This paper answers case study questions to provide an overview of Taco’s ethical and legal issues, company culture, and the role that both top executives and board members had in this scandal. It also presents and recommends the course of action that the company took, and should take, to restore the trust of stakeholders while avoid fraudulent financial problems. The Ethical and Legal Issues in this Case There were numerous ethical and legal issues in the Taco case. The most damaging issues were accounting fraud, misleading of board members and shareholders, and expense abuses committed by Kowalski and his underpants.
Over $150 million were stolen from the company in the form of massive bonuses and commissions paid to Kowalski and other board members. Kowalski committed tax evasion in New Hampshire and New York. He cheated his employees out of their stock options and used the money to buy yachts, art, and vacation homes. The Role That Taco’s Corporate Culture Play in the Scandal Taco’s corporate culture played the role of being supporters of Kilowatt’s greed. This corporation exacting culture was focused on the rapid growth and profitability rather than concern for all stakeholders.
While in the role as president of Taco’s largest division, Grinned Fire, Protection Systems Co. , Kowalski created a competitive culture among managers. He established bonus programs for managers, awarding them publicly for the worst-producing unit and the best. He earned the reputation of being a “corporate tough guy, respected and feared in roughly equal measure. ” His reputation was based on his aggressive approach towards overtaking his division’s competitors, turning them into profitable units for growing Taco’s portfolio. Cowlick’s acquisition and merger practices later resulted in the resignation of CEO John F.
Fort Ill. The board turned away from Fort’s conservative and profitable approach to support Cowlick’s largest acquisition plan. They made Cowlick CEO in 1992, with an exorbitant salary of $170 million making him the top paid CEO in U. S. A. However, even the highest CEO salary was not enough. Kowalski proved to be a proto©g©e of his former Taco’s CEO, the late CEO Joseph Grazing, whose leadership was based on indulging in a lavish lifestyle using Taco’s incentives. Taco’s culture of greed was a significant factor in Cowlick’s unethical decisions.
The roles that the board of erectors, CEO, CUFF and legal counsel played The CEO was the ringleader for the ultimate downfall of Taco. Leo Dennis Kowalski was the CEO responsible for the hiring of and positioning of the legal counsel and board of directors. Kowalski knew what he wanted, knew what it would take to get there and knew who would help him accomplish this. Leo Dennis Kowalski had an accounting background from Sexton Hall University. He started from the bottom of the Taco workforce and worked his way up. When he started at Taco he “found a friend and mentor in CEO Joseph Gazing” (Farrell et al 334).
Gazing was known for living a lavish epistyle. Kowalski learned from Gazing and dreamed of being in his shoes. John Fort Ill replaced Gazing after he lost his battle with cancer in 1982. Fort was the opposite of Gazing, “Fort was analytical and thrifty”. Kowalski was able to impress Fort. He earned the admiration of Fort with his ability to “cut out extras and reduced overhead, eliminated 98 percent of the paperwork, and reworked compensation programs”. Kowalski and Fort butted heads on their taste for new acquisitions. Kowalski would lobby to convince the board of directors to use the “strategy of acquiring profitable companies”.
The board continually sided with Kowalski which led to Fort’s resignation. Kilowatt’s lifestyle soon mimicked that of Casino’s. Kowalski handpicked “trusted people and placed them in key positions” . Mark Swartz was one of these individuals. He had a strong financial background. Kowalski also brought in Mark Beeline as Taco’s general counsel. Kowalski cut jobs as he pleased and had the support of the board. The board of directors was responsible for protecting Taco’s shareholders. They did this by “disclosing any questionable situations or issues that might seem unethical or inappropriate”.
Each of these individuals was secretly making unethical business transactions. How could they judge and report unethical issues when they were practicing their own? These individuals were submissive to Kilowatt’s requests and desires. They each contributed to the situations that arose in Taco. Have Taco’s recent actions been sufficient to restore confidence in the company? Taco, under the new leadership of CEO Deed Brenner, is now in the process of restoring its reputation. His key strategy is to rebuild the corporate communication function, meaning that a new culture, vision, and values, need to e established.
A communication team was assembled to renew the company image in the eyes of the stakeholders and communicating the company strengths to them. The team was focusing on three key aspects that needed to be addressed. Rebuilding reputation and trust, which would be done by enforcing to the employees and investors what the real Taco was, the strengths of the business, marketplace and the future of the company itself. Secondly, the company needed to establish a global presence. To do this, the communication team focused on re-enforcing the positive facts about the company to the takeovers.
