Free Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski by Catherine S. Neal

prosecutors in the post-Enron environment, Robert Morgenthau was ready to investigate and prosecute highly compensated, high-profile executives he believed were abusing their positions of power.
Old rumors about Tyco’s accounting methods that were quelled by the positive outcome of the1999–2000 Securities and Exchange Commission investigation were revived in the precarious post-Enron environment.
Some Tyco Directors were angered by the payment of a $20 million investment banking fee to their fellow Board member Frank Walsh.
Kozlowski and the Board announced a plan to split up the company, then backpedaled—and the market did not react favorably to the indecisiveness. The price of Tyco stock continued to drop.
Tyco shareholders filed derivative actions because of the Frank Walsh investment banking fee—no doubt unhappy with the company’s performance during the first few months of 2002, nervous because of rumors and comparisons to Enron, and alarmed by the heightened scrutiny of Tyco that appeared frequently in various media outlets.
The sales tax indictment, charges that were ultimately dropped, removed Kozlowski from Tyco. He had no input during the internal investigation, was never interviewed by anyone from Boies, Schiller or the Manhattan DA’s office, and as former Director Wendy Lane said in her interview for a Harvard Business School case study, once you leave the company, “. . .
[Y]ou lose control over not only the information flow, but the information itself, the litigation process and settlement or adjudication proceedings. There is also an implication that you were at fault.” 6
Exposure of poor record keeping, sloppy governance, and a pattern of inaccurate and incomplete meeting minutes, missing meeting minutes,or failure to ever create minutes when Directors met became a serious problem when Kozlowski needed documentation of decisions that were made by Tyco Directors.
Tyco grew very quickly into a large company, but Tyco corporate remained a mom-and-pop shop. Company loan programs had been loosely administered for decades. In addition, there was far too much informality and familiarity in Tyco corporate offices—they lived with an “it has always been done this way” mentality.
The Board of Directors gave Kozlowski increasingly more spending authority—it had increased to $200 million by 2001. It was the imperfect combination of a Board that was willing to grant inappropriate levels of authority and a CEO who was happy to have almost unlimited authority.
Directors had entered into, on behalf of Tyco, what was by my calculations a nearly half-billion dollar Retention Agreement with Kozlowski less than a year before all of the problems began. However, if Kozlowski was terminated for cause, the company would have had no financial obligation to him. “Cause” was defined as Kozlowski’s “ . . . conviction of a felony that is materially and demonstrably injurious to the Company.” 7
    If any of the foregoing had not happened, it is likely that Tyco would never have been caught in a costly scandal and Dennis Kozlowski would not have been indicted and convicted. It was a perfect storm.
    2. The Dire ct ors
    In my assessment of what went wrong at Tyco, the weak, dysfunctional Board of Directors is at the top of the list. The problems are too numerous to name, but following are some of the most troubling:
Why was the testimony of Directors who said they could not recall approving or did not approve bonuses meaningful, or at all credible? They didn’t recall or record many of their decisions.
A Director testified that he didn’t even read the half-billion dollar Retention Agreement until he wanted to figure out how to get rid of Kozlowski.
Directors had “huddles” where no minutes were recorded—it’s impossible to know what was and wasn’t decided or approved during many undocumented gatherings.
The Directors gave Kozlowski $200 million spending authority and for years allowed him to run the