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Title: Newspaper journal article review

 

Contents

Brief summary of Tyco International Ltd. 2

Agency theory and authentic leadership  theory in real-life context: The case of Tyco’s corporate scandal 4

Conclusion. 6

References. 7

 

Brief summary of Tyco International Ltd.

Tyco International Ltd. (Tyco) is a diversified American company that was incorporated in 1962. It provides products and services relating to security, fire protection, valves and controls, and industrial operations. Tyco Laboratories started operations in 1960. It began by undertaking experimental work on behalf of the American government. In 1964, the company eventually went public. It then started expanding mostly through acquisition. During the 1970s, Tyco shifted attention from expansion to profits in its three main divisions; namely electronics, fire protection, and packaging.

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Today, the company continues to operate in five segments: Flow Control, ADT Worldwide, Electrical and Metal Products, Fire Protection Services, and Safety Products. In recent years, the company has continued acquiring companies in efforts to expand its operations. For example, in 2010, it acquired three companies, including Brink’s Home Security Holdings, Inc. (BHS). In 2011, Tyco acquired two more companies: Visonic Ltd and Chemguard Inc.

Nevertheless, Tyco’s history has not always been an impressive one. In 2002, the company was faced with one of the biggest corporate scandals in the U.S corporate history. The scandal started unfolding when a probe into a restatement of the stock price of the company was launched by the Securities and Exchange Commission (SEC) in 1999. The then CEO of Tyco, Dennis Kozlowski, was put on the spot over his business practices that had already started raising some eyebrows. In January 2002, Tyco’s questionable accounting practices were unearthed. Kozlowski was accused of having been forgiven a no-interest loan of $19 million in 1999 (New York Times, 31December 2002). The SEC investigators also found out that the stock price of the company had been overrated. The CEO and CFO (Chief Financial Officer) of Tyco were also found to have sold shares of the company worth $100 million (New York Times, 31 December 2002). The CEO had gone ahead to state to the public that he was holding them, which in essence was a misrepresentation and an effort to mislead investors.

During the trial of Kozlowski, it was discovered that the CEO was living a very lavish lifestyle. For example, Kozlowski was found to own a Manhattan apartment worth $18 million (Bolman & Deal, 2008). Moreover, information provided during his trial showed that his wife’s fortieth birthday cost a whopping $2.1 million dollars at the expense of Tyco (Bolman & Deal, 2008). Yet the trial occurred at the year when Kozlowski was at the peak of his career, having been named among the top 25 managers of the year 2002 New York Times, 31 December 2002). The court found Kozlowski and his co-accused guilty of all but one of the charges brought against them ((Bolman & Deal, 2008). One of the most troubling things about this scandal is that no one had blown the whistle on this company. It is also troubling that as agents, the top executives of Tyco had put their interests before those of their principals (shareholders).

The reason for choosing Tyco International Ltd is because of the scandal that the threatened to bring down one of the largest conglomerates in the US. The scenario that unfolded at Tyco is of relevance in efforts to apply organizational and leadership theory to real-life situations. For example, the scandal can be used to highlight the problems identified in the agency theory. The agency theory focuses on situations where the interests of principals (shareholders) clash with those of the agents who work for them (managers).

The case of Tyco is also relevant in efforts to put the authentic leadership theory in a real-life context. The introduction of the authentic leadership theory has been inspired largely by the upheavals that have affected society in recent years, including corporate scandals at reputable companies such as Enron, Tyco, and WorldCom, massive failures within the banking industry, and economic recessions. The uncertainty and fear caused by these upheavals have triggered a growing need for authentic leadership. As people become increasingly apprehensive about the corporate events taking place around them, the demand for trustworthy, honest, and good leaders continues to increase, and with it discourse on authentic leadership theory. For this reason, the case of Tyco is of utmost relevance in efforts to place the theory in its proper real-life corporate context.

