Eight

The Good Old Days

“I wish there was a way to know you’re in the good old days before you’ve actually left them.”

Andy Bernard, The Office1

Not many people know how it feels to be on top of the world. For a while, Dennis Kozlowski knew what it was like.

The Retention Agreement

The company grew and prospered during the first few years of Kozlowski’s leadership, but Dennis Kozlowski and Tyco International really hit their stride in the late 1990s. In 1996, Tyco was added to the Standard & Poor’s (S&P) 500, a stock market index of the 500 largest U.S. companies based on market capitalization.2 During his criminal trial, Kozlowski was questioned about Tyco and asked if it was a large company during the years he was the CEO. Kozlowski told the court and the jury that Tyco was large “by virtually any measure, sales or market capitalization, Tyco usually fell within the top 25 companies in the world in the last few years that I was running [the company].”3 In 1998, Kozlowski was courted by Raytheon Company, a Massachusetts-based high tech company that, like Tyco, operated in four business segments: commercial and defense electronics, engineering and construction, aviation, and major appliances. The company’s Board wanted Dennis Kozlowski to serve as its next CEO.

Kozlowski was elected to the Raytheon Board of Directors in June of 1995, so the Raytheon Directors knew him well and had no doubt watched and were impressed by Tyco’s success and phenomenal growth over the three years Kozlowski sat with them in the Raytheon boardroom.4 Kozlowski was tempted to take the reins of what was at the time one of the largest defense contractors in the world with annual revenue of nearly $20 billion; when the job was proffered in 1998, Raytheon was substantially larger than Tyco.5 Kozlowski ultimately declined the offer, even though he could likely have negotiated compensation as CEO of Raytheon even more lucrative than the compensation opportunities he had with Tyco.

Raytheon was not the only company interested in luring Dennis Kozlowski away from Tyco in the late 1990s and early 2000s.6 As his tenure at the head of the flourishing diversified conglomerate neared the ten year mark, Kozlowski was in demand. Despite occasional problems that ranged from serious to simply annoying, like the SEC investigation, David Tice, and a journalist Kozlowski thought had a grudge against Tyco, the company’s performance under his leadership made Kozlowski a darling of executive headhunters. Even with frequent and serious external interest, Kozlowski was a Tyco loyalist. Over the years, he received many attractive offers to go elsewhere, but he always opted to stay with Tyco.

By the end of calendar year 2000, Kozlowski was weighing his options and he seriously considered embarking on a new endeavor; he planned to leave Tyco for the world of private equity.7 He considered joining the Carlyle Group in Washington, DC, but was leaning more toward building his own private investment firm. Before 2001, Kozlowski had not signed an employment contract with Tyco. He and Mark Swartz were both at-will employees. Because of Tyco’s strong performance and the enormous performance-based compensation Kozlowski received during the prior few years, there was concern on the Street that Kozlowski would pocket his earnings and move on to other pastures. The Board of Directors thought the time was right to secure an employment contract with their CEO; the Directors wanted an agreement that would offer investors and the Board assurance that Kozlowski would remain CEO of Tyco for many years into the future.

If the terms of a contract tell tales, the Retention Agreement the Tyco Board of Directors entered into with Dennis Kozlowski in January of 2001 shouted that the Board wanted very much for Kozlowski to remain Tyco’s chief executive and was willing to pay whatever it took to keep him. Kozlowski said, “Mark [Swartz] worked with the Board to draft the agreement. I didn’t work on the draft, but I believe it was derived from Jack Welch’s compensation as disclosed in GE’s proxy.” The Board, on Tyco’s behalf, entered into a Retention Agreement with Dennis Kozlowski the pecuniary value of which was so great that Kozlowski himself was shocked at the Compensation Committee’s willingness to sign it.

