A potential corporate scandal is lurking in your company

“Ten years ago this month, for the Spring 2000 edition of Directors & Boards, I ran a photo on the cover of Dennis Kozlowski, then the high-flying chief of high-flyer Tyco International. It is not something I am ashamed of, nor is it something that I am particularly happy to be reminded of. 
Those were certainly palmier days for Kozlowski and Tyco. It may be hard to believe now, but there was a period when he was considered a paragon of good corporate governance.
…Not only did we do this particular cover story, but five years earlier we ran an article authored by Kozlowski himself, titled “The Vitals of Accountability.” As he stated in this article, “The key issue for our board, and for every board in America today, is how to ensure accountability.” In light of subsequent events, how sad it is to remember him composing (and us publishing) a line like this. If he believed it then, he was right to express such an observation. He would be right to say so again today — were he not an inmate at a New York correctional facility.”

JIM KRISTIE, Directors & Boards (March 2010)

Directors & Boards is a publication I look at from time to time, and I was surprised to find this mea culpa from its editor this month. Full marks to Jim Kristie: not many would have the guts to revisit a blunder from the past. Most of us prefer to forget our mistakes and bury them very deeply, acknowledging them neither to ourselves or to others.

What’s the big deal about Dennis Kozlowski? Well, he’s currently behind bars, serving a 25-year sentence for abuse of office at his company, Tyco International. Among the things he pulled off at his organisation: getting Tyco to pay for a $30 million apartment which contained the now-famous $6,000 shower curtains; getting the company to pay $1 million towards his wife’s 40th birthday bash, by disguising it as a “shareholder meeting”; and receiving $81 million in allegedly unauthorised bonuses. Nice money if you can get it.

Still, the real question in the Kozlowski issue was raised by commentator Dan Ackman in Forbes magazine after the trial, referring to the CEO and a co-defendant: “They acted like pigs, as a lot of CEOs act like pigs. Still, the larceny charges at the heart of the case did not depend on whether the defendants took the money–they did – but whether they were authorized to take it.”

The Kozlowski case was an indictment not of individual larceny, but of a system of governance. It was one of the many scandals in the early years of this century that led to sweeping legislative change in corporate governance. The Tyco board was clearly in Kozlowski’s thrall: it had approved a contract for him which stated that conviction for a felony would not be grounds for dismissal!

In this sense there is a potential Kozlowski scandal brewing in every company. Boards are put in place to protect the interests of shareholders, not chief executives. They have to tread a fine line between acting as the CEO’s cheering squad and constraining his behaviour. A schizophrenic situation at the best of times, so it is really no wonder that so many boards get it wrong from time to time.

A second issue: As Kristie points out, even larcenous leaders can talk the good talk. Many in leadership positions are extremely manipulative and paint a very deceptive picture of themselves. Listening to the talk of any leader can be deeply misleading; we must instead focus on their walk. If a leader preaches accountability and good governance and is simultaneously gorging himself at the company trough as Kozlowski was, then many loud bells should go off.

Like it? Hate it? Engage here