Dennis Kozlowski, Mark Swartz, and “the Niceties of Corporate Governance”

Dennis_before Koz  Swartz

Floyd Norris posted a story in his blog in today’s New York Times, "Unhappy Birthday, Dennis", citing the New York State appellate court’s unanimous ruling upholding the criminal convictions of Dennis Kozlowski and Mark Swartz for "grand larceny in the first degree (12 counts), conspiracy in the fourth degree, violation of General Business Law § 352-c(5) and falsifying business records in the first degree (8 counts)", otherwise known as stealing millions of dollars from Tyco and Tyco’s shareholders.

In his blog post, Norris walks down memory lane and notes how he wrote a column in 1999 questioning the integrity of the Tyco juggernaut, whose astronomical growth throughout the 1990’s was often compared to that of General Electric under the stewardship of Jack Welch.  Bringing us forward to the present day, Norris reflects:

"An investor who bought when I wrote back in 1999 could have gotten out with a nice profit a few months later. But if he held on, he would have since lost a third of his investment.  In that 1999 column, I quoted Mr. Kozlowski as saying there was “no risk that investors will wake up one day and find out there’s something wrong.” Perhaps the operative part of that forecast was “wake up.”

Based on my own direct experience with Kozlowski and Swartz in the context of Tyco’s AMP acquistion in 1998-1999, in 2002 I wrote an extensive expose of the Tyco fiasco in Directors & Boards Magazine titled "Tyco’s Betrayal of Corporate Governance".  This story followed my Spring 1999 story, also featured in Directors & Boards, titled "The Problem of Emotion in the Boardroom", which dissected the topic of emotional dysfunction in both the public and prviate boardroom, using the example of the board dynamics at AMP, which was Tyco’s last major acquisition ($11 billion).  In this case, in October 1998 Tyco interceded as a "white knight" to Allied Signal’s hostile takeover bid for AMP in August 1998.

In reading the appellate court’s decision (click here for the full text of the decision), I found it particularly galling that Mark Swartz and Dennis Kozlowski have persisted in claiming that they were legitimately entitled to the egregious compensation that they awarded to themselves.  Happily, the appellate court blasts this claim:

" More significantly, though, the entitlement claim was flatly refuted by Mark Foley, the Tyco executive who was responsible for the calculation of the year-end figures on which the annual bonuses were based. In fact, Foley’s testimony unequivocally established that defendants received everything they were entitled to under the end-of-the-year formula. Thus, defendants’ claims only succeeded in pitting their credibility against that of the committee members and Foley and various other members of their own staff. Defendants even contradicted each other on a number of points. The jury’s resolution of this factual issue is amply supported by the weight of the evidence since defendants’ self-serving testimony was illogical, internally inconsistent, refuted by Tyco’s records and shown to be false by all other witnesses."

But I find the implications of Swartz and Kozlowski’s assertions that corporate governance process is irrelevant even more disturbing:

"Most notably, Tyco’s annual proxy statements, prepared under defendants’ supervision, failed to indicate even the most oblique reference to their multimillion-dollar midyear bonuses. This documentary void revealed more than a few isolated "procedural irregularities," as Swartz maintains, or a "fail[ure] to adhere meticulously to all of the niceties of corporate governance," as Kozlowski would have it. Rather this consistent pattern of documentary omission over a period of years constituted powerful evidence of defendants’ intentional hiding of these payments from the directors and led inexorably to the jury’s conclusion that defendants took these bonuses without permission or authority. The absence of any reference to these transactions in the chain of documentation available to the committee clearly demonstrates defendants’ coverup of their thievery."

Happily, the court soundly rejects these notions, yet I am deeply troubled that anyone, even a desperate person such as Kozlowski, would consider the approach that portraying corporate governance requirements as a "nicety" might carry weight with a panel of judges.

The requirements of corporate governance are not niceties.  They represent necessary processes with a fundamental purpose– to protect investors and to safeguard the duties of responsible stewardship and oversight that define core director responsibilities.

Kozlowski and Swartz amply deserve to serve their full jail time, and it is cold comfort for investors who lost billions of dollars to see this small measure of justice strongly reaffirmed by the appellate court of the State of New York.

I wonder if Dennis was able to stick a small birthday candle in one of his delicious jailhouse vending machine Payday candy bars today to celebrate his 61st birthday?



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