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How Tyco International Remade Its Corporate Governance

How Tyco International Remade Its Corporate Governance



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A look at how Tyco, the US conglomerate went about fixing its damaged reputation after the resignation and sentencing of L. Dennis Kozlowski, the former CEO for abuse of office.
A look at how Tyco, the US conglomerate went about fixing its damaged reputation after the resignation and sentencing of L. Dennis Kozlowski, the former CEO for abuse of office.

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Published by: Customs Street Advisors on Mar 26, 2009
Copyright:Attribution Non-commercial


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How Tyco International Remade its Corporate Governance
Eric Pilmore
 Wharton Business School, September 2006 Senior Management 
A series of high-profile corporate scandals at Enron, WorldCom, Tyco, and other firmshas eroded investor confidence and led to sweeping new federal regulations. And forleaders of every firm, they have posed the question: How can we scandal-proof our owncorporate governance to avoid such disasters?Eric Pillmore, senior vice president of corporate governance at Tyco, who helped torebuild the company's governance, examined insights from his experiences during arecent session of the Wharton Advanced Management Program.Pillmore's former boss at Motorola—Ed Breen—was named Tyco CEO in July 2002following the resignation of CEO Dennis Kozlowski. Breen appointed Pillmore to fill a newposition as senior vice president of corporate governance. Unlike Enron and WorldCom,Tyco actually had a strong underlying business, so there was an opportunity to turnaround the company. But how could Tyco restore the credibility of the board andleadership in the eyes of shareholders? Before he was hired, Breen had asked everymember of the board if they would be prepared to resign if asked. They all agreed.Ultimately, they installed a new board within the first year of Breen's tenure.Breen's bold actions were key to turning around the company. "He succeeded as CEObecause he was decisive," Pillmore said. "He made a lot of decisions very rapidly. Whenyou are in crisis, you can be paralyzed by it—or you can act."
Three Lessons
 Pillmore identified three primary leadership lessons from studying weaknesses at Tyco,as well as governance challenges at companies such as WorldCom, Enron, andHealthSouth:1.
Strong functional leadership and mentoring are critical to the ongoingdevelopment of high-integrity leaders and employees:
Absolute power tendsto corrupt. Top leaders need strong functional leaders who can push back. "If youlook at the companies that got into trouble, they were led by intimidating strongleaders, supported by ‘yes' men and women," Pillmore said. "There was littlementoring in their functions. Mark Swartz at Tyco, Scott Sullivan at WorldCom,Andy Fastow at Enron—every one of these guys was a deal guy. They were notbroad cross-functional leaders. They made headlines in the CFO magazines asthe highest-paid CFOs. It leaves an organization with very little character inside it.It allows an intimidating leader to do what he needs to do to get things done."At Tyco, Kozlowski took the company from $300 million to $36 billion withessentially the same leadership team. "Had those jobs turned over periodically,the story would have been a lot different; but Dennis, by design, kept them veryclose, and this meant people were extremely loyal to him," Pillmore said. "Hedesigned a structure of loyalty around him with little accountability."
Functional leaders can temper the ambitions of the top leader. To what extent areleaders of HR, finance, legal, marketing, and other areas playing a strongfunctional role in your company? To what extent are people underneath you ableto surface issues?2.
Leaders must have a "web of accountability" surrounding them, withprocess disciplines in place to hold them accountable:
Leaders at thecompanies that ran into trouble had few systematic constraints on their actions."Whatever they wanted to roll out, they could pretty much roll out," Pillmore said."Any CEO is doomed to fail without an accountability structure around them. Idon't care how good they think they might be, or how strong their integrity. Withpressures to make earnings forecasts, you are asking for trouble without thatstructure in place."At HealthSouth, five CFOs came into the company in a 10-year period and all fivewent to jail. None of them could confront chief executive Richard Scrushy. "Theywere all drinking the same Kool-Aid," Pillmore said.How are leaders in your company held accountable? What structures andprocesses ensure that they are called to task? Even if your systems are workingwell with current executives who have high integrity, how could they be open toabuse in the future by less ethical leaders?3.
Boards and senior leadership teams must develop and implementsophisticated means to evaluate senior management character:
In thecompanies that got into trouble, managers were evaluated based on their ability tohit their numbers, but there wasn't much assessment of their character. "Theboards had little idea of the character of these people that ran their companies,"Pillmore said. Tyco now evaluates 10 character traits of top managers annually. Itlooks for qualities such as "managerial courage." Pillmore noted that ScottSullivan, former WorldCom CFO, said on the day that he was sentenced that hisbiggest regret was that he was a coward under pressure. "You want people in thegrassroots of the organization who are empowered to be courageous," Pillmoresaid. "Leaders create the environment that makes it comfortable to becourageous."Does your company evaluate the character of its senior leaders or merely tracktheir contributions to financial performance? Does the firm encourage people to becourageous? What aspects of character are most important to the long-termsuccess of your firm?Boards need to be alert for these three warning signs. "Get your antennae up if you seeintimidating leaders, people who don't understand the scope of their functions, and if noone is really worried about the character of the leaders," Pillmore said. "You are lookingat a potential disaster. Those are the common threads."
Rebuilding Tyco
 How did Tyco go about turning around its own governance? To transform itself, thecompany changed leadership, policies, and communications. To strengthen leadership,Breen brought in a new board of directors and a new corporate team. He also establishedPillmore's position and an ombudsman—both reporting directly to the board. Thecompany also created policies to support good governance. The guiding principle: If

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