Five

Behind the Elephant

Dennis Kozlowski began his business career in 1969 as an internal auditor with the SCM Corporation, first in New York City and then in Syracuse, New York. With more than three years of internal audit experience under his belt, Kozlowski left SCM and moved to Boston and into a second audit position with the Cabot Corporation. He spent the entirety of his career in what would be considered unglamorous businesses: SCM, Cabot, Nashua Corporation, and Tyco—no dot-coms, no sexy consumer goods, no Apples or Microsofts or hedge funds or investment banks.

The years Dennis Kozlowski worked for the Cabot Corporation were also the years he and first wife Angie became a family. They had two daughters; Cheryl was born in 1974 and Sandy in 1977. When Cheryl was born, the couple was living in Atkinson, a small town in New Hampshire near the Massachusetts state line. Kozlowski said he was traveling frequently, including several trips to Europe, which at the time were rare and very expensive. When he wasn’t traveling, Kozlowski made the ninety-minute commute from Atkinson to Boston in a yellow 1973 Volkswagen Beetle. “A Super Beetle,” he clarified. “This was during the years of the oil crisis,” he said, explaining his rationale for purchasing the tiny vehicle, “when Ford and Carter were in the White House.” Before he traded it, Kozlowski folded his six-foot two-inch frame into the yellow Super Beetle for more than 100,000 miles.1

On top of the three years he spent honing his auditing skills at SCM, Kozlowski earned another three years of internal audit experience at Cabot Corporation before he left the company in 1975.2 Feeling the relatively new responsibility of supporting his young family, Kozlowski decided to make a move when he had the opportunity to become the Director of Internal Audit at Nashua Corporation in Nashua, New Hampshire.3 He stayed with Nashua Corporation for less than a year and said, “I knew the day I started that it was a mistake.” Kozlowski was manager of administration, which in reality was the job of cost-cutter; he was the ax man. “It was a financially difficult time for the company,” he said, “and nobody liked to see me coming.”4 Kozlowski was dissatisfied with his role at Nashua Corporation so when a Massachusetts headhunting firm contacted him about an opportunity with a company called Tyco, he was more than willing to take a look.

In 1975, Tyco was a small company in Exeter, New Hampshire with between $15 and $20 million in annual revenue; it was smaller than any of the other organizations for which Kozlowski had worked since he graduated from Seton Hall University with a Bachelor’s degree in accounting in 1968.5 When during his second trial he was asked to describe the type of company Tyco was in 1975, Kozlowski said, “Tyco was a smaller company than Nashua, but had a far greater potential from what I saw.”6 Tyco was in search of an Assistant Comptroller, a position that, if offered and accepted, would have the internal audit function at Tyco reporting to Dennis Kozlowski. It was a position similar to the one he held at Nashua Corporation. During his Tyco interviews, Kozlowski met with Howard Hull, who was Vice President and Comptroller, with the Vice President of Finance, and Kozlowski met with Tyco’s CEO Joe Gaziano. “In fact, we had a few meetings,” Kozlowski recalled, “and subsequently they offered me a job as Assistant Comptroller and Director of Internal Audit at Tyco.”7 Dennis Kozlowski became a Tyco employee when he was twenty-eight years old. He noted that “[m]y starting salary because of my age was $28,000 a year.”8

Kozlowski’s career at Tyco began under the leadership of Joseph Gaziano, who was the company’s third CEO. The company was founded in 1960 by Harvard PhD Arthur J. Rosenburg. In the beginning, the company operated as a research laboratory in Waltham, Massachusetts where Rosenburg did experimental work primarily in fulfillment of government contracts.9 In 1962, two years after Rosenburg opened shop, Tyco was incorporated as Tyco, Inc. and two years later, in 1964, became a publicly traded corporation. The progress continued in 1965 when the company’s name was changed to Tyco Laboratories, Inc. and in the same year, it acquired Mule Battery Manufacturing Company, the first of hundreds of companies it would acquire over the next several decades.10 Seemingly setting the tone for his successors, Rosenburg began to aggressively grow the company through numerous acquisitions during the 1960s. By 1970, the company had grown significantly and was in need of restructuring, which is why the Tyco Board of Directors made a change in management, replacing the company’s founder with Joshua M. Berman.11

At the time, Josh Berman was a member of the Tyco Board. He was also a practicing attorney; Berman was a partner in the Boston law firm Goodwin, Proctor & Hoar. Berman headed Tyco as both Chairman and CEO until April 1973, when Joseph P. Gaziano was named Tyco’s President, CEO, and Chairman of the Board.12

