Business Ethics (via Tyco)

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Business Ethics (via Tyco)

Postby hyksos on August 5th, 2018, 4:09 pm 

Tyco and Enron scandals are ground zero for business ethics.

I felt I needed to make this article, because wikipedia is woefully inadequate at describing exactly what those scandals involved, and why the actions of the CEOs and other executives were so un-ethical. Wikipedia only describes the court cases involving actual crimes of Dennis Kozlowski and Mark Swartz -- and totally leaves out the ethical dilemmas. Those criminal cases were heavily covered by TV media, and so they skew the history unfortunately.

To do this subject justice, it would be better to make a youtube video with narrative and cartoon like diagrams.

Tyco International was a company that originally manufactured fire hazard technology for office buildings, but that became larger and started to also supply tech for general building security (like ADT).

I will describe what Tyco was doing under CEO Dennis Kozlowski and CFO Mark Swartz in the late 1990s. A small glossary is required.

Consultants. After a company is acquired as a subsidiary, they send in a team of "consultants" onto the office and factory floors. The word "consultant" was normally supposed to mean a team of experts who are hired as independent contractors to help a company with something difficult. To empower the company. But in this article, "consultants" will mean like a group of gangster-like outsiders sent in to a company to spy on its inner workings.

Downsizing. A massive and sudden layoff of employees at a company. This is a corporate buzzword that essentially means firing a large percentage of employees at a company.

Aggressive Acquisition. Watch the TV show Shark Tank to understand the true meaning of this word, aggressive acquisition. In Shark Tank, a shark will offer initial capital up front, for a percentage stake in the company. The sharks usually put forth tiny amounts of get-you-started capital in the small millions, and then demand some reasonable percentage like 15% or lower. In aggressive acquisitions, a conglomerate is buying up a subsidiary with a huge (billion dollar) capital sale, with a stipulation that their shareholders will get something like 90% of the ownership. Aggressive acquisition appears on its face that the conglomerate is buying out this little company at a loss. It is supposed that the conglomerate will "flip" the company with some kind of magic to make up for this loss.

The exact nature of the "flip" to make up the loss of the acquisition is where Kozlowski and Swartz come in.

Tyco had bought up a little company, sent in consultants who then roamed the halls of the newly acquired business. The consultants were not there to help. They were there to decide who would be fired. These gestapo-like consultant groups told themselves they were "Cutting the fat" and "making the company lean and mean" and other buzzwordy sounding phrases. It almost sounded like they were there to make the company better. This was all a labyrinth of lies, as we shall see.

The acquired company was being downsized by an almost immediate removal of about 40% of its workforce. This causes an immediate spike in short term profit, because 40% of the salaries and wages were switched off like a light switch.

Code: Select all
profit = revenues - costs


Keeping the revenue constant, a sudden decrease in costs would correspond to a sudden increase in profit. Kozlowski, Swartz, and their tiny coterie of stockholders would funnel this temporary profit increase to themselves, and not "reinvest it" back into the company.

In about 18 to 24 months, the acquired company could not keep its head above water -- lacking 40% of its workforce. It would go under -- and shut its doors. Now 100% of the employees were out of work. The downsizing was not making the company 'lean and mean' -- it was in reality, burning the company to the ground. While the company burned and the boat sank, Kozlowski, Swartz and their shareholders would be running off into the woods with heavy money bags slung over their shoulders (so to speak).


Tyco Culture
Tyco culture was to lay off half of the employees, suck up the temporary profit, and then escape with money bags before the place burns down around them. You might be shocked at the greed and immorality of this action, by itself. It seems to be screwing your fellow man to make yourself rich. -- but settle down and get some popcorn -- because this is only the beginning of this evil.

Tyco did not do this once. Oh no. They took their newfound money bags and used that capital to do another aggressive acquisition on another company. Send in the consultants. Lay off 40%. Funnel the temporary profits into the hands of your friends. Run off with money bags before it burns down.

Then they did it again. And again to another company. Lather. Rinse. Repeat.

They money and power went to Kozlowski's head. Several times I had mentioned "funneling" the profit, and that almost sounds like some sort of criminal act. But nothing criminal has happened here. Kozlowski used legal techniques to enrich himself , including :

  • Increasing his own salary and personal compensation packages to egregious levels.
  • Buying a $30 million penthouse on 5th avenue in NYC -- but pretending like it was "office space" for the company. It was in reality a gift for his wife.
  • Renting out expensive islands in the Mediterranean to hold "company picnics" -- which were then charged to the company, without a dime out of his own pocket. The "company picnic" was actually his wife's birthday party which was lavish enough to be described as a "roman orgy" by several critics.

Kozlowski was living LifeStyles of the Rich and Famous while 10s of thousands were kicked out of their jobs.

For the business ethics student this is the core message which you need to come away with : Absolutely everything I have described so far is 100% LEGAL in the United States of America.

While legal, this action is unabashedly, disgustingly un-ethical. More academically, this is a case in which we can differentiate blind, selfish greed from enlightened self-interest.

Some follow-up notes here would discuss how Kozlowski and Swartz were actually charged with crimes -- but those are covered by wikipedia for the curious.
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Re: Business Ethics (via Tyco)

Postby zetreque on August 5th, 2018, 8:44 pm 

I dare you to break down the ethics of everything Elon Musk next.
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Re: Business Ethics (via Tyco)

Postby Lozza on April 1st, 2019, 6:33 am 

hyksos,

Welcome to the post deregulation of banking and business era and "trickle-down economics". What you've described is a common story of corporate acquisition to exploit and strip a company of its assets, not of corporate expansion or investment which we were more commonly used to seeing prior to the 1980's.

People forget that "legality" has absolutely nothing to do with "morality". Sure, sometimes they coincide, but in the corporate world, particularly since the early 1980's, the only concern is legality, and even that's quite often tenuous. The Sub-Prime Loan fiasco that subsequently caused the Global Financial Crisis is a good example, whereby high risk investments were given Triple A ratings by our "investment watchdogs" and banks were involving themselves in a bad business practice for no other reason than the fear of losing business to their competitor banks that were selling a well established bad product...sub-prime loans. Even the name "SUB-PRIME" tells you it's a not good investment, but they were given AAA ratings. Money buys you any amount of corruption you want, you just need to have enough money.

Unfortunately, ethics doesn't enter into it. Corporate "ethics" revolves around legality, nothing more. Otherwise, you lose ground to your business competitors. That's the predominant theme and "ethos" within the corporate world.
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Re: Business Ethics (via Tyco)

Postby A_Seagull on April 19th, 2019, 7:35 am 

I think if you are going to label the actions of Tyco et al as unethical you need to be very specific about what it actually was that was unethical.

For example did they lie, cheat or deceive?

Who lost out financially? Presumably the people who bought shares after the takeover. But in this game it is buyer beware.

OK people lost their jobs, but businesses go under all the time.. that is the nature of a competitive mark=et.
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