The Last Tyco Tycoon?

With Kozlowski gone, Tyco CFO to call it a day. Plus: NYSE plays rough, Warnaco warns, and Eisner eyes options. Plus: why are businesses cutting back on liability coverage?

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Mark Swartz, CFO at Tyco International, intends to step down from his post at the troubled conglomerate.

Swartz has served as Tyco finance chief since 1997, having started with the company in 1991. Over the years, he worked closely with former CEO Dennis Kozlowski on dozens of acquisitions. Those deals helped turn the Bermuda-based Tyco into a multi-billion dollar conglomerate and a Wall Street favorite.

Kozlowski resigned from