Eric M. Pillmore: Tyco: Charting the Return to Trust

Eric M. Pillmore assumed the newly created position of senior vice president – corporate governance for Tyco International in August 2002. From July 2000 to July 2002, he served as the senior vice president, CFO and secretary of Multilink Technology Corporation. Eric worked for General Instrument Corp. (GI) from 1996 to 2000, and served as senior vice president of finance and chief financial officer from December 1997 to January 2000, leading up to the sale of GI to Motorola.

From January 1994 to February 1996, Eric was the CFO for the Plastics Americas Division of the General Electric Company. Prior to that, he served as the CFO for GE Medical Systems Asia Ltd., in Tokyo, Japan. In addition, he worked in various financial positions for GE from 1979 to 1991, including six years as a GE corporate auditor. Eric is a 1975 graduate of the University of New Mexico, Albuquerque, New Mexico, with a B.B.Aa from the Andersen School of Business. He has been married to his wife, Pamela, for 24 years and they have five children. He and his family currently reside in Doylestown, Pennsylvania.

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Ethix: You recently went to Tyco in spite of all that was going on there. Why did you do it?

Eric Pillmore: Ed Breen, the new Tyco CEO, was my former CEO at General Instrument (GI). We met during his first week in the job and, given the issues the company was facing, he decided it made sense to create a governance role to focus on and help resolve many of these issues. The plan was for me to work across business functions, with a small staff, and pull together a strategy and game plan on how to address the many governance issues Tyco faced.

Now why was that attractive to me? I had received great training in the Navy, at GE and at GI, combined with some very challenging experiences, that had prepared me at this time in American history to have a significant impact on a very large company. Tyco also had a large number of employees (270,000), and many times that when you consider the number of family members across the Tyco employee population. The company had been rumored to be on the brink of bankruptcy. The challenge was unbelievable. But I also thought the task was possible, based in part on my previous relationship with the CEO, and knowing Ed Breen’s strong ethical foundation.

Critical Time for Business

You mentioned something about ‘this point in history,’ so obviously you’re seeing a much bigger picture. How pivotal is this point in business history in light of the broken trust from business we have seen the last two years?

I think American industry is at a real turning point. If industry and its leaders can figure out how to rebuild trust and get people to return to the financial markets, that could have a huge impact on the American economy long term. Companies like Tyco and others need to face the issues and communicate in a very transparent way with investors, employees, suppliers and customers, talking openly about the critical issues with those constituents. As we take swift action in the short term, I believe we’ll succeed over the long term. Leaders must take a long term approach by making a strong commitment to add the necessary resources, and to drive strong ethical values down into the fabric of their companies. We are not talking about creating bureaucratic procedure manuals to place on the shelf and gather dust. This is about changing hearts and rebuilding trust. And the only way you do that is to build strong ethical values into the fabric and the DNA of a company.

Morale at Tyco

How did you find the morale at Tyco when you got there?

One measure of morale came before I ever took the job,—from a friend who was a Tyco employee. As the crisis unfolded and the negatives all hit the newspaper, it became a subject of our regular conversations. This gave me a personal insight into the morale at the company. I soon recognized that the reputation of the company was damaged to the point where employees were no longer proud enough to wear a shirt that has the Tyco monogram on it. People ask me how you measure when you have addressed the issues with the employees. One way is to wait for the day that people begin putting their Tyco t-shirts back on, demonstrating their pride and trust in the company.

How long do you think that will take?

I think a year from now we’ll have a better idea. People don’t get over this overnight. And we must rebuild the trust with all five constituents at the same time.

Employees, customers, suppliers, investors and..?

The fifth one is the regulatory authorities we’re dealing with on a regular basis!

The Importance of Transparency

You mentioned transparency in building trust with the public. Can a company afford to be more transparent than its competitors? Is transparency an asset or a liability in the market?

I think it is an asset. But we are choosing to manage this asset a bit differently than others. For example, we invested about six months ago in an extensive effort to draft our guide to ethical conduct. A reporter from a newspaper in Japan asked me, “Why would you put that up on the web and share it with everyone after you have invested so much time and effort in it? Why not just keep that for employees and give out copies and control the access to it? Why let people steal all your good ideas?”

I think what we’re doing here is bigger than Tyco. I’d like to see the Guide for Ethical Conduct raise the standard for every public company in America. Quite honestly, some of that is happening. We’re hearing about some very large Fortune 50 companies using our guide as a model for changes they are also considering. Why is that?

