Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (7 page)

When the French and Israeli studies appeared in U.S. news outlets, late night television host Jimmy Fallon shared results of the research in his monologue and said, “a new study found that women think men holding a guitar are more attractive, even if they’re not playing it.” Fallon continued, “In a related story, guys with an accordion will die alone.”
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Kozlowski organized a band when he was still in high school. His neighbor Stas Polakowski was a good drummer, his friend Walter Sumner was a good electric accordion player and keyboardist, and his friend Eddie Betz was a good woodwind player and according to Kozlowski, the most talented musician in the group. “We practiced at the Polish-American Falcons—a private club,” he said. “They had a hall with a bar and a restaurant and we practiced on weekends when the hall wasn’t booked. People heard us practice and hired us. We also played in the bar on Friday evenings—for tips.”

Kozlowski played with the same band members through college. “I was the least talented musician,” he said, “but the only one capable of getting bookings.” The band played high school and college dances, weddings, at bar and bat mitzvahs, and in clubs. “We could play any kind of music—polka or rock ’n roll or Jewish music,” Kozlowski said of
The Hi-Tones.
“We used fake books with all kinds of music. We practiced before events and learned how to play the music that had been requested.”

During college Kozlowski met Gary Lewis, the son of his boss Frank Lewis, and the two became friends. “Gary was a very good saxophone player,” Kozlowski said, “so I brought him to practice with the band.” Kozlowski took some heat from the members of the Polish-American Falcons for bringing an African-American man into the club. “I didn’t know how to handle it,” Kozlowski said. “Gary was my friend and I looked up to Frank Lewis. He was smart and educated and he was African-American. I guess I didn’t think it was a problem.”

When Kozlowski started college in the fall of 1964, he decided to major in history because he loved the history classes he took in high school. However, as do many college students, Kozlowski changed his major at the end of his freshman year at Seton Hall. He tried out several majors until he eventually landed in the college of business where he decided to study accounting. “I started thinking about my future and I knew I was going to need a job,” he said. “The hottest recruitment on campus was for accounting students.” Of his pragmatic decision, Kozlowski explained, “I was living at home, working two jobs to pay for school, and I was living in the metropolitan New York area. I picked up the paper and there were hundreds and hundreds of entry level accounting jobs.” During his junior year, Kozlowski got his first business experience when he worked for six weeks at Tungsall Electronics in Newark. It was the first in the string of positions that would ultimately lead him to that of Tyco’s CEO.
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Dennis Kozlowski graduated from Seton Hall in 1968 with a Bachelor of Science degree in accounting. When Kozlowski attended Seton Hall, the university was an all male school and the young men were required to wear jackets and ties to classes. The university became co-ed in the fall of 1968, just after Kozlowski graduated. He admitted that during his four years of college, he didn’t spend much time studying. “I studied as much as I could,” Kozlowski said. “It was a very busy four years.” Even though much of his time was spent working in the drug store and hustling gigs for the band, Kozlowski found time to join a fraternity at Seton Hall; he was a member of Delta Sigma Delta. “My social life revolved around the fraternity,” he said. “We had a Saturday night party where we all brought our girlfriends. That was my only social life. The rest of my time was spent working and going to school.”
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John Franklin Fort III

Kozlowski’s predecessor at the head of Tyco grew up very differently than he did. John Fort’s great-grandfather, John Franklin Fort, was the thirty-third Governor of New Jersey (1908–1911). Fort’s gubernatorial term left a legacy of “moral rectitude, honesty and hard work . . . [d]uring a period in New Jersey history when corruption and an arrogant disregard for the commonwealt [
sic
] characterized government. . . .” Despite his honorable reputation and his work ethic, Governor Fort was criticized for both his policies and his performance. The criticism was not unlike that directed toward many leaders and seemed to center on Governor Fort’s ineffectiveness and inability to be all things to all people. In his later years, Fort expressed disappointment in himself; he had hoped to accomplish great things as Governor and lamented because his achievements fell short. Former Governor Fort explained by telling the story of a little girl who asked her mother the difference between hope and expectation. “Well,” said the mother, “I hope to see your father in Heaven, but I do not expect to.”
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In addition to his lineage, the Governor’s great-grandson came to Tyco with impressive credentials. He earned an undergraduate degree in aeronautical engineering from Princeton University and a Master’s degree in industrial management from MIT, the alma mater of his predecessor Joe Gaziano. Fort began working for Simplex Wire and Cable Company in Cambridge, Massachusetts as a part-time production control clerk while he was a student at MIT and he continued with the company after completing his graduate degree. His initial assignment was at a factory in New Hampshire where the company produced underwater cable for the U.S. Navy. Fort quickly rose through the ranks at Simplex and eventually became Vice President and General Manager, positions he earned and held between 1966 and 1974. Under Fort’s leadership, annual sales doubled to $12 million.
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When the company was sold to Tyco in 1974, Fort stayed on after the acquisition and for six years, he served as President of Simplex Wire and Cable, the company then operating as a Tyco subsidiary. In 1980, Fort was promoted to Tyco’s Senior Vice President of Operations; with the new rank came a move to Tyco corporate headquarters. Two years later, Fort was named Chairman and CEO of Tyco after Joe Gaziano’s sudden death in 1982. Fort served as CEO for ten years until Kozlowski succeeded him in 1992.
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* * *

