Tyco Two are Found Guilty

Former Tyco CEO Dennis Kozlowski and his CFO Mark Swartz have been found guilty of stealing over $150 million from the company they used to run. The pair could wind up in jail for 30 years – not long enough, frankly. However, their accomplice looks to be getting off scot-free. American corporate law made it easy for them to plunder their shareholders, and American corporate law hasn’t changed enough.

Mr. Kozlowski is famous for buying a $6,000 shower curtain with company funds, billing the firm for half his wife’s $2 million birthday party in the Mediterranean, and sticking the company with payments on his $18 million apartment in Manhattan. Mr. Swartz, as CFO, was responsible for keeping track of the company’s money, but he was too busy filling his pockets to keep proper count. Their defense was that they weren’t thinking and that they didn’t mean to steal the money.

Mr. Swartz might be the smarter of the two, since he didn’t take the stand. There are no words of his that prove his utter immorality. Mr. Kozlowski is another story. On the stand, his lawyer asked why he didn’t report a $25 million bonus on his tax return for 1999. The answer is appalling. “I just was not thinking when I signed my tax return that I had a $25 million loan forgiveness.” Most people won’t see $2.5 million in their working lives, yet this convicted felon took ten times that, didn’t report it, and claims he didn’t remember receiving it.

Just how was this possible? Under American corporate law, the owners (that is the shareholders) don’t get to run the company, and they don’t get to force management to do anything very often. At shareholders’ meetings, they don’t have the right to grill management over the actions taken, they don’t have the right to vote “no” when it comes to electing board members (they get to withhold support, a meaningless gesture), and they don’t have any recourse but to sell their holdings. Meanwhile, management appoints the compensation committee, and the compensation committee decides management’s pay.

The Sarbanes-Oxley law is a start in providing for better corporate governance. Transparency is vital for shareholders to understand what management is doing and whether a company like Tyco is being mismanaged (or in this case plundered). But it isn’t enough. Shareholders need vastly greater legal rights over management. They need to ability to act on the information Sarbanes-Oxley gives them. Mr. Bush’s ownership society could start right here.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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