven Strategy―frameworks that were built to help leaders and professionals plan and evaluate businesses so they can also help others achieve their organizational goals and career goals.
The frameworks describe the plans and actions that drive returns for anyone in an organization such as independent contractors, marketers, brand managers, communicators, and other people in any field. These actions lead to the creation of wealth and value for customers, employees, shareholders, and the society.
Every Tuesday, we’ll highlight case studies, business strategies, tips, and insights related to Return Driven Strategy and Career Driven Strategy.
In planning, building, or managing brands and businesses, these strategies, case studies, and guidelines will help you choose what specific actions to take and when to take them.
Hope you found this week’s insights interesting and helpful.
Stay tuned for next Tuesday’s “Return Driven Strategy!”
Head of Marketing
Valens Dynamic Marketing Capabilities
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