“We aim for sustained earnings growth in excess of 20 percent, powered by increased revenues and margin expansion. …[Tyco’s] model has produced consistently strong results for well over a decade.”
— Dennis Kozlowski, former CEO of Tyco International from page 18 of the 1999 Shareholders Annual Report
Last week, Dennis Kozlowski, the former CEO of Tyco International, was directed by a judge to forfeit all of his compensation earned during a nearly 7-year period beginning in September 1995. In his order, the judge said that the total compensation outstanding under the agreement is well over $100 million. (Source: WSJ)
The denouement of this once famous corporate executive is not surprising. Although BusinessWeek named Kozlowski one of the 25 outstanding managers of the year in 2002, for the previous decade he had beaten down his division managers. Year after year, each division President was expected to increase profits by 20%, regardless of circumstances. If there was a hiccup, namely, profits grew less than 20%, then the division President was subjected to intense pressure to perform. If, for a second year in a row the company again failed to meet the 20% growth hurdle-rate, then often the division President was fired. In one business unit, the division’s chief financial executive traveled hither and yon in order to find acquisitions that would bolster profits. He spent almost a year in Asia frenetically searching for an acquisition so that the business unit could achieve Tyco’s 20% goal. It was a very simple—yet brutal—system that everyone understood.
I realize that it is not unusual for corporations to have aggressive objectives for their senior managers. But usually there is a more collaborative relationship—integrated through some sort of strategic planning process—between corporate management and the divisions. In contrast, Tyco’s managerial process had an unrealistic, even coarse aspect to it. It reminded me of what W. Edwards Deming said years ago. Simply having [financial] goals—without a method for achieving the goals—is useless.
However, during Mr. Kozlowski’s reign (during which time, I had a consulting engagement with one of Tyco’s divisions), Tyco did produce seemingly impressive results. Between 1995 and 1999, ostensible net profits increased from $.2 billion to $2.6 billion, and the stock price rose from $7 per share to over $51 per share. But in 2002 Kozlowski resigned as Tyco’s CEO, and the stock price plummeted. Tyco’s foundations were built on sand, and when the winds blew, it toppled over. In June 2005, Mr. Kozlowski, the son of a police investigator, was convicted on 22 of 23 counts, “including grand larceny, conspiracy and securities fraud.” (Source: WSJ) He is now serving time in New York State’s Mid-State correctional Facility.
If a corporation’s mission is to simply maximize profits anyway possible, unethical decisions by managers will surely follow. At a minimum, top management must articulate the strategies that are required to achieve corporate financial goals. And, more importantly, the CEO must exercise virtuous character traits in order to lead the many stakeholders who are dependent on the corporation for their well being. On all counts, Mr. Kozlowski failed his many constituencies, and the company almost fell into bankruptcy. In his vision for Tyco, the jailed CEO had an ethical blind spot, which was his undoing. He did not realize that ethical behavior—on the part of the CEO–is good business.
Do you agree that corporate management is responsible for more than just meeting certain financial targets? Should the goal of the CEO be to simply maximize profits? Or are virtuous character traits important to running a company?