We have taken a unique approach and I think people are intrigued by what we have done. If we hide behind the shadows it doesn’t help anybody else. As we share the results of our efforts, it could save people a lot of effort, a lot of money and spread the best practice methods, which is how we can have the largest positive impact.

How Did We Get Here?

Why don’t you say a bit about your view of what gave rise to this in American business, how we got here?

I think the issue of functional leadership and mentoring was significant. As you look across the companies that had problems, look at the age and experience of people in some of these key jobs. They were typically identified very early as bright, young rising stars in a company and rose to their executive position without the functional leadership, mentoring, and training required to fulfill those jobs. What is needed are training programs and succession planning tracks that ensure these people get the proper character development, leadership, and mentoring. For example, they should be encouraged to make lateral moves and take on cross-functional assignments to develop a broader perspective. I am fortunate to have been mentored in the past by leaders with strong character and good foundational ethics who taught me to stand up and do the right thing when under pressure. Many of these people didn’t have that development. So that’s number one.

Another area is accountability. Good ethical leaders without a web of accountability around them can be headed toward a crisis. Without an accountability structure, even the best leaders can go astray. They incrementalize and rationalize what’s right. For example, accountability relationships can come from a spouse, a pastor, your peers, or your subordinates. But they have to know that you’re willing to be held accountable. Otherwise, if your standard degrades, their standards may degrade with you.

I think what you’re saying here is that there are few all good or all bad people? The line between good and evil runs right down the center of the human heart. We migrate one way or the other depending on peer pressure, and need some outside influence.

Laws, regulations and processes are part of it, and are necessary and good. But quite honestly to get at the heart as you just described, we’re not going to get there with just procedures. We’ve got to bring character and ethics to life.

We have got to figure out a way to bring to life the code of conduct in a company so people truly live it, they understand it, they see it modeled, they feel it as a part of the corporate fiber, not just part of the corporate library. Open communication outlets are key. There need to be trusted ways for people to speak up.

We’re learning that ethics and character really matter in the company and for its stakeholders. We think it’s going to be a differentiator for Tyco.

We’re trying one other thing to bring the guide for ethical conduct to life. Of course, we include what is the right thing to do, what are the policy and the standard. We’ve also decided to highlight what unethical conduct looks like. If you really want to create an open culture, you need to create examples of the wrong way to do things. What if feels like, what it looks like, what it smells like, so you can generate some dialogue with employees, customers and suppliers. When unethical conduct occurs, we want our employees to feel right about saying no to the wrong kind of behavior. We want them to also know the company stands behind their strong stance against unethical conduct.

Have you created these lines of communication for your people?

We’re in the process of doing that. We have created the content and the guidelines. The toolkit is now in the hands of our leaders to open up communication with the employees.

If they’re not comfortable with that you probably don’t want them there.

Avoiding Legalistic Codes

One of the weaknesses of a code is that it smacks of legalism. The company is out to get you and this is the policing mechanism. Or, if something is not in the code then it must be okay.

We named our document “The Guide for Ethical Conduct” and not the “Code” for this reason. The idea is that you come with a conscience, a background, and a set of values. We are going to give you guidance with regard to the company. We call it, “Doing the Right Thing.” So that’s the idea. Right now we are rolling out a controllership guide, where we face a couple of significant challenges. One, how do we bring it to life and make sure it doesn’t gather dust? Two, how do we ensure that everybody in the company owns this? This is not just for the controller or the finance team. There is content there that you ultimately want to drive into the behavior of all your people. We’re going to put it up on the web and we’re going to make it available for everybody. This isn’t a deal where we’re going to lock it up and only finance people are able to read it. We’re going to share it with people and communicate broadly with operating management about the importance of it and their responsibility with it and how it becomes part of the core guidance for how the company operates.

One company I have talked with made a clear statement in front of their guide to the effect: make sure you understand the spirit of what is intended here. We are not trying to create a legal document for finding loopholes, but a guide to help you and the company succeed.

To do this means having root values underlying the code or guide. Do you have such values? And how do you use them?

Our company has four core values: integrity, excellence, teamwork and accountability. We use these values in our performance appraisals. What we have done is study the character traits that tie to those values, and picked two or three attributes under each value for measuring our leadership team. We look at behavior. What does it mean to champion integrity and trust? To have managerial courage? So it’s your job as a leader to evaluate each member of your team.