Gaziano was a Massachusetts Institute of Technology graduate—a member of the class of 1956. Before heading Tyco, Gaziano was a Vice President at the Raytheon Company. He left Raytheon in 1967 to run Prelude Corporation, a Westport Point, Massachusetts company that operated deep-sea lobster boats. Gaziano became a legend in the commercial fishing industry when in 1971, he almost started a war with Russia over the destruction of equipment caused by Russian trawlers fishing in the same waters on the continental shelf where large Prelude ships operated. Gaziano was beyond frustrated with the ongoing damage to the company’s gear, so he instructed captains of Prelude ships to keep logs of the Russians’ destructive actions. Once he collected the captains’ logs along with Coast Guard surveillance of the Russian ships, Prelude filed an action in a United States District Court in which the company sued the Russian government to recover damages to Prelude equipment. According to Carlton “Cukie” Macomber, a company insider in 1971, once the legal action was filed, the U.S. State Department immediately told Gaziano, “We are in the middle of a Cold War and you are going to start a real one.” The Russian government did not respond immediately to Prelude’s legal action, so with an aggressive move that exemplified Gaziano’s style, the company took a second jab by placing a lien on the Suleyman Stalskiy, a Russian freighter that had entered San Francisco Harbor. On June 9, 1971, U.S. Marshals seized the vessel and held it in the harbor for six days—days during which, Macomber reported, “the State Department became very frustrated with us.”13

The seizure had the desired effect. Within days, limousines carrying Russian delegates arrived in Westport Point; the Russian government came knocking at Joe Gaziano’s door. In its lawsuit, Prelude asked for $300,000 in damages. After days of negotiations, the parties reached a settlement under which the Russian government paid Prelude in excess of $80,000 for the damage caused to the company’s equipment. After the international incident was peaceably concluded, Gaziano contacted President Richard Nixon and began an effort that would become his legacy to the fishing industry: work that resulted in a 200-mile zone around domestic shores that protects U.S. commercial fishing vessels from encroachment by foreign fishing operations.14

Of his predecessor’s face-off with the Russians, Dennis Kozlowski said, “That’s classic Joe.”15

Gaziano’s arrival at Tyco in 1973 triggered a decade of significant growth and change for the company. Soon after Gaziano became CEO, Tyco stock was listed on the New York Stock Exchange in early 1974 under the ticker symbol TYC.16 Later that same year, Gaziano followed Rosenburg’s lead by growing Tyco through mergers and acquisitions, but he upped the stakes. Gaziano became known as one of the first corporate raiders as he pursued hostile takeovers of several companies during his tenure as Tyco’s CEO.

Kozlowski said he accepted the position offered by Tyco in 1975 because of the company’s dynamic CEO.17 He was impressed with Gaziano—his background heading the missile program at Raytheon, his commanding presence, and his plans to grow Tyco. “Joe Gaziano was a ballsy guy,” he said, “and I liked him. I don’t know how well he could read a financial statement, but he was smart and he had great instincts.”18 Gaziano’s plan to grow Tyco to a $1 billion company primarily through acquisitions also drew Kozlowski to the company. During his criminal trial in 2005, Kozlowski was asked to describe Tyco at the time he joined the company. He provided a vivid picture:

Well, way back then Tyco was a very small company. It did about 20 million dollars in sales and had about ten or 15 different businesses. And the businesses did anything from using nuclear technology to measure stress on helicopter rotor blades to making [quartz] chips for old time radios before you had transfusers [sic] and other products. It made honing [sic] devices for submarine torpedoes. It was a solar energy company. It was really the spin-off of some really bright people that had more of a scientific background and they would start-up some of these businesses and try to create them into commercial businesses. Joe Gaziano, who was the new CEO at the time, had a focus to develop some of these businesses into good long-term businesses which would be able to sustain worldwide competition. So he had a big time vision. It was an exciting time and he asked me to sign up and be part of that team.19

Kozlowski described an organization of approximately 2,000 employees that operated almost exclusively in the United States. He noted that the company’s name was Tyco Laboratories, even though the company neither owned nor operated any laboratories at that time.20

Not long after he joined Tyco, Kozlowski was moved from internal audit to operations, a path that one former Director said placed Kozlowski “in the bowels of the operating businesses for many years” as he worked his way up the corporate ladder.21 Kozlowski became a Tyco loyalist and by all accounts, he knew every business the company operated. The depth and breadth of his knowledge of Tyco operations was one of the reasons Dennis Kozlowski was widely respected by customers, suppliers, and the management of companies he acquired.22 Kozlowski said it would have been impossible for him to lead Tyco and successfully acquire hundreds of companies had he not understood the businesses.23

During his second trial, Kozlowski described the twenty-seven years he spent with Tyco and the path that ultimately led to the chief executive’s position. He spent four years at Grinnell in Tyco’s fire protection and prevention division, beginning in 1977. He was first an Assistant Comptroller, after which he was promoted to Comptroller, and then Kozlowski was named CFO of Grinnell.24 From there, Kozlowski was moved to Ludlow, a $27 million acquisition Joe Gaziano closed in 1981. Ludlow Corporation manufactured packaging materials and was not operating efficiently when Tyco added it to the growing conglomerate. Ludlow was the second acquisition that moved Tyco into the packaging business. Two years earlier, Gaziano arranged the acquisition of Armin Corporation, a company that manufactured polyethylene films used in packaging. Armin was immediately accretive to earnings, but Ludlow needed help. So Gaziano moved Kozlowski from Grinnell and named him CFO of Ludlow in 1981, where and when Kozlowski inherited the job of managing the messy integration of Gaziano’s hostile takeover.25

