Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (4 page)

Even though McRae was clear about Tyco’s ownership of the property and despite the fact that she personally stamped Kozlowski’s signature on the nominee agreement, when during the trial the Assistant District Attorney asked her about 950 Fifth Avenue, her first damning response was “[t]hat was Dennis’ apartment.” Dolly Lenz referred to the property in the same way, and she testified that Kozlowski didn’t tell her that the apartment was for Tyco.
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Kozlowski was certain Lenz knew it was a corporate apartment. Or perhaps he didn’t disclose Tyco as the buyer because of the co-op’s restriction on corporate owners. Maybe he didn’t feel the need to differentiate to a real estate broker his ownership versus the company’s ownership. It’s possible that Lenz was informed but the information was irrelevant to her because the property had to be titled in the name of an individual. Whatever the reason, it was an unnecessarily complicated arrangement that no doubt confused and biased the jury during Kozlowski’s trials.

Less than two years after Kozlowski approved the purchase of the Tyco apartment on Fifth Avenue, questions arose about whether the CEO misappropriated corporate assets to purchase and furnish a luxury apartment for himself. The appearance of impropriety is sometimes just as damaging as actual wrongdoing. Unfortunately, Kozlowski and other individuals at Tyco, including the CFO, the employees in Executive Treasury, corporate counsel, and the Tyco Board of Directors did not protect the company or Kozlowski from the potential problems created by using corporate funds to purchase an apartment titled in the CEO’s name. The confusion and controversy were completely avoidable had the company and Kozlowski made better decisions—had they done what was simple and obvious. If he wanted the apartment, Dennis Kozlowski could and should have purchased the 950 Fifth Avenue property personally, with no connection or ties to Tyco. If the corporation needed an apartment, Tyco could and should have purchased other property that could have been titled in the corporation’s name. Unfortunately, simplicity, oversight, and common sense seemed in short supply at Tyco. The purchase of the 950 Fifth Avenue apartment was one of many incidents of sloppy, careless decision-making, needless complications, and shoddy record keeping that, at least for the sake of appearances, unnecessarily blurred the line between personal and company assets.

When Dolly Lenz told Kozlowski about the Fifth Avenue property, he believed the building’s location and the apartment inside would work well for Tyco; it would be a private meeting place where deals could be negotiated outside corporate offices and away from prying eyes.
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Tyco’s Manhattan offices were in a high-profile building on West 57th Street where visitors’ comings and goings were sometimes noted by analysts and reported by the press. Dennis Kozlowski was well known at the time for his aggressive acquisition strategy. During the years he served as CEO, Tyco acquired hundreds of companies. So when the CEO of a potential target company or an investment banker was spotted visiting Tyco’s corporate offices,
it raised eyebrows and sometimes became public knowledge. Kozlowski believed the lack of privacy jeopardized or even ruined deals. He also feared speculation about certain meetings generated inaccurate information that had the potential to affect the market and the price of Tyco stock, positively or negatively, but in either case, erroneously. “We did the CIT acquisition in the apartment,” he said. “Those talks started in the Tyco offices and that resulted in a
Wall Street Journal
article. We needed privacy.” Kozlowski said other acquisitions were negotiated in the Tyco apartment as well, and he cited privacy as the primary reason he approved the purchase of the luxury apartment.
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Shelling out more than $18 million for a luxury apartment seems an unnecessary extravagance for a publicly traded corporation. Certainly there were far less costly ways to conduct private business meetings. However, the purchase was well within Kozlowski’s Board-approved spending authority. During Kozlowski’s second criminal trial, Mark Foley, Senior Vice President of Finance at Tyco, testified that during the October 3, 2000 meeting of the Board of Directors, the Board granted Kozlowski spending authority of $200 million for corporate acquisitions and capital expenditures.
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The increased spending authority was reflected in the minutes of the October 3, 2000 Tyco Board meeting and was just one in a string of Board resolutions that increased the CEO’s spending limit. Kozlowski said that, at the time, it felt as if the Board wanted to push all responsibility, decision-making, and oversight to him; it seemed as if Board members wanted to be bothered with Tyco business as infrequently as possible.
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On July 7, 1998, the Board granted Kozlowski spending authority of $50 million. Less than a year later, on May 12, 1999, the Board doubled the authority to $100 million and then doubled it again in October of 2000.
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The purchase price of the Fifth Avenue apartment didn’t come close to Kozlowski’s Board-established spending cap.