Under the terms of the agreement, “in recognition of [Kozlowski’s] significant contribution to the creation of shareholder value and leadership during his tenure as Chairman of the Board of Directors, President and Chief Executive Officer of the Company, [the Compensation Committee] wishes to obtain his commitment to serve as Chairman of the Board, President and Chief Executive Officer of the Company until his 62nd birthday on November 16, 2008 and his commitment to serve after his retirement as a consultant to the Company, at the direction of the then Chief Executive Officer of the Company.”8

Upon his exit from the company, Kozlowski would receive “an amount equal to three times the sum of (x) [his] then current annual base salary (without giving effect to any reduction thereof following the Effective Date [of the agreement]) plus (y) the highest annual bonus (including cash, shares and other forms of consideration) earned by [Kozlowski] with respect to the eight fiscal years preceding the year in which the Date of Termination occurs (or an amount equal to the annual bonus including cash, shares and other forms of consideration earned by [Kozlowski] with respect to the Company’s 2000 fiscal year, if higher).”9

(x) + (y) = $412,480,272, considering the floor of the agreement, which was Kozlowski’s compensation in 2000. According to Tyco, Kozlowski’s compensation during the years leading up to the Retention Agreement was as follows:

1997 $26,454,603

1998 $70,329,840

1999 $21,074,097

2000 $137,493,42410

In addition to the $412.5 million golden parachute, Kozlowski was granted 800,000 restricted shares of Tyco common stock on January 21, 2001, the day he signed the Retention Agreement. Each year for the following eight years on the anniversary date of the agreement, one-eighth (1/8) of the restricted shares would vest; if Kozlowski stayed with Tyco until his sixty-second birthday, all 800,000 shares would be fully vested.11 On the day members of the Compensation Committee and Kozlowski signed the Retention Agreement, Tyco stock (TYC) closed at $84.85.12 If the stock performed similarly over the next eight years, Kozlowski’s 800,000 shares would be worth more than $67.9 million.

On top of the $412.5 million golden parachute and the 800,000 shares of TYC stock, Kozlowski would be paid one thirty-sixth (1/36) of the (x) + (y) amount each year for the rest of his life in exchange for thirty days of consulting services per year.13 The Compensation Committee valued Dennis Kozlowski’s consulting services to be worth at least $11,457,785 a year ($412,480,272 × 1/36). That’s $381,926 per day of consulting work (($412,480,272 × 1/36) / 30). If a consulting day was eight hours long, Kozlowski’s hourly rate would have been $47,740. Those numbers are based on Kozlowski’s compensation in FY 2000. If Tyco performed better than in FY 2000 during any year before his birthday in 2008, the dollar amounts would have been even larger.

In addition, Kozlowski was to receive all fringe benefits available to him on the day he left the company or retired “including but not limited to relocation benefits [did the Tyco Board believe he would need to relocate in order to provide 30 days of consulting services per year?], security, sponsorships and events, grossed-up payments for New York state and city taxes, if applicable, health insurance coverage (including coverage for spouse (or domestic partner)), life insurance coverage and continued access to Company facilities and services, including access to Company aircraft, cars, office (with secretarial and administrative support), apartments and financial planning (tax, accounting and legal) services.”14

Of course, the Compensation Committee had to draw the line somewhere. The generous and expensive benefits remained in effect only until Kozlowski’s death.

In exchange for the $412.5 million, the 800,000 shares of stock, consulting fees, and what must be the most generous benefits ever offered to a former employee by a business organization, Dennis Kozlowski had to forego other opportunities available to him and agree to serve as CEO and Chairman of the Board of Tyco International Ltd. until November 16, 2008. At Phil Hampton’s house in Naples, Florida on January 21, 2001, Compensation Committee members Phil Hampton, Stephen Foss, James Pasman, and Peter Slusser signed the Retention Agreement. As did Dennis Kozlowski.15

The Board of Directors and the members of the Compensation Committee must have felt absolute certainty and confidence in their CEO in order to offer such a rich contract. Even in the much-maligned world of executive compensation, Tyco’s Retention Agreement with Dennis Kozlowski was extraordinary. Imagine how embarrassing it would be if, after entering the agreement, the company’s performance faltered. Envision the extreme public scrutiny the Tyco Board would face: the criticism of shareholders, journalists, analysts—of everyone. The Directors would no doubt be sued, accused of breaching their duty to Tyco shareholders when they entered into the half-billion-dollar-plus employment contract. The agreement was so outrageous, the Directors may have been accused of criminal negligence. After the Compensation Committee signed the Retention Agreement on January 21, 2001, if Tyco did not continue on the same trajectory of growth and performance it experienced over the prior nine years under Kozlowski’s leadership, the Tyco Board of Directors was screwed.