Core Values Tied to Compensation

Are you going to tie this to an incentive plan or compensation plan?

Yes, the leadership assessment will become an integral part of the individual’s future compensation actions.

Otherwise it is communicated that those other metrics (making the numbers) are really what matter and this is secondary.

Agreed. When you look at the foundational values for a company and you look at character of people, if you have the right values, and you screen and hire people leaders with the right character, then you’ll see the right behavior. And then people begin to see that you’re living it out. If there is a breakdown here, you are not doing it right.

How do you hire for character?

I think you have got to figure out ways to conduct background checks and do evaluation interviewing to get at that.

Can People Change?

Steven Carter (author of Integrity) gave a talk in the fall and he mentioned he thought most people had their character solidly developed by the time they were in their early twenties. They were formed and they were going to be who they were going to be. What do you think of that? Talking about character development and leaders, you must disagree at some level?

I agree that values and character are shaped at a pretty young age. But I have seen a lot of examples of people who were brought up in environments where they got all that, and they still went bad. None of us are trained as leaders at a very young age. I think it is critical, to have mentoring and support relationships. If you look at some of the failed leaders, that wasn’t there.

Beyond Employees

Now you have talked mainly about dealing with your employees. What are you doing with suppliers and some of the other stakeholders to rebuild trust at Tyco?

We’ve done the rollout of the Guide to Ethical Conduct to employees. Next on the list is the rollout with suppliers and customers. Our first opportunity to do that is in August at a forum of all our transportation suppliers—everybody from truck, rail and air. We’re developing a strategy to do a broader rollout of our entire supply base. We are discussing how to do the same kind of strategy with our customer base. We’re out on the road proactively talking with investors about what we’re doing. One of the topics we’re talking about is rebuilding trust through governance.

We expect our institutional investors to have high returns so they lean on corporations, and that seems to accelerate the pressures for reporting earnings and short-term kind of horizons. There is a whole pressure cycle that really comes down almost to individual investors and institutions. How do you hold that off?

Well, I don’t know that you can hold that off. We have a three-prong strategy for customers, suppliers, and investors. We talk about three priorities: building trust, strengthening liquidity, and driving operational intensity. Now that’s what I spend most of my time talking about at my presentations. When Ed Breen, our CEO, goes out to talk, the opening section of his presentation to his investors and employees is rebuilding trust and what we’re doing as a company to do that. It includes the Guide for Ethical Conduct, transformation of the leadership team, transformation of the board, and the development of all our governance practices.

So investors should understand that and rather than expect the short-term quarterly profits.

What investors want is credible long term value in the results. They want credible forecasts and they also want long-term value. We’ll talk about the opportunity to generate cash, reduce our debt, really solidify the company’s balance sheet long term and grow cash earnings. That’s what we’re talking about. And we talk about it as a long-term deal. In the long term, hopefully the integrity and character and trust become much more important to investors.

Government’s Role

What role do you see in the government? Sarbanes Oxley is one regulation and does something. But do you see new things coming out of the government that will play a role here?

I would love to see Congress spend some time talking about best practices in companies. There is so much negative out there about what companies are not doing, but I’d love to see some companies brought in to talk about what they are doing from a best practice standpoint to really build foundational value. We don’t have enough attention in this direction.

What additional pressures do you think globalization puts on companies in terms of behavior? Might global competition create more pressures if you’re dealing with a competitor that may operate with lower environmental, human relations, or safety kinds of standards?

The pressure is there, and I think at the end of the day you have to have leaders who can stand up and be counted to say no. Some CEOs have gone on record and said that they are not going to participate in business like that. What does it do? It raises the standard in people’s eyes as to where that company stands and I think people value that. I believe they win business elsewhere because of those efforts.

Taking a Long-Term View

We have a couple of great examples of CEOs we talked to recently who have built this trust in their companies, but in both cases they’re long-term CEOs and they can afford to take a long term view. I have wondered what happens with companies when they bring in a CEO and if they don’t perform within a year they are gone. That forces a short-term view doesn’t it?

I think some of that can also be in the makeup of the board. The board must have a long-term view about what the company is doing. If expectations are the CEO is going to turn the company around in a year, then where does that get set? By the board. I think too often we succumb to the expectations of the investment community instead of proactively going out and trying to set the tone ourselves, saying this is a long-term deal. People ask me, how long is it going to take? I tend to be pretty conservative. I have to tell you I don’t think it is going to happen over night. Rebuilding trust takes time.