1. Evaluate the corporate governance of Tyco International under Kozlowski, in particular the functioning of its board! Mr. Kozlowski ran a decentralized company, allowing for high autonomy and an entrepreneurial culture. Executives were empowered to act in the company’s best interest and received compensation based on the company’s growth targets, whereas non-executives got rewarded based on their individual performance. Consequently, it incentivized all employees to perform well. In addition to motivating employees to meet growth targets, Mr. Kozlowski initiated many acquisitions and in some cases to smooth out the earnings of Tyco, because it was smaller acquisitions that did not need to be reported. The functioning of the board started out well, where all parties enjoyed the loose corporate culture, but eventually this structure triggered misconducts in the top management. 2. Can you identify any issues/problems with regards to Kozlowski’s relationship with the board of directors? The main issue between Mr. Kozlowski and the board of directors was the lack of transparency.
The board did not take part in the reports from the internal auditors, which solely was reported to Mr. Kozlowshi, neither were they informed about his projects that required capital from the company. To have a well established communication and transparency between these two parties is an essential element at any firm. The corporate policy of decentralization was also present in relations to the board of directors. They trusted Mr. Kozlowski and his management too much based on financial statements that had been tampered with.
Because of his great track record the last 10 years, they almost became blinded by the fortune and did not question Mr. Kozlowski’s actions. The betrayal of Mr. Kozlowski and the ignorance of the board, resulted in a destruction of shareholder value and a sharp decrease in the firm’s credibility. 3. Discuss and evaluate the changes in the corporate governance of Tyco international after the arrival of Ed Breen! The fraudulent behavior of Mr. Kozlowski and his peers got massive consequences. According to their reporting, stock prices dropped with 74 % from 2002-2003.
Breen tried to restore confidence in the top management and the board of directors by only taking on new people, this meant that a lot of bureaucracy was established that was not present with the pre-Breen corporate governance style. This has costs that the shareholders pay for, but we believe that the benefit greatly out ways this. Figure 1. Stock chart Source: Google Finance They were to raise $4. 5 billion in the convertible bond market# in January 2003 and if Breen had not taken drastic action they may not have been able to raise that kind of cash.
If you look at the Tyco share price, is seems that when the new board and management was in place in May 2003, the share price rose considerable also compared to the S&P500. However, despite Mr. Breen’s considerable efforts, the stock prices never managed to increase to the same level as in 2001. 4. What are, in your opinion, the characteristics (i. e. the structure, procedures) of a good board of directors? A good board of directors should consist of both insiders and outsiders. This might be a factor that Tyco in 2003 was lacking.
To get a better sense of the company the board should have members with experience from the company. In addition, a board should have well-functioning communication and openness, clear transparency, experienced and skilled members with high credibility and reputation. The diversity of the board members are also an important element of a good board. We believe the most essential characteristic of a board member is to have a pure interest in the company in question, in order to act in its best interest, commit to the meetings and actively take part in monitoring its executives.