There was, however, one provision in the agreement that gave the Board a way out of performing everything promised in the contract. Under the terms of the Retention Agreement, if Kozlowski was terminated “with Cause,” the company would have no further obligation to him.16 “Cause” was defined as Dennis Kozlowski’s “conviction of a felony that is material and demonstrably injurious to the Company or any of its subsidiaries or affiliates, monetarily or otherwise.”

The Recession of 2001

Almost immediately after the Retention Agreement was signed, a recession hit the U.S. economy and ended the longest period of economic growth in history. Despite the downturn that began in the first quarter of 2001, Tyco continued to grow, perform, and acquire as had become expected. In February of 2001, the company announced a $400 million addition to its fire and securities services group with the acquisition of Scott Technologies, a designer and manufacturer of respiratory systems and other devices for the firefighting and aviation markets. Scott Technologies had projected annual revenue of around $250 million.17

On March 28, 2001, more good news came when Businessweek magazine named Tyco the number one performing company of 2000. The article noted that “[w]ith a bear market in full cry, uncertainty about the economy rampant, and much of Corporate America deep in hunker-down mode, Dennis Kozlowski might be expected to be a tad less ebullient. But the supremely self-assured chief executive at Tyco International Ltd. (TYC), who masterminded $9 billion worth of acquisitions last year and then stunned analysts in March by announcing he would spend another $9 billion to buy commercial-finance giant CIT Group (CIT), looks on the carnage as a call to action.” The article quoted Kozlowski as saying: “This is a good environment for Tyco . . . [t]here will be more opportunities than there were when the economy was booming.” Of Kozlowski’s ability to lead Tyco through the recession, the article said that “ . . . after helping build the conglomerate from a $20 million-a-year corporate also-ran into a $30 billion-a-year industrial giant, Kozlowski knows how to navigate rough waters.” Tyco landed at the top of the list of best performing companies because of its stellar results. Businessweek noted that Tyco shareholders had benefited from Kozlowski’s “go-get-’em” style and shared that “[i]n the past three years, the company’s stock has returned 117%, including a 44% return in the past year alone, while Tyco’s earnings on a latest-12-months basis have climbed 149%, to $4.8 billion, as sales rose 27%, to $30.3 billion.”18

On April 27, 2001, Tyco was ranked number one in the “2001 Reuters Survey of U.S. Larger Companies;” the rankings were derived from data collected from analysts about the quality of information companies make available to them. Kozlowski said of the Reuters top spot, “Tyco is delighted to receive top marks in the prestigious 2001 Reuters Survey of U.S. Larger Companies. Having just reported that Tyco’s second-quarter earnings per share rose 30%, it is especially gratifying to know that analysts have ranked Tyco first for plain talk.” The 407 broker-analysts who responded to the survey ranked Tyco as the company with the best transparency, quality of reporting, and disclosure.19

The Wedding

Dennis Kozlowski’s professional life had never been better. The company continued to perform despite the recession and both he and Tyco had become favorites of analysts and of the media. On May 28, 2001, Kozlowski appeared on the cover of Businessweek, tagged “The Most Aggressive CEO.” The accompanying story lauded Kozlowski for leading Tyco through the economic downturn; in the worst quarter for U.S. corporate profits in ten years, Tyco’s earnings grew 33 percent and the company reported a 26 percent increase in sales. Kozlowski spoke of Tyco’s recently announced plans to acquire The CIT Group, Inc., at the time the largest independent commercial finance company in the United States. It would be a $9.2 billion acquisition and seemed to break Kozlowski’s rule against acquiring companies outside of Tyco’s existing business divisions. Filled with his typical and seemingly unsinkable confidence, Kozlowski said, “I think CIT will be one of the best deals we’ve ever done.”