Agency theory and authentic leadership  theory in real-life context: The case of Tyco’s corporate scandal

In the research approach adopted in this paper, an article from popular press, which addresses the issue of Tyco International Ltd, is selected. The title of the article is “Corporate Conduct: The Overview; Tyco Admits Using Accounting Tricks to Inflate Earnings” and it was published in the New York Times on 31 December 2002. This article is used as the basis of an in-depth analysis of two theories; namely the agency theory, and the authentic leadership theory in real-life context.

There is abundant literature on the agency theory. According to Jensen & Meckling (2006), the agency theory defines the relationship between agents and principals. More importantly, it discusses the “agency problem”. This problem exists because the interests of agents tend to conflict with those of principals. In the view of Jensen & Meckling (2006), the existence of this problem raises a question of the circumstances under which corporations continue to exist.

An agency relationship exists whenever a structural arrangement is put in place in which one party engages the services of the other to undertake a specific task (Bolman & Deal, 2008). In the case of a corporation, the owners (shareholders) tend to enter into a relationship with their agents (managers) (Bolman & Deal, 2008). In this relationship, both the principals and the agents are perpetually seeking to maximize utility. However, their interests tend to diverge. In situations where agents have no ownership interest in the corporation, they tend to care less about an increase in expenditure during the running of the affairs of the corporation because, after all, the money they are spending belongs to someone else (Bolman & Deal, 2008).

One of the ways in which principals attempt to overcome this problem is by linking the compensation of the company to the price of the corporation’s stock (Bolman & Deal, 2008). However, this strategy has been seen to reduce the agency problem in only a marginal way. At Tyco, Dennis Kozlowski, the company’s CEO, took more than $30 million from the company’s coffers to buy, decorate, and furnish his palatial home in New York (Bolman & Deal, 2008). Nonexecutive shareholders are constantly worrying about such extravagance since they cannot always keep track of the actions of the management. In any case, the shareholders would incur hefty “monitoring costs” through supervision and auditing in efforts to keep track of issues such as company time and expenditure (Bolman & Deal, 2008).

The authentic theory of leadership is equally applicable to the scandal that unfolded at Tyco in 2002. The company’s CEO, Dennis Kozlowski, lacked in the elements of authentic leadership. According to Northouse (2013), an intrapersonal view of the authentic leadership theory is appropriate, in which case focus is on what goes on within the person of the leader. In this case, focus is on the self-regulation, self-knowledge, and self-concept of the leader (Northouse, 2013). According to Eilam (2005), an authentic leader must exhibit genuine leadership and lead from conviction. The moral premise of this theory is that leaders should always strive to do what is morally right. Tyco’s CEO failed to meet the parameters of leadership as outlined in this intrapersonal view of authentic leadership by simply taking the morally wrong path of spending the company’s money extravagantly.

Conclusion

In conclusion, it is important for efforts to be made to explain theories through real-life situations in the world of corporate affairs. This paper has examined the applicability of the agency theory and the authentic leadership theory to the corporate scandal that was unearthed at Tyco International Ltd in 2002. The agency theory is applicable to this case because it explains the “agency problem” that drove the agent (CEO) into extravagant spending of company money, an action that was against the interest of the principals (shareholders). In taking this morally wrong action, the CEO of the company also demonstrated his lack of authentic leadership.

 

References

Bolman, L. & Deal, T. (2008). Reframing Organizations: Artistry, Choice, and Leadership (Fourth edition). San Francisco, CA: Jossey-Bass.

Eilam, G. (2005) “What’s your story?” A life-stories approach to authentic leadership development. The Leadership Quarterly,16(3), 395–417

Jensen, M. & Meckling, W. (2006), Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3, 305 – 360.

New York Times, (2002), Corporate Conduct: The Overview; Tyco Admits Using Accounting Tricks to Inflate Earnings. 31 December 2002 Retrieved from http://www.nytimes.com/2002/12/31/business/corporate-conduct-overview-tyco-admits-using-accounting-tricks-inflate-earnings.html?pagewanted=all&src=pm  on September 9, 2013.

Northouse, P. (2013). Leadership: Theory and practice (Sixth edition). Los Angeles, CA: Sage.

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