The year after Kozlowski began his work at Ludlow, Tyco suffered a significant loss. After a decade of bold, aggressive leadership as the company’s CEO, Joseph Gaziano died suddenly on December 17, 1982 after being diagnosed with a rare cancer of the heart. He was only forty-seven years old at the time of his death. In response to the unexpected circumstances, the Tyco Board of Directors chose Gaziano’s successor; the Board tapped John Fort III to serve as Tyco’s fourth CEO. Fort had been with Tyco since 1974. At the time of Gaziano’s death in 1982, Fort was Senior Vice President of Operations, a position Gaziano had placed him in two years earlier.26

By all accounts, Joe Gaziano was a big personality. He was a manager known for engaging in hostile takeovers, he was outspoken and aggressive, and in a move that typified his bravado, Gaziano sued the Russian government during the Cold War. He was bold, fearless, and as Kozlowski described him, “ballsy.” As part of his total compensation as CEO, Gaziano reportedly enjoyed a number of lavish executive perquisites; he had access to company cars and planes, and he lived in expensive corporate homes and apartments.27 He was said to have an extravagant and luxurious lifestyle. That’s how Tyco’s Board of Directors compensated the Chief Executive Officer when Dennis Kozlowski joined the company.

As compared to Gaziano’s swing-for-the-fences style, John Fort was staid. Fort was known as a cost cutter and he did not insist on or negotiate as part of his compensation package the executive perks his predecessor enjoyed. Soon after he was named CEO, Fort reportedly disposed of Joe Gaziano’s perks; he sold the corporate planes, houses, and apartments, and reduced the size of corporate operations.28 Under Fort’s leadership, Tyco made more deliberate and often smaller acquisitions. However, not all of the acquisitive growth during the decade John Fort was CEO was accomplished via small deals. In 1987, Tyco acquired Allied Pipe & Tube Corporation, and the following year, the company acquired for the sizeable cost of $350 million the Mueller Company, a well-established water and gas pipe manufacturing company.29

Kozlowski said that during the 1980s, Tyco was buying a lot of pipe and he believed the company would profit from vertical integration of the supply chain.30 For that reason, he spearheaded the acquisitions of Allied Pipe & Tube and Mueller during Fort’s tenure as CEO. In 1987, after Kozlowski became a member of the Board of Directors, he became even more involved in the company’s corporate operations and strategic decision-making.

When Fort was CEO, he named thirty-six year old Dennis Kozlowski President of Ludlow—in 1982.31 Kozlowski described his effectiveness at Ludlow during his second criminal trial. He said:

When I first got to Ludlow we were break even or maybe earning a little bit of money. It was—we had a lot of work to do. We had a number of divisions that were losing money. A number of operations that were not functioning very well. People there, the morale was pretty low in the organization. They went through this lengthy takeover, but by the end of my stay at Ludlow, by putting in pay for performance systems, good incentive systems, motivating the management with these types of systems, which I thought were key—one of the key things to running a business, Ludlow became quite profitable.”32

Because of his success at Ludlow, Fort placed Kozlowski at the head of other Tyco divisions. As President of Grinnell, for example, Kozlowski transformed in a very short time frame a company that was barely breaking even into a profitable one, with annual revenue of over $100 million.33 Kozlowski’s skill as a manager took him to the head of three of the four operating businesses34 before he was named President and Chief Operating Officer of Tyco in 1989 at the age of forty-three.35 By the end of the 1980s, John Fort was leading the company with Kozlowski pushing him from behind. Robert A. G. Monks, a Director at the time, said that Fort was CEO but that “Dennis was doing all the hard work.”36

The somewhat frenetic collection of businesses under the Tyco corporate umbrella at the time of Joe Gaziano’s death had transformed into four cohesive operating divisions: electrical and electronic components, healthcare and specialty products, fire and security services, and flow control products.37

* * *

During the 1970s and 1980s, Dennis Kozlowski became a manager by running businesses in all of Tyco’s operating divisions.38 During his years in the trenches, he honed his management skills and his successes solidified his belief in a few strongly held strategies for achieving organizational goals: hire the right people, motivate them with pay-for-performance compensation programs, decentralize control, allow only minimal bureaucracy, engage in no hostile takeovers, and always look for ways to “make more for less.”

Kozlowski admittedly worked almost nonstop for most of his life. His increasingly busy schedule and the demanding positions he held as he built his career at Tyco required frequent travel that kept him from his family about eighty percent of the time.39 Unfortunately, his marriage to Angie Suarez Kozlowski didn’t survive. Kozlowski and his wife separated in 1995 and they divorced in 2000 after twenty-eight years of marriage. Corporate governance guru Robert A. G. Monks sat on the Tyco Board of Directors from 1984 until 1993, the years Dennis Kozlowski climbed the rungs of the corporate ladder until he reached the top. Monks said he’s never known a CEO of a large corporation whose marriage wasn’t negatively affected by the demands of the position. “Dennis was married to Tyco,” he explained.40

Of Kozlowski’s ascent in the company, Monks said, “For years, Dennis was the guy who ran around behind the elephant. He worked more and harder than anyone else. Dennis deserved to be CEO. He earned it.”41