The May 28, 2001 Businessweek feature article closed with personal information about “The Most Aggressive CEO.” In addition to noting his place and date of birth (November 16, 1946), his education, employment history, and hobbies, the article revealed that Kozlowski’s stake in Tyco at the time was 12.7 million shares worth $675 million. The article also shared family information, recognized Kozlowski’s two daughters, and listed his marital status as divorced. With his combined marital status and net worth, Kozlowski may have been the most eligible bachelor in the U.S. in May of 2001. However, between the time William C. Symonds researched his article for Businessweek and its publication date, Kozlowski’s status changed from divorced to married.20

On May 5, 2001, Dennis Kozlowski married his second wife in a small family ceremony on his prized historic 130-foot sailing yacht Endeavour. The couple exchanged vows just off the coast of Antigua.21 Kozlowski met Karen Mayo in a restaurant in New Hampshire and the two dated for several years before they married.22 Kozlowski did not speak of his second wife after the couple divorced in July of 2008 because of a confidentiality agreement. However, two years before the divorce was final, Kozlowski said in interviews that Karen visited him in prison only once—to tell him she wanted a divorce.23

It’s easy to understand why Kozlowski and his second ex-wife agreed to confidentiality when they signed their divorce agreement. The second Mrs. Kozlowski and her then CEO husband became tabloid fodder after he was indicted in June of 2002, just a year after the two married. It must have been an incredibly stressful time for the bride and groom of a still new marriage. On top of serious legal woes, personal details of their lives were aired very publicly. Media interest in their private lives continued for several years. The reports were numerous, ugly, and usually mean-spirited.

Much of the media coverage stemmed from evidence presented during both of Kozlowski’s criminal trials. Not much seemed to be off limits from the Manhattan DA’s case. During the first of the two criminal trials, Tammy Cross, a former Tyco employee who handled Dennis Kozlowski’s personal finances, was asked to reveal the price of a diamond ring Kozlowski bought in 2001.24 The Assistant DA (ADA) asked Cross, “Do you recall how much money the diamond ring cost?” Her reply was, “Five million 38 thousand.”25 When the ADA asked Cross if she knew for whom her boss purchased the $5 million ring, she testified, “I believe it was for his wife.”26 The purchase of the ring was irrelevant to any of the charges in the indictment, as was much of the evidence presented to jurors in both trials. It’s unclear why the court allowed the prosecution to admit the evidence.27 Unfortunately for Dennis and Karen Kozlowski, the media reported almost all of the personal, intimate, easily sensationalized details revealed during the trials. After it was revealed in court, news of the price of Karen’s ring appeared the following morning in the New York Times.28

After questioning Cross about the wedding ring, the ADA asked about the infamous fortieth birthday party Dennis Kozlowski threw for his wife a month after he married her.29

The Party

Kozlowski spent a significant amount of time in Europe during the summer of 2001, focused on the company’s electronics business. He visited all AMP facilities in Europe with then AMP President Juergen Gromer. “We were also putting the full-court press on Airbus,” he said of his goals for the extended trip. “We wanted their business with us to grow to the size of our business with Boeing.” Unlike much of Kozlowski’s time and travel for Tyco, the summer of 2001 was about organic growth instead of buying companies. Kozlowski said he traveled during the week that summer, and on weekends he lived on Endeavour.

Every June for several years, Kozlowski hosted a birthday party for his former girlfriend, then wife Karen at their home in Nantucket. He knew months in advance there was a problem planning the 2001 event because he would be in Europe the entire month of June. Kozlowski also knew the European Air Show in Paris, which he had to attend on behalf of the company, was the week of June 16, 2001—the week immediately following Karen’s birthday. He didn’t want to break with tradition, so Kozlowski decided to host the perennial birthday bash in Europe. He brought the party to him.30

In testimony during Kozlowski’s first criminal trial, former Tyco corporate event planner Barbara Jacques was asked about the birthday party for the CEO’s wife.31 As with Tammy Cross and several others, the prosecution questioned Jacques not only about her work at Tyco but also about the personal details of Dennis Kozlowski’s life. With Jacques and another former Tyco employee, the prosecution solicited testimony about personal relationships the women had with Kozlowski. The ADA presented details of Kozlowski’s personal life to the jury as evidence suggesting he used Tyco funds either to make his two so-called “mistresses” happy or to buy their silence about the wrongful acts of which he was accused. It would have taken an unreasonable stretch of the imagination to reach either conclusion. Jacques told the jury she was involved in an intimate relationship with Kozlowski in 1986 and 1987. She said it ended mutually, on friendly terms, when Kozlowski “met somebody else” and that the two had no problem working together in the years after the personal relationship was over. Like the shower curtain, the wedding ring, and the Sardinia birthday party, the media loved the irrelevant yet juicy details revealed during Kozlowski’s trials. After Jacques testified, she was thereafter referred to in stories with headlines such as “Mistresses on the Stand!”32