In addition to satisfying the company’s privacy needs, Kozlowski also believed the real estate was a sound investment and would appreciate over time.
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He explained that “at the time, 950 Fifth Avenue was not an ‘A’ building in that area, but more of a ‘C’ building, primarily because it was narrow, making the rooms in the apartment very narrow.” He felt confident the property would appreciate because of the prime location. “It was a good investment,” Kozlowski said in justification of the purchase.
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New York City (NYC) Department of Finance records show that units 10 and 11 of 950 Fifth Avenue were sold on December 14, 2004 for $20,200,000 and technically confirm Kozlowski’s assertion that the property appreciated.
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The apartment did in fact sell in the tough post-9/11 Manhattan real estate market for more than Tyco paid for the property in 2000. However, Kozlowski approved additional expenditures related to the apartment over and above the purchase price. During Kozlowski’s second criminal trial, former Tyco employee Linda Auger testified that between June of 2000 and June of 2002, Tyco spent a total of $31.5 million, which
included the purchase price, taxes, as well as furniture and fixtures for the 950 Fifth Avenue duplex.
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No available records indicate how much, if any, of those additional expenditures were recouped by Tyco when the apartment was sold in 2004. NYC Department of Finance records name “L. Dennis Kozlowski as Nominee” as the seller of the property in 2004 and the seller’s address is recorded as Tyco International (US), Inc., 9 Roszel Road, Princeton, New Jersey. The records include no information about Schwarzman’s sale and Kozlowski’s purchase of the property in 2000.
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Four

Executive Perquisites

In 1966, the Beatles recorded “Strawberry Fields Forever,” with lyrics written by John Lennon although attributed to both Lennon and Paul McCartney.
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In the fall of 1980, Lennon gave an interview that appeared in
Playboy
magazine in January of 1981. Lennon and his wife Yoko Ono sat down with freelance writer David Sheff in their home at the Dakota on Central Park West in Manhattan. When during the interview Sheff asked Lennon about the meaning of “Strawberry Fields Forever,” Lennon responded with an explanation of the lines
Living is easy with eyes closed.
Misunderstanding all you see.
Lennon said, “I was different from the others. I was different all my life. The second verse goes, ‘No one I think is in my tree.’ . . . Nobody seems to be as hip as me is what I was saying. Therefore, I must be crazy or a genius.” In sum, Lennon said reality was whatever he wanted it to be; that to him, surrealism was reality.
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Before the interview appeared in
Playboy,
John Lennon was shot and killed outside the Dakota on December 8, 1980.
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With the shots fired by Mark David Chapman, the building across the street from Central Park where the rich and famous lived was transformed from the luxurious New York home John Lennon shared with his wife into the place where his life came to a tragic and premature end.

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For many people, it would have been easy to see the potential problems created by a publicly traded corporation’s purchase of a luxury apartment that would be used by its CEO, a purchase that was authorized using less than one-tenth of the CEO’s Board-granted $200 million spending authority, that required only the CEO’s approval, and was structured to title the property in the CEO’s name personally. Why did a company the size of Tyco lack internal controls and Board oversight that would have prevented the purchase? Or at least would have required the CEO to seek advice and approval? In this case, the only involvement of Directors was Josh Berman’s letter of reference. The potential problems should have been obvious. But
in 2000, Tyco and Kozlowski were on top of the world and Kozlowski didn’t foresee any problems with the decisions he made about the $18 million duplex.

Charles Lindbergh, one of Kozlowski’s heroes, once said that “[l]ife is like a landscape. You live in the midst of it but can describe it only from the vantage point of distance.”
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More than a decade after he approved the purchase of the 950 Fifth Avenue residence, a self-reflective Kozlowski wondered why he didn’t anticipate the trouble and questioned how he failed to better protect Tyco shareholders and himself. Kozlowski said, “We didn’t need that apartment. I don’t know why at the time I thought it was necessary.”
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Living is easy with eyes closed.