Ten years seemed to be the unofficial term limit for Tyco CEOs. Gaziano served as CEO from 1972 until his death in 1982. John Fort was Tyco’s CEO from 1982 until he was displaced by Dennis Kozlowski in 1992. And Kozlowski headed the company from 1992 until he was indicted by the Manhattan District Attorney on sales tax charges and fired by the Board of Directors in June of 2002. The Tyco Board named John Fort interim CEO during the summer of 2002, but he was quickly replaced by Edward Breen, who left his post as President and Chief Operating Officer (COO) of Motorola to take Tyco’s top position in 2002. Breen had been Tyco’s CEO for almost exactly ten years when he retired in September of 2012.

After his retirement, Breen was criticized when his $150 million golden parachute was disclosed in Tyco’s proxy filed with the Securities and Exchange Commission in January of 2013.
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Breen received ironically generous compensation and perks from Tyco during the decade he occupied the Chief Executive’s Office. It was ironic because Breen played the role of redeemer who came to Tyco and righted the company after a very costly scandal, the heart of which was excessive executive compensation. In fiscal year 2012 alone, Breen’s compensation was more than $23 million. In 2011, Breen pocketed more than $20 million. While the scandal was still ongoing, Breen was publicly criticized when the company disclosed payments of more than $420,000 for his and his special advisor’s personal use of company aircraft in 2004. The proxy disclosing Breen’s expensive executive perquisites was filed in January of 2005, just as the second trial of Tyco’s former CEO and CFO
was beginning in a courtroom in Manhattan—the two former executives were being tried for using unauthorized and excessive compensation and perks to support their lavish lifestyles.
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* * *

During the decade John Fort headed Tyco, he promoted Kozlowski multiple times. First, Fort named Kozlowski President of Ludlow Corporation and then placed him at the head of Grinnell. Fort clearly had confidence in Kozlowski’s abilities as Ludlow and Grinnell were Tyco’s two largest businesses at the time. During Fort’s tenure as CEO, Kozlowski joined the Board of Directors in 1987, and he was named President and COO of Tyco in 1989. Years later, when testifying in Kozlowski’s second criminal trial, John Fort said of his relationship with Kozlowski, “We worked very closely together. He was by far the best manager we had in the company, and had a lot to do with the success we had in the 10 years I was CEO.” Fort praised Kozlowski’s performance, testifying that “he was extremely competent. His financial skills was [
sic
] excellent. What was really excellent was his ability to look at the financial data and take very sound operating moves based on it. His analysis was excellent.”
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Fort characterized his exit from the CEO’s office quite differently than Kozlowski described it. Although Kozlowski stated unequivocally that Fort was fired by the Board of Directors, Fort said under oath, “I ran the company until I retired in 1992 as Chairman and Chief Executive Officer.” However, multiple sources confirmed that, on the day the Board replaced him, Fort was taken by surprise, became irate, and demanded that the company buy back all of the Tyco stock he owned at the time, which Kozlowski, as the new CEO, agreed to do. After insisting that the company buy all of his Tyco shares, Fort remained on the Board—an olive branch extended by Kozlowski and the Board to sooth a very angry John Fort. Kozlowski said he didn’t want to damage the company by allowing Fort’s ouster to appear ugly. Kozlowski was strenuously advised that it was in Tyco’s and his own best interests for Fort to sever all connections to Tyco and that Kozlowski should insist that he do so. But instead, Kozlowski acquiesced to Fort’s desire to stay. He said, “I screwed that up.” Kozlowski allowed Fort to hold a seat on the Board and to retain an office at Tyco. Kozlowski characterized his decision to allow Fort to remain on the Board and in his office at Tyco corporate headquarters as one of the worst decisions of his career. Kozlowski said, “John Fort, the former CEO who the board fired, wanted the job back after I grew the company for 10 years,” something in retrospect he evaluated as a “BIG MISTAKE.”
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In Kozlowski’s telling, Fort was not privy to plans to replace him, but news of the Board’s desire to make a change in the summer of 1992 reached Fort before the scheduled Board meeting. In the weeks preceding the meeting, Fort was reportedly away on vacation and thus absent from the corporate offices as changes were
contemplated. Kozlowski recalled that Tyco Director Phil Hampton was also vacationing in the summer of 1992. By chance, Hampton found himself on the same cruise as Merrill Lynch analyst Carol Neves. “Phil probably had a couple of scotches and inadvertently talked to Carol about firing Fort,” Kozlowski speculated. Upon learning that the Tyco Board intended to remove Fort, Neves called her professional contact and good friend Irving Gutin.