Jacques testified that Kozlowski first spoke to her about planning Karen’s fortieth birthday party during the Tyco holiday party at the end of 2000. Jacques said after receiving the initial instructions from Kozlowski to schedule the June 2001 party, she had no further conversations with him about the types of events she was planning for Karen’s birthday celebration. Kozlowski has long been credited with choosing the theme and activities. But in fact, Barbara Jacques planned the party.

If they chose to make the trip to Italy, the seventy-five party invitees had a list of events and activities available to them over the four or five days they spent at Hotel Cala di Volpe in Costa Smeralda on the island of Sardinia. Sardinia is an island in the Mediterranean about 150 miles off the west coast of Italy. Jacques said she planned for the guests “[a] welcome reception and buffet. During the day there were activities, bicycles available, they could go horseback riding, water skiing, sailing, golf. The next night we had a beach party for them. Following day there was a scavenger hunt and we took them to dinner at a restaurant—took over the restaurant and had the whole group at the restaurant and the final evening was the birthday party.”

The party was legendary. On Thursday, June 14, 2001, the approximately seventy-five attendees who had flown to Italy to celebrate Mrs. Kozlowski’s fortieth birthday were transported from the hotel to a country club that had been transformed into a Roman-themed fantasy land. The attendees, about half of whom were Tyco employees or Directors, were treated to an over-the-top extravaganza; it was an evening filled with excess, exuberance, and entertainment. When they arrived at the party, Jacques reported that the guests were greeted by “chariots and gladiators at the door with swords. As they went into the reception area, there were live male models, they had a reception, background music going, being played during the reception which was probably for an hour or so.” During her testimony, the ADA interrupted Barbara Jacques and asked, “What did the live male models do?” to which Jacques responded, “Just looked good. . . .”33

In public displays that would haunt Dennis Kozlowski for the rest of his life, video of the birthday party was shown during his criminal trials. Over protests from defense counsel—all of whom feared Kozlowski and former Tyco CFO and co-defendant Mark Swartz would be unable to receive a fair trial because of the extreme prejudicial effect the video would have on the jury—the judge allowed thirty minutes of the four-hour video recorded during the party with an additional twenty minutes during which prosecutors showed still photographs of the festivities.34 The jury saw images of the shirtless, buff male models outfitted in only flesh-colored briefs and cowboy boots as well as women in a similar state of undress who strolled around a sparkling pool occasionally posing with attendees for souvenir photos. There were video and photos of an ice sculpture of Michelangelo’s David that urinated vodka, and a birthday cake in the shape of a woman with sparklers flickering from her breasts. The jurors saw video of party attendees dancing to the music of a band from Nantucket, E. Cliff and the Swing Dogs, before they enjoyed a second surprise musical performance. A guest who checked into the Hotel Cala di Volpe under the name “Elvis Smith” a day before the party was Kozlowski’s special treat for his friends, family, colleagues, and his new wife. Jimmy Buffett and his band played for the birthday girl and her party guests for between forty-five minutes and an hour. The cost of bringing a little Margaritaville to Italy: $250,000.35

According to Jacques’s testimony, an Executive Committee meeting and a TyCom (a Tyco subsidiary) Board of Directors meeting were scheduled on Sardinia the same week as the party.36 In addition, the few days on Sardinia were offered as a retreat for several of the employees in attendance. “It was a mix of business and pleasure,” Kozlowski said, “and something that happened over and over at Tyco. It was part of the culture, part of the pay-for-performance culture.” He added that “those opportunities were how I connected the conglomerate; we got everyone together and made them feel like a part of a single organization. It was important.”37

Kozlowski said because of the AMP visits, the focus on Airbus, and the European Air Show, he and other Tyco employees would have been in Europe in June of 2001, regardless of the events on Sardinia. “Those people had been working nonstop; they needed and earned a retreat,” he explained.38 Many of them, including Kozlowski, missed the Tyco Chairman’s Council in Athens, Greece held a few weeks before the birthday party, because they were tied up with a deal.