Lastly, the team wanted to focus on the company s business strengths. There was a lack of knowledge both inside and out on what brands the company owned. The team turned to vice president of branding and advertising, Jim Herman, to create a new direction for the brand. The other actions Taco should take to demonstrate that it intends to play by the rules. Taco took action and replaced the senior management team that ran the firm under Kowalski. This was a good first step in cleaning up their image and taking the needed precautions to prevent unscrupulous behavior moving foamed.
However, Taco needs to make additional steps in ensuring the internal controls are in place and that the public perceives them as a firm to trust. Taco should first initiate an internal code of ethics program starting from senior leadership all the way down to the lowest ranking employees. The program needs to be stringent and focused around personal and professional integrity. The program should also be part of their corporate vision statements and marketing materials. This will get the word out to their customers and the general public.
Further, Taco should hire two independent 3rd party firms to audit their books and practices every quarter. Each firm should conduct an independent audit and then auditing each other’s findings after the initial audits are complete. Again, the audits and controls should be made public and part of the corporate prospectus and quarterly reports. Taco needs to get their senior management team directly involved in public speaking about their refined business practices and weave trust into every piece of marketing literature that it creates. Establishing charities and community based projects will also help recover their image.
Lastly, Taco should hire an Ombudsman to act as an intermediary between the board of directors and stockholders and also the media. Overall, Taco needs to make their company as transparent as possible to the stockholder, employees, and customers. Further, they need to ensure rigor around internal controls, management public behavior, and overall ethical business practices. Serbians-Solely Act of 2002 Serbians-Solely Act of 2002 (SOX) will prevent future dilemmas in Taco and other major companies by implementing newly created standards for corporate accountability and corporate governance. “SOX applies to all public companies in the U.
S. ND international companies that have registered equity or debt securities with the Securities and Exchange Commission (SEC) and the accounting firms that provide auditing services to them”. The opportunities for what former chief executive officer, L. Dennis Kowalski and his former CUFF, Mark H. Swartz, did will no longer be as easily available now that Serbians Solely Act has become the watchdog for the corrupt executive Serbians Solely Act specifies financial reporting responsibilities, including adherence to inter controls and procedures designed to ensure the validity of Taco’s financial records.
Serbians-Solely act requires all financial reports to include internal control reports designed not only to show the company’s financial data to be accurate, but that the company has confidence that internal controls are in place to safeguard their financial data”. If Taco does not comply with the Serbians-Solely Act, the outcome for non- compliance can be “penalties that range from loss of exchange listing, loss of insurance to multimillion dollar fines and imprisonment”. Can the SEC trust Taco’s new board?
After what Business Week called “one of the most spectacular governance allures in history’, some major changes were needed. The first order of housecleaning business was to replace each senior executive from Taco. In order for there to be trust and confidence in the “new’ Taco, the entire board needed to be removed and replaced with people from outside the current circle with a different collective expertise. The board needed to move away from the expertise of mergers and acquisitions to a more operationally founded group.
In an unprecedented move the board of directors, was oversaw the shenanigans committed by Dennis Kowalski, stepped away from Taco to make room for a rand new board. Two previous directors were appointed to act as nonvoting advisors to the board for a period of one year. The words of Eric Fillmore, the Senior Vice President of Corporate Governance from 2002-2007, sum up the attitude of the new regime: “During that first year, Taco was like a $35 billion dollars start-up. Going back in time using Internet Archive Waupaca Machine, you would be hard pressed to find any mention of the corporate mission, goals, or values. After CEO Deed Brenner came to helm the company, a complete restructuring revalidated the company. Now, visiting the “Mission and Goals” age in the “About Taco” site, it is clear from the first goal that corporate governance and ethical business practices is what truly drives Taco today: “Governance, Adhere to the highest standards of corporate governance by establishing processes and practices that promote and ensure integrity, compliance and accountability. Brenner and the new board of directors created the new post of “Senior Vice President for Corporate Governance”, who answers directly to the board itself. After the board of directors who were in power with Kowalski stepped aside, a completely new group of people from many different tauter companies took positions on the board to renew confidence and trust in Taco.
With the new board of directors who have charted a path toward ethical integrity and corporate responsibility, the SEC should have confidence in the success of Taco as a company and as a responsible party to shareholders. It is clearly evident that with the creation of the new position of “Senior Vice President of Corporate Governance” this company has made a 180 degree turn from the past and has set its sights and aligned it mission and goals to achieve success in an ethical and responsible manner to all stakeholders.