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Tyco Internationals’ ethical and governance failure

Student’s name

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Corporate failure at the board level is a sobering reality that has left an indelible mark on
corporate landscape, showing some of weaknesses which are inbuilt into governance structures
(Solomon, 2020). The consequences of such failures go far beyond the boardroom also affecting
stakeholders, shareholders and even overall economy. 2002 was a bumpy ride for Tyco
International an international leading conglomerate that had been shrouded with ethical
misconduct and governance snafus even at the highest offices of its management (Ndekugri &
Twum-Danso, 2019). Through intensive investigation of the ethical and governance aspects, this
essay attempts to uncover underlying problems in Tyco that ultimately led to a major corporate
collapse.

This essay presents a detailed review of recent academic and theoretical writings on
corporate governance in order to shed light on the ethical shortcomings, major scandals at board
level that occurred within Tyco International 2002. Through this journey, we will discover the
complexity of agency problems and other factors issue such as ethical leadership role in conflicts
of interest board structure , risk management auditing lapses that altogether cleaned up Tyco’s
failure at the level where it has failed. This particular analysis will not only explain what
happened with Tyco but also present a broader perspective on the possible consequences for
corporate governance in order to draw practical lessons, and that is why this research matters.

Tyco International

In 2002, the Tyco Unraveling of events revealed a number of illicit practices and lapses
in governances that took place at board level, which had far-reaching implications across the
firm as well as for its stakeholders (Byar, 2022). Single major ethical debacle for Tyco was bald
disregard of truth and righteousness in financial matters. Board members engaged in improper
practices, such as reporting fluffed up profits of the company and concealing liabilities which
gave an illusionary impression that it was at very good financial position when all along this
exactly did not reflect reality (Fairchild et al., 2019). Such deliberate misrepresentation of
financial information not only broke the trust placed in shareholders but also had serious
consequences for business as a whole.

Tyco Board failed to exercise oversight from a governance standpoint. Without any
independent oversight, executives’ power was almost absolute without much supervision in the
decision-making processes that maintained an atmosphere of immunity (Arena et al., 2021). The
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board’s failure to implement effective checks and balances facilitated a corporate environment
that enabled fraudulent activities. Major problems included the pervasive conflict of interest
among Tyco’s board. The deal was about the chief executive officer Dennis Kozlowski indulging
in self-beneficial transactions such as using firm’s money for personal use (Ndekugri & Twum-
Danso, 2019). Wanton abuse of power and the resources available was a clear indication that
meant that those in charge had no moral boundaries which resulted to lack of confidence by
investors but also among stakeholders.

Tyco case shows how ethical gaps and failures in governance are interlinked. So the
board was unable to perform its governance duties on account of not meeting high moral
standards (Lessambo & Lessambo, 2018). These interrelated considerations make this all the
more plain that to take a rigorous look at corporate failure in one’s board means addressing both
dimensions of ethics and governance.

Ethical Failings in Corporate Governance

1. Agency Theory

Agency theory is one of the cornerstones in corporate governance literature and indeed, it
offers us a framework for reviewing these relationships between principal shareholders and
agents board members or executives within an organization (Wikartika & Akbar, 2018). Agency
theory deals with conflicting situations that may arise where ownership and control details are
shared by shareholders who in trusting their possessions to appointed agents (Vitolla et al.,
2020). In the case of Tyco, agency problems were apparent since interests between a board and
shareholders differed. CEO, Dennis Kozlowski and other executives were own by shareholders
but it is clear that their actions did not have as the end this maximization of value to them instead
they acted based on personal interests (Byar, 2022). This mismatch of interests was the cause for
breach fiduciary duty and failure to act in best interests of company and its investors.

Tyco’s inability to maintain effective agency relationships can be traced back to the
insufficiency of control mechanisms that would ensure alignment between interests of agents and
shareholders (Farlow-Williams & Creed, 2023). Tyco’s board did not have proper monitoring
and accountability structures in place so executives can participate in self-dealing with impunity.
Since there were no checks and balances, the environment was ripe for agency problems to thrive
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leading ultimately into ethical failures in technical governance at Tyco. The Tyco case underlines
the importance of having effective control mechanisms in corporate governance structures. These
agency problems can only be minimized when solutions such as independent audits, clear
reporting and bureau control over executive powers are put in place to promote a culture of
responsibility (Vitolla et al., 2020). Addressing the causes of agency problem issues may reduce
risks for organizations on ethics lapses and governance breakdowns at board levels.

2. Ethical Leadership

Ethical Leadership as an Organizational Practice is very important in corporate governance

because it highlights the responsibility of leaders to ensure ethical behavior and decision making
within any organization (Saha et al., 2020). Organizational culture tone helps leaders influence
employees on ethical principles that they follow, as well as take part in shaping the frameworks
of governance. In that regard, ethical leadership was glaringly absent in the failure of Tyco’s
board. Dennis Kozlowski, the CEO and other top executives lacked moral sense as they engaged
in fraudulent financial practices using company money to make them richer (Awolowo et al.,
2018). A lack of moral directives from the highest levels and principal leadership to this culture
led it into embracing unethical conduct more easily.