Chairman’s Council was a Tyco incentive program that recognized and rewarded top performers. Barbara Jacques explained that there were a few Tyco programs that rewarded employees with trips and retreats, all of which were a mix of business and pleasure. She said the Tyco retreats and incentive programs were similar to Sardinia—the same types of events and activities, the inclusion of spouses and significant others, liquor, food, and big-name bands. She noted that Chairman’s Council and other Tyco events were held in desirable locations, such as New Zealand, Australia, Aspen, Colorado, and Athens, Greece. Jacques, who organized the events, said they had each cost as much as $2 million and she confirmed that Tyco paid for them in full—100 percent.39

The amount of trial time devoted to the party is inexplicable as none of the charges in the indictments of Kozlowski and Swartz had anything to do with the party. The evidence was irrelevant. However, the prosecution seemingly introduced evidence of the Sardinia party to suggest to the jury that Dennis Kozlowski used company money to pay for personal, extravagant expenses. The total cost of Tyco events and Mrs. Kozlowski’s fortieth birthday party on Sardinia in June of 2001 was around $2 million.40 Kozlowski was certain that his instructions to Jacques were to charge him for all personal expenses associated with Sardinia.41 Jacques confirmed that Tyco was to pay for the business expenses and Kozlowski was to be billed for all personal expenses.42 She also confirmed that all non-employees paid their own travel expenses to Sardinia. Jacques handled the division of costs between Tyco and Dennis Kozlowski—she determined what was business and what was personal. Kozlowski never saw the bills.43 Jacques’s division of expenses resulted in an almost 50/50 split, with Tyco footing about $1 million of the expenses.

It looked bad. Even though Tyco regularly threw extravagant, expensive events for its employees all over the world, the video and photographs of the excess on Sardinia were damning. It appeared that Kozlowski had a Roman orgy on the company’s dime. Jacques confirmed that the Buffett performance was the only thing about the party of which Dennis Kozlowski was aware before he arrived on the evening of June 14. The theme, the nearly nude models, David pissing vodka, the togas, the gladiators, the laser show, the cake with sparkling breasts—they were all unexpected and unwelcome surprises to Dennis Kozlowski when he arrived at his wife’s birthday party.44 “It was not at all what I envisioned for that party,” he claimed. “We had family present at that party. My wife’s parents were there. My daughters were there. It was in bad taste and certainly nothing I would ever choose.” Just like the $6,000 shower curtain.

Kozlowski’s modus operandi during the years he was CEO included absolute delegation of decision-making and details, as he did with Barbara Jacques for his wife’s birthday party. He was by choice focused completely on running the company and he had plenty of money. So he simply handed his checkbook along with his authority and responsibility to those around him who were paid generously to take care of the details of the CEO’s personal life and financial affairs.

In the visitors’ room at the Mid-State Correctional Facility more than nine years after the Roman orgy on Sardinia, Kozlowski and three former members of the Endeavour crew who were visiting him in prison talked about the night they attended the infamous birthday party. Kozlowski said, “It wasn’t one of the better parties I’ve been at in my life.”45 Sparky, Lars, and Joe agreed that the party was not the wild event the media and the Manhattan DA portrayed it to be. All four said Kozlowski was only at the party for around three hours, maybe less, on the night of June 14, 2001.

It didn’t matter that he found the party distasteful, and it didn’t matter that he stayed only a few hours. It didn’t matter that there were Tyco Directors and their spouses at the party. It didn’t matter if many members of the top management team were there. It didn’t matter that Kozlowski instructed Jacques to charge him for all personal expenses. It didn’t matter that the theme was not his idea. Once the jury saw that video, once the media sensationalized juicy images of Kozlowski’s Roman orgy, that birthday party was used to define him. The taint of Sardinia cost both Dennis Kozlowski and Tyco far more than the $2 million they spent on the birthday bash.