Monday, March 01, 2004

A massive concentration of wealth at Tyco

Title: Former Tyco Executive Takes Stand in Trial :
Source: Washington Post
Date: February 10, 2004

The Tyco trial is clearly showing just how quickly Tyco executives were concentrating wealth -- with the blessing of the board of directors. From the article:
    "The crux of Swartz's argument was that the Tyco compensation committee and the company's full board of directors approved relocation programs that helped the men borrow tens of millions of dollars to buy fancy homes and other perks. In August 1995, Swartz said, the board rendered its blessing after only five minutes of discussion. He said the board fully understood that the plan allowed executives to borrow up to five times the total value of their salary, bonus and stock holdings.

    'What I remember about that meeting is that [compensation committee chairman] Dick Bodman in explaining the program said that Dennis would be able to borrow enough to purchase Gracie Mansion,' Swartz said. 'In the final part of the conversation Dennis reminded Dick he wasn't just going to be buying one location. He might be buying a lot of mini-mansions.' "
Here we have a large company loaning its executives tens of millions of dollars. In many cases like this one, corporate loans for executives are interest free and are eventually forgiven -- the executives never have to pay them back.

It is fascinating to look at Tyco's Web site and read what the company has to say about the matter:
    Relocation Programs, under which certain executive officers, including Mr. Kozlowski, former CFO Mark Swartz and former Chief Corporate Counsel Mark Belnick used the Company’s relocation program to take non-qualifying interest-free loans and unauthorized benefits that were not generally available to all salaried employees affected by relocations. Under the program, Mr. Kozlowski improperly borrowed approximately $61,690,628 in non-qualifying relocation loans to purchase real estate and other properties, Mr. Swartz borrowed approximately $33,097,925 and Mr. Belnick borrowed approximately $14,635,597.

    The “TyCom Bonus” Misappropriation, in which Mr. Kozlowski caused Tyco to pay a special, unapproved bonus to 51 employees who had relocation loans with the Company. The bonus was calculated to forgive the relocation loans of 51 executives and employees, totaling $56,415,037, and to pay compensation sufficient to discharge all of the tax liability due as a result of the forgiveness of those loans. This action was purportedly related to the successful completion of the TyCom Initial Public Offering. The total gross wages paid by the Company in this mortgage forgiveness program were $95,962,000, of which amount Mr. Kozlowski received $32,976,000 and Mr. Swartz received $16,611,000. These benefits were not approved by, or disclosed to, the Compensation Committee or the Board of Directors. However, the employees who received these bonuses were led by Mr. Kozlowski to believe that they were part of a Board-approved program.
We are talking about $200 million or so handed to 51 executives -- a remarkable amount of money by any measure. Tyco's Web site describes the $200 million in this way: "The amount of money improperly diverted by Tyco’s former senior executives from the Company to themselves is very small in comparison with Tyco’s total revenues." In other words, the $200 million handed to executives is inconsequential for the company. That is how massive the concentration of wealth is becoming, and it also explains why executives throughout corporate America are receiving such gigantic amounts of money.

The important thing to recognize is that this "inconsequential" $200 million could have just as easily gone to rank and file employees in the form of higher wages, or back to consumers in the form of lower prices. See this page for details.


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