Tyco’s ethical shortcomings resulted in a tidal wave of organizational culture. Ethical

leadership was absent, and trust disintegrated among the employees, investors, as well other
stakeholders (Lessambo & Lessambo, 2018). In an ethically void environment, employees might
be compelled to acknowledge immoral actions as everyday business operations in a climate that
endorses or even encourages these dubious practices. Such drying up of moral rectitude at the
highest echelons was seen in every rung of this organization, creating wider crevices on
governance (Solomon, 2020). The connection between ethical leadership and governance can be
seen in the Tyco case. The governance collapse directly resulted from the breakdown of leaders’
ethical standards. People with questionable ethical integrity are likely to form a board that will
not put in place the right mechanisms of governance, accountability or consider what is best for
shareholders (Mahajan, 2023). Tyco simply did not have ethical leadership in place, there were
no governance, malpractice grew by the day and nobody stopped them.

The Tyco case identifies the importance of having ethical leadership as a pillar underpinning
successful governance in companies. Boards should select leaders who are not just good at
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corporate management but also committed to ethical values (Kataria & Kataria, 2022). Thus,
only by investing in a good governance framework where ethical leadership becomes an integral
part of all operations would organisations learn how to protect themselves from the kinds of gaps
that Tyco fell into.

3. Conflict of Interest

An issue of conflict of interest is a serious ethics concern in corporate governance especially

at the board level. When people in leadership or powerless positions become self-aware rather
than organization needs, interests of its stakeholders (Solomon, 2020). When it comes to the
governance, identification and control of conflicts of interest is a very important part in ensuring
transparency as well as trust. There are some obvious conflicts of interest, such as the CEO
Dennis Kozlowski in Tyco International. Kozlowski was engaging in deals of personal gain,
stealing money from the company to squander it on himself such as throwing grand parties and
buying art (Fairchild et al., 2019). The blatant abuse of power was not only an ethical
transgression but also undermined the fiduciary commitment to shareholders.

In the case of Tyco, it has shown that conflicts can skew decision-making processes in a
board. He had started making personal gains that hurt the wellness of his company and its future.
Such a type of murky decision-making resulted in financial irregularities that eventually
destroyed the company Tyco (Chauke, 2018). Good governance must, therefore, have strong
mechanisms to enable its identification, disclosure and elimination of conflicts of interest. On the
other hand, Tyco’s board failed to perform its oversight responsibilities. Due to no arm’s length
analysis, and lack of accountability; it meant that conflicts of interest could continue without
checks thus enabling executives to be exploitatory for personal enjoyment (Sahut et al., 2019).

Tyco conflicts of interest opened negative legal and reputation consequences. He and
other managers were prosecuted, while the Tyco’s reputation was destroyed. The ensuing legal
aftermath highlighted the necessity of conflicts of interest not only from an ethical perspective
but also to avoid possible illegality that can be deemed arising out people’s failure and nature
problems with personal ethics (Larcker & Tayan, 2020).

Governance Failures in Corporate Governance

1. Board Structure:
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The composition and structure of a board significantly impact the governance dynamics
within an organization. A well-structured board is likely to provide good governance, promote
responsibility and safeguard shareholders’ interests (Baysinger & Butler, 2019). It means that
board structure is crucial in the analysis of governance failures resulting into corporate collapses.
0Tyco’s board had a number of weaknesses that led to its governance failures One weakness was
the fact that they were not autonomous. The board was mostly comprised of insiders and those
close to the CEO, Dennis Kozlowski. This prevented an independent board from being able to
offer unbiased supervision because the decisions of senior executives or even potential unfair
practices are not criticized within (Ndekugri & Twum-Danso, 2019).

The concentration of power in the hands of a few executives especially among chief
executive officers generated governance imbalances. Kozlowski was more or less in power and
would be developing an atmosphere, which did not allow for criticism of anything to happen;
decisions were taken as without adequate checks (Arena et al., 2021). One important feature of
governance is the functioning of board committees (Larcker & Tayan, 2020). In the case of
Tyco, there were committees charged with such crucial duties as audit and compensation that did
not have enough independence necessary for strong oversight. Without independent voices in
such committees, the shortcomings – and even wrongdoing involving money could continue
without being noticed.

2. Risk Management

Poor risk management for companies put them in various vulnerabilities that hinder its
financial ability hence eroding the trust of stakeholder (Hubbard, 2020). Tyco was an epic
corporate disaster highly complicated by huge holes in managing risks. The company faced a
host of risks including financial, operations and reputational that were not well managed. After
“Since the Risk Management practices that were being implemented by boards of this
organisation were not robust enough to control these risks, they escalated and thus brought
downfall of this organization (Turnbull, 2019).

Tyco’s risk management failure was largely characterized by financial risks mismanagement.
Tyco’s vulnerability to the severe financial risks was due to high unethical practices that
involved inflating company earnings and hiding liabilities (Lessambo & Lessambo, 2018). Poor
reporting, poor transparency and poor financial disclosures restricted the board’s ability to
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evaluate these risks properly enough. Tyco had several operational risks, including weak internal
controls and a culture of impunity. Byar (2022) established that operational risks had not been
attended because the board did no proper oversight allowing room for fraud and failure of
internal controls. This led to an environment where unethical behavior could thrive hence
increasing the operational risk of the organisation that lacked control mechanisms.

