There's greed -- and there's Greed, Tyco style
"Greed" is not a word I throw around easily. In fact, whenever I read it I'm suspicious, at least for a moment. It's a word that's loaded with judgment, and that's fine, except that often it's used to describe behavior that could just as easily be called profit maximization. And I've long believed that profit maximization, as long as it's legal and moral, is usually just fine.
But sometimes "greed" really is greed -- and I have never seen anything like the greed detailed in Tyco's remarkable new filing with the Securities and Exchange Commission. I've been reading SEC filings for years -- call me strange, but I like 'em -- and this one is in a class by itself. If you've ever wondered why corporate governance is important for investors, ever suspected that maybe all this talk just comes from a bunch of do-gooders who don't know the real world, by all means read this filing here. You'll understand.
You've already seen the headlines about the $15,000 umbrella stand that Tyco's former CEO, L. Dennis Kozlowski, allegedly bought with corporate funds for his company-purchased apartment on Fifth Avenue in Manhattan. The $1,650 notebook. The $450 pincushion. These details are irresistible, and they're all here. But most newspaper articles haven't delved deeper into the filing for allegations that are far more significant.
Tyco is suing Kozlowski over his behavior as CEO, and this new SEC filing includes a copy of the lawsuit as an exhibit. It's a big one -- 139 pages. And like all lawsuits, it's one side's version of events, part of an adversarial proceeding. Kozlowski may have his own version, which we haven't seen; through his lawyer, he claims innocence. But the most sensational allegations seem to be supported by documents, which are included. They certainly demand attention.
The big theme is that although Kozlowski was one of America's most highly paid CEOs, and sometimes the most highly paid, receiving tens of millions of dollars in certain years, he nonetheless extracted further tens of millions, year after year. The lawsuit claims Kozlowski never revealed his actions to the board and in fact worked hard to conceal much of what he did. As a result, the huge sums he paid himself were never reported to shareholders, in violation of SEC rules.
How did he do it? Sometimes he just awarded mammoth bonuses to all top executives, including himself, without telling anyone else -- even though all his pay is supposed to be approved by the board. Thus in 2000 he gave himself over $25 million as a bonus for a job well done, on top of huge reported compensation, without telling the board.
Another favorite tactic was to borrow vast sums from the company, then instruct the bookkeepers to forgive the loans. Of course this created a slight problem: A forgiven loan consititutes income for tax purposes, and that means you have to pay income tax. So Kozlowski would instruct the company to pay him yet more money -- known as a gross-up -- to cover the income taxes on the extra income. In 2000 the forgiven loans and gross-ups amounted to more than $32 million for Kozlowski. Again, the board and the shareholders knew nothing about it.
While Kozlowski thought he could fool the board, he didn't presume he could fool the IRS. So he actually permitted the company's bookkeepers to report all this income. It isn't often you get to see a W-2 statement on which box 1, "Wages, tips, other comp." reads $87,605,358.94, but you get to see one here -- Kozlowski's W-2 for 2000. On that same form, you'll see that Kozlowski prudently contributed the maximum -- $10,500 -- to his 401(k). Good retirement planning, Dennis!
Kozlowski stands accused of many, many other schemes to extract additional millions from Tyco for himself, most of them having to do with buying and selling homes. But perhaps the most shocking accustion concerns money he gave to someone else. The suit allegest that Kozlowski gave $20 million to Tyco lead director Frank Walsh as a fee for bringing Tyco together with CIT Financial Group, which Tyco eventually bought. The suit also alleges that Kozlowski and Walsh agreed they would tell no one about the fee.
Governance-wise, you can't get much worse than this. Experts on governance applaud the idea of the lead director -- someone independent of the CEO who can put shareholders' interests first. For the lead director to receive a giant, secret fee from the CEO subverts every principle of good governance about as completely as possible.
By the way, when the board eventually found out about the fee, its members
uananimously told Walsh to give it back. His reaction, according to the suit: "Walsh responded by gathering up his papers, saying 'adios' to the other directors, and walking out of the meeting."
If you're really tough-minded, you may still ask why any of this matters. After all, even the lawsuit acknowledges that the dollar amounts aren't material in a company with assets of $55 billion. But it matters because investors will distrust everything about Tyco for years to come. As famous short seller Jim Chanos says, it's hard to believe that the crew that apparently lied so thoroughly about personal finances turned into a group of Boy Scouts when it came to reporting corporate numbers.
Remember: Tyco has lost more market value than Enron. This is serious. And it's serious ultimately because a bad CEO and directors who trusted him let corporate governance turn into a circus.