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Dennis Kozlowski and Tyco were not alone in the world of extravagant executive perquisites—like having access to a luxury corporate apartment. In the late 1990s and early 2000s, Tyco’s purchase of the 950 Fifth Avenue apartment was not beyond the pale or even unusual for a company of its size.

During the ugly and very public 2002 divorce of Jack F. Welch, Jr., the former CEO and Chairman of the Board of General Electric (GE), court filings disclosed a long list of executive perquisites GE provided to Welch. Included among the profligacy was a company-owned $11 million luxury apartment at the Trump International Hotel and Towers on Central Park West. In addition to providing Welch an expense-free home in Manhattan, GE also provided fresh flowers for the apartment, regular shipments of wine, a kitchen staff, a housekeeper, and dry cleaning and laundry services. The company even paid for part of Welch’s tab at Jean Georges, a pricy restaurant in the building.
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When Welch’s perks were made public by his soon-to-be ex-wife, neither he nor GE disputed the expenditures. GE gave undivided, vocal support to its CEO and insisted that the company complied fully with disclosure requirements. Jack Welch, in his own and the company’s defense, stated that his generous compensation and perquisites “worked to the benefit of all constituencies.” Of note is the vast difference in support Welch received from GE when he was attacked for receiving lavish company benefits compared to the absolute lack of support offered by Tyco to its CEO. Instead of acknowledging the generous compensation and perks, or justifying them by pointing to the company’s performance under Kozlowski’s leadership, or even admitting that the company had paid its executives too much, Tyco Directors cut Kozlowski loose. GE had Welch’s back. Tyco fed Kozlowski to the sharks.

During the barrage of media coverage at the time of Welch’s divorce, experts and commentators weighed in on the extravagant executive benefits GE bestowed on Welch. For example, corporate governance expert Nell Minnow called Welch’s compensation too generous and stated that “[t]here is really no justification to pay for any living or traveling expenses at that level. . . .” Rakesh Khurana, then Assistant
Professor at the Harvard Business School, explained during a 2002
PBS NewsHour
interview that “it’s an extension of the sort of super-star CEO mentality that had been created over the last 15–20 years in which a CEO was sort of thought to deserve everything he got because he created all this value for the corporation.”

With a legitimate, purely capitalistic counter argument, Welch pointed out that “ . . . [i]t was an employment contract. I fulfilled my obligations. GE did fantastically. It increased market cap $250 billion over the time frame, and became number one market cap in the world, most admired global company for five years in a row.” Despite the logic of his argument, Welch took a beating in the press. Shortly after news of his company-supported lifestyle became public, the embattled CEO gave up many of his perks.

In stark contrast to the detractors, there were commentators who disagreed with the criticism of Welch and GE. Edwin A. Locke, then Professor Emeritus at the University of Maryland at College Park, said in Welch’s defense that he should have answered critics by saying “I earned the benefits through decades of hard and successful work. I am proud of what I earned, and I intend to keep it.”

Nearly a decade after former CEOs Kozlowski and Welch were harshly criticized for their executive perks, Kozlowski addressed the Welch controversy. In a letter written from his prison cell in upstate New York, Kozlowski said he knew Jack Welch. “He’s a great business leader who was very lucky to have G.E. Capital during the booming days. Jack got away with less disclosure because he was Jack.” Kozlowski added, “We modeled my compensation system and retention agreement after Jack’s. It did not work out very well for me.” Kozlowski compared their relative consequences and noted that “Jack said he was sorry he got piggy and all was forgiven. It must be good to be Jack Welch.”
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Lavish executive perquisites did not end with Welch-era CEOs. Chief executives and other Named Executive Officers (NEOs) continue to receive perks and the goodies get bigger and better with time.
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Publicly traded corporations are required to disclose to the U.S. Securities and Exchange Commission (SEC) and to shareholders the compensation paid to CEOs, CFOs, and other NEOs. A publicly traded corporation is a business organization that issues securities to the public. The securities are typically bonds, debt the company owes to investors, or shares of stock that give investors ownership interests in the corporation. A publicly traded corporation’s stock is made available to the public through a stock exchange or in the over-the-counter market. Both GE and Tyco International were (and continue to be) publicly traded corporations—the stock of both trade on the New York Stock Exchange using ticker symbols GE and TYC respectively.
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The obvious advantage of being publicly traded is access to capital in amounts that are almost infinite so long as the investing public is willing to take a risk on the business. Along with the advantages come vastly increased reporting requirements and the burden of complying with thousands of state and federal securities
regulations. A large number of these regulations require corporations to disclose financial and other significant information to the public so that investors can make educated judgments about buying securities.