Tyco’s governance blunders posed serious risks to reputation. The revelation of unethical
behavior, financial irregularities and legal actions highly affected Tyco. Stakeholder trust,
customer relationships as well as the market position of a business have long-lasting effects in
materializing reputational risks (Farlow-Williams & Creed, 2023). Risk management breakdown
at Tyco is inseparably connected with governance failures. A good governance system must have
mechanisms for identifying and holding risks at bay especially to ensure that the board is able to
oversee operations effectively (Awolowo et al., 2018). Tyco’s board, which lacked mechanisms
to prevent accumulated risks that also contribute to the broader corporate collapse.

Tyco’s case indicates that it is essential to ensure the consideration of a robust set of risk
management procedures in corporate governance mechanisms. Boards should dedicate special
attention to identification, assessment and mitigation strategies of identified risks that could
jeopardize the organization from financial, operational or reputation exposures (Baysinger &
Butler, 2019). Tyco’s failings can serve as a test case for future governance structures to learn
how they might be more robust against many kinds of risks.

3. Auditing and Accountability

Auditing and accountability mechanisms are the most important components of proper
corporate governance that ensure stakeholders that financial reporting is honest, straightforward
(Tumwebaze et al., 2018). Auditor and corporate managers who have been tasked with the
responsibility of monitoring these processes greatly contribute to ensuring that financial facts are
honest. Tyco also fell because of audit practices. The external auditors who are supposed to be
free from any control by the company have failed in detecting wrongs that were of great
magnitude (Turnbull, 2019). Lack of diligence in auditing allowed poor practices, such as
overstated earnings and concealed liabilities to persist without detection.
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Internal controls are first line of defense against financial mismanagement. This is due to
the fact that Tyco had compromised internal controls hence giving room for executives in
engaging themselves into fraudulent activities (Mahajan, 2023). An environment is thereby
fostered where financial improprieties can nurture and grow without adequate monitoring,
control or checks and balance due to the board’s failure in maintaining effective internal
controls. The Tyco board and executives were significantly deficient in accountability. Rampant
impunity fueled the culture of accountability in terms of ethical violations and governance
failures (Ndekugri & Twum-Danso, 2019). Since there was no accountability, the wrongdoing
went on and eventually caused serious legal troubles for Tyco as well as damaged its reputation.

The loss of auditing and accountability had a tragic effect on the trust between
stakeholders. Accurate financial information enables shareholders, employees and the rest of
market to generate reliable data that can be used confidently for making informed decisions
(Solomon, 2020). Thus, Tyco’s failure to follow auditing principles and provide accountability
led to a diminished level of trust that eventually had severe repercussions for the stakeholders
involved. Tyco demonstrates the ways organizations should advance auditing procedures,
making accountability mechanisms more effective (Arena et al., 2021). Boards will be created
that support the independence and efficiency of both internal as well as external auditors, who
should promote a sense of responsibility (Larcker & Tayan, 2020). The lapses observed in Tyco
should serve as lessons on how future governance structure will design transparency and
rigourness into its auditing practice for a way of generating trust among stakeholders.

Corporate Governance Theories

1. Ethical Decision-Making Models

Several different ethical decision-making models including Kohlberg’s stages of moral

development, or the one put forward by Rest on ethics offer some perspective as to how Tyco
went wrong in its various ethical failings. The involvement of the executives in fraudulent
financial practices and conflicts of interest indicates a departure from ethical decision-making
(Valentine & Godkin, 2019). Boards need to implement ethical leadership that highlights the
moral aspects of decision making in order to create a culture where governance is driven by
considerations based on rightness.
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2. Stewardship Theory

The stewardship theory suggests that managers can be acting as stewards who are responsible
for the organization first and their own interests second (Schillemans & Bjurstrøm, 2020).
Tyco’s executives failed to act in accordance with this stewardship responsibility, neglecting
corporate interests for personal benefits In future governance structures, leaders should be
representative of stewardship principles where the long-term interests of an organization take
precedence over personal gain. Establishing structures that promote the stewardship approach
can aid in fostering a more ethical and efficient governance setting.

Conclusion

We analyze that after the corporate fail of Tyco International, our research identifies a
multi-dimensional relationship between various flaws in governance embedded through different
theories such as agency theory, ethical decision making models and many more like stewardship
model. In light of the breakdown in board structure, risk management auditing and accountability
highlighted above, there is a need for firms to strengthen their governance frameworks. Tyco
case gives a grim background that the key factors of ethical leadership, interest alignment and
governed process are important. To prevent more corporate calamities, it is necessary for
practical implementations of governance to adopt findings from academic works. Amid the
changes in companies, Tyco’s case illuminates that ethical leadership and openness combined
with accountability are unchanging concepts to help maintain stakeholder confidence for future-
oriented businesses.
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