Investor fears about the trustworthiness of corporate governance re-emerged Monday as Tyco International Ltd.’s L. Dennis Kozlowski announced his resignation as chief executive officer of the Bermuda-based manufacturing conglomerate.
Kozlowski told board members that he is under criminal investigation for personal tax evasion, having been accused of avoiding paying hundreds of millions of dollars in New York state taxes by allotting family trusts to purchase goods and services for the company.
A manufacturer and supplier of industrial products and systems, including syringes and electrical equipment, Tyco has about 240,000 employees. Kozlowski was appointed to lead the company in 1992, having joined Tyco in 1975.
While the office of prosecuting New York District Attorney Robert Morgenthau declined to comment on the specifics of the tax evasion probe, and Kozlowski stated that he is leaving the company for personal reasons, it is clear that the latest criminal investigation has only increased public wariness about the state of U.S. companies beyond the corporate image and reported financial statements.
For the New York district attorney is not alone in actively playing the corporate watchdog in recent months, and public wariness about the reliability of company reports and motives of corporate executives is on the rise.
Last month, brokerage house Merrill Lynch agreed to pay $100 million in a settlement agreement with New York state Attorney General Eliot Spitzer, who had accused the company of deliberately misguiding investors by providing upbeat forecasts on some companies to the mass retail market, while disparaging those same companies to their bigger clients.
Spitzer has warned that Merrill Lynch is not the only investment bank that has willfully misled its clients, and there is speculation that other firms will soon be forced to pay up or face trial for such illegal practices.
Public outrage against corporate executives deliberately misleading investors has been increasing steadily since the collapse of Houston-based energy giant Enron Corp. last autumn, and indeed, the Securities and Exchange Commission is stepping up its efforts to crack down on white-collar crime, as whistle-blowers come forward with allegations of foul play in long-established companies such as accountants Arthur Andersen LLP and companies that prospered under the dot-com tizzy such as telecommunications giant Global Crossing Holdings Ltd.
And although Merrill Lynch has settled with the New York Attorney General’s Office, the SEC continues to investigate the matter, as the company faces a potential flood of investor lawsuits, blaming the brokers for their losses on the stock market over the years past.
In fact, so much has the sheer volume of investigations coming forward to the SEC’s attention ballooned in recent months that the agency’s employees went on strike last week, staging a public protest, demanding an increase in pay to have paychecks more in line with employees in other financial departments such as the Federal Deposit Insurance Corp., whose employees on average make up to 15 percent more than their SEC counterparts.
Amid such growing investor wariness about the transparency of corporate accounts and the doubts cast over the credibility of business leaders, the resignation of Tyco’s CEO will likely only tarnish the company’s image and future prospects, which have already been facing problems even before Kozlowski’s announcement to step down.
Tyco recently abandoned a plan to break itself up into several parts, and announced instead that it would sell or do an initial public offering of only its CIT Group finance unit. The abrupt reversal of Tyco’s long-term strategy, along with repeated profit warnings, worries about Tyco’s credit, and accounting questions had already rattled shareholder confidence in Kozlowski’s leadership.
It also led to questions about the independence and effectiveness of Tyco’s board, which Fort had said voted unanimously for both the original breakup plan and the revised plan unveiled in late April.
Making a seemingly endless series of acquisitions over several years, Tyco’s earnings rose smartly over the last decade, and the company became a favorite of big investors. At its peak, Tyco had a market value of $120 billion, making it one of the 20 most valuable companies in the United States.
But even as it grew, the company’s accounting and business practices drew scrutiny. Tyco was one of the first big companies to move its nominal headquarters offshore to avoid U.S. taxes.
Tyco’s reputation took a big hit in late January on news that it had made a $20 million payment to an outside director and to a charity he controls as a finder’s fee for a merger, raising questions about the director’s independence.
The company’s latest personnel reshuffle, which will see former chief executive John F. Fort II, currently a director of the company, taking over Kozlowski’s place until a new head is appointed, cause jitters among investors across the board in trading Monday.
Shares of Tyco posted their biggest drop, falling $5.90, or 27 percent, to $16.05. The company’s stock had dropped 61 percent in the past year.
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