Irving Gutin was with Tyco for many years, and he held several high-level positions including head of mergers and acquisitions and head of investor relations; he was a Senior Vice President. Like Fort, Gutin became part of the Tyco conglomerate as part and parcel of an acquisition. Gaziano brought Gutin into the company during the $27 million Armin Corporation acquisition in September of 1979. Kozlowski said that Gutin, whom he described as loyal to John Fort, confronted him with the information he learned from Neves. As Kozlowski recalled the awkward conversation, he said, “I told Irving ‘You heard something you shouldn’t have heard. Sit on it.’”

Gutin disregarded Kozlowski’s suggestion; he didn’t sit on the information. Instead, he tracked down Fort, who had just returned from vacation, and shared the rumored news of the Board’s plan to replace him. Not surprisingly, Fort questioned Kozlowski about the rumor he heard from Irving Gutin, who heard it from Carol Neves, who heard it from Phil Hampton. When Fort asked if he knew what the Board was planning, Kozlowski played dumb and told Fort he wasn’t certain what was happening. A few days later at the board meeting, the rumor became reality; John Fort was out and Kozlowski was named his successor. Kozlowski said, “I remember the day of the meeting; John came out of the boardroom after speaking with the Directors and he asked me to go in.”
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Once Kozlowski was in the room, the Directors presented him the opportunity to take the helm as Tyco’s CEO. When they crafted their initial offer to Kozlowski, members of the Compensation Committee planned to cut by about $100,000 the salary Kozlowski was already making as President and COO. In lieu of a more lucrative salary, the Committee offered a package of performance-based compensation—incentives paid through the use of bonuses and grants of restricted shares that vested only if performance goals were met. Kozlowski’s pay, specifically the pay-for-performance provisions of his compensation agreement with Tyco, became the basis of charges included in the Manhattan DA’s 2002 indictment, and his compensation was the central issue of his criminal trials in 2003 and 2005.

In his trial testimony, Kozlowski explained his negotiations with the Board in July of 1992. He told the jury about the inclusion of bonuses and restricted shares in his compensation package, about his history of advocating and using incentive pay programs as he rose through the ranks at Tyco, and about the creation of a three-pronged compensation system:

The Board elected me the Chief Executive Officer of Tyco. . . . After that there became a question of compensation for me as the CEO. In the past John Fort’s compensation was . . . his salary, bonus, but he also got restricted shares. . . . In John Fort’s case, his restricted shares were vested over time. So he would be given a grant of shares [and] vesting would take place simply by being there. In our case, since I had come up with pay for performance throughout the operating divisions at Tyco and all the businesses I worked in, Ludlow or Grinnell, whatever the business was, we focused on pay for performance and I suggested to the Board that . . . I would like to have the upside of pay for performance and the downside, you know, if it doesn’t work well, but I suggested to the Board that we institute a system where my restricted shares would vest based upon the formula on performance. That was worked out with the Compensation Committee at Tyco, and that gave rise to what developed as the three prong effort of our compensation system. An increase in earnings per share earned us stock, or in some cases share equivalents. An increase in our operating cash flow earned us cash bonuses and an increase in our earnings earned us a cash bonus. Initially that cash bonus was capped, but that was subsequently changed.