Executive compensation is one of the many required disclosures and must be included in proxy statements corporations file annually with the SEC. In addition to salaries, bonuses, stock options, and performance-based payments, a corporation must disclose perquisites provided to its executives.
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Even though the SEC requires disclosure of executive perquisites, the agency does not specifically define “perquisite.” During its most recent update of the regulation, the SEC confirmed a continuing belief “that it is not appropriate . . . to define perquisites or personal benefits, given that different forms of these items continue to develop, and thus a definition would become outdated.”
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The SEC offers only that “perquisites” should be interpreted broadly and that the following guidelines be used in the determination of what should be disclosed:

An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.

An item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.
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Among the examples provided by the SEC of items considered perquisites and therefore must be disclosed are club memberships not used solely for business purposes, personal financial or tax advice, housing and relocation expenses, personal travel using company vehicles, and security provided at a personal residence.
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After being disclosed to the SEC and shareholders, executive perks are frequently examined by analysts, watchdog organizations, journalists, and others who trudge through proxy statements to ferret out “All Other Compensation,”
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which is the category under which perks are disclosed.
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Although these watchdogs, through the media, occasionally criticize elaborate perks granted to executives,
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the attention hasn’t shamed boards of directors into reducing the lavish benefits offered to C-level executives.

Perhaps corporations that provide generous perks to their executives are doing the right thing. Perquisites are arguably good investments and in shareholders’ best interests. The most common justification voiced in favor of offering executive perquisites is the same core reason employers offer any type of employee benefit; executive perquisites allow a board of directors to recruit and retain the best talent, to attract and keep a CEO capable of growing a company as successfully as Jack Welch grew GE or as effectively as Dennis Kozlowski grew Tyco.
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In addition to helping with recruitment and retention, perks like company cars, use of corporate jets, and
administrative and personal assistants allow executives to use their valuable time more productively. Other perks, like an annual physical exam, the services of a physician, and security services are provided to protect the health and safety of executives, and benefits like financial planning and tax gross-ups ensure compliance by executives with state and federal regulatory requirements.
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In response to the financial crisis of 2008, the U.S. Congress passed in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act). Under Dodd-Frank, publicly traded corporations became subject to more rigorous disclosure mandates, including a requirement that executive pay be directly compared to the performance of the company. Another Dodd-Frank provision requires disclosure of executive compensation in comparison to the median salary of all other employees in the company. The Act also created a “say-for-pay” requirement under which corporations must allow their shareholders to vote at least once every three years on executive compensation. Although the results of shareholder voting are technically non-binding, boards of directors at even the largest organizations recognize it is patently unwise to award executive pay packages that shareholders do not support.
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Dodd-Frank was enacted to regulate the financial services sector, however the provisions related to executive compensation reach far beyond Wall Street. The desired effect of the enhanced disclosures required by Dodd-Frank is to provide additional information to shareholders and to promote shareholder engagement—to bolster basic corporate governance mechanisms. Even though sweeping legislation like Dodd-Frank creates expensive and burdensome compliance issues for publicly traded companies, perhaps the additional regulations will prevent another instance like Jack Welch and GE having to defend executive perquisites disclosed during a messy divorce and reduce the possibility of an executive like Dennis Kozlowski and a company like Tyco having to explain the CEO’s luxury apartment during criminal trials. Compliance is expensive, but it is not nearly as costly as scandal, litigation, indictments, and loss of investor confidence.

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Criticism of Kozlowski’s purchase of the units at 950 Fifth Avenue grew exponentially when the media found out that, in addition to the multi-million dollar apartment, Kozlowski authorized the services of an interior designer to redecorate it. In more damning testimony during Kozlowski’s second criminal trial, Kathy McRae testified that “Mr. Kozlowski had told me that there was going to be a cap of . . . six million dollars for renovations and furniture for the apartment, and I kept a running total of what invoices were paid and what was left for a balance; and I got the invoices in the Executive Treasury and asked they be paid from a Tyco account.”
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