Introduction
Tyco International Ltd is a manufacturing company involved in the provision of fire protection and safety systems and electronic security services. Between 1996 and 2002, Tyco made management decisions that contributed to its financial failure. The management of the company employed some inappropriate practices that contributed to bankruptcy faced by the company at that time. The management overstated the operating income of the company while compensation to senior executives and other transactions were hidden from the investors. During the same period, Tyco acquired many companies.
The acquisitions were associated with financial misconduct that inflated the operating income to about one billion dollars according to the accounting department. The management also inflated the operating income through its contract transactions with Tyco’s ADT Security services from which Tyco acquired residential and commercial security alarm monitoring services. In addition to an overstatement of the operating income, millions of dollars in executive compensation and transactions involving Tyco’s former Chief Executive Officer remained undisclosed to investors. Because of these improper financial practices of inflating the operating income by the accounting department and undisclosed executive compensations, Tyco faced bankruptcy between 1996 and 2002.
Organizational Behavior
Tyco International Ltd. acquired many related companies to accomplish its plan of international expansion. However, the accounting department tricks inflated the operating income arising from these transactions to the tune of $500 million. The acquisition of companies involves combining two or more organizations into a single organization. This is important for a company’s growth and expansion to new markets. Tyco’s expansion plan involved the acquisition of many companies among them Dong Bang Industrial Co. Ltd, a South Korean fire protection firm. Illicit payments were made to government officials to assist the company in securing government projects.
The administrative approach believes “in the separation of different roles into departments based on skills and qualifications of individuals” (Hatch, 2006, p. 34). Each individual fulfills his or her obligation to the company. In Tyco, the executives received heavy bonuses, which contributed to the poor financial performance of Tyco. Also, there was improper acquisition accounting made under the influence of top executives that resulted in overstatement of the operating income.
The scientific management approach involves the process of delegating tasks to an individual. The scientific approach when implemented would help maximize the results. In Tyco, the management influenced the decisions made by the accounting department. Certain executives received undisclosed bonuses that were classified in their financial statements. This affected negatively the operating income of the company.
The quantitative management approach involves “the use of research techniques such as statistics and information models to improve decision-making” (Herbert, 1997, p. 113). Tyco management never relied on operations research in making its decisions to acquire new company subsidiaries. Evaluation of the impacts of the acquisitions on the operating income before any acquisition is necessary. To rectify this, the management reduced the value of the acquired assets and increased the value of the acquired liabilities. This was in a bid to reflect the company as profitable to the investors.
Tyco’s financial misconduct remained undisclosed to the investors and other employees. The management led by the former CEO Kozlowski, Swartz and a few select employees engineered a program where they paid themselves bonuses in cash and stocks as well as getting forgiveness for loans taken. Unlike the organizational behavior in this company, the systems approach considers the shareholders and investors in formulating corporate strategies and in major decisions.
The leadership of Tyco contributed immensely to the financial problems of the company through the allocation of executive bonuses and loans. Tyco failed to disclose the amount of money received by the Kozlowski and Swartz under the relocation loan program thus resulted in an inflated operating income for the company. Tyco also failed to disclose the relocation loan granted to another executive, Belnick. The executives also conducted transactions with the company involving real estate. In one such transaction, Kozlowski sold real estate to Tyco at higher prices than the market value of the estate.
Improper management decisions also contributed to the financial failure of Tyco during this period. The management schemed to overstate the operating income of Tyco in connection with transactions involving ADT. Tyco management advised ADT to implement a connection fee of $200 payable by dealers to ADT for each contract purchased. The connection fee was offset by a growth bonus of the same value thus could not contribute to ADT’s purchase of a security monitoring contract from Tyco. The management allowed the use of reserves to improve performance in terms of its earnings.
Conclusion
Proper organizational behavior contributes greatly to the performance of an organization. Poor financial and administrative decisions that do not take into account the external and internal forces affect organizational performance. A combination of improper management and leadership decisions involving the allocation of bonuses to executives and improper procedures in acquisitions contributed to the financial failure of Tyco. Therefore, effective financial performance requires the right management decisions and approaches regarding a company’s expansion and new acquisition plans.
Reference List
Hatch, M. J. (2006). Organization Theory: Modern, symbolic, and postmodern Perspective. London: Oxford University Press.
Herbert, A. (1997). Administrative Behavior: A Study of Decision-Making Processes In Administrative Organizations. New York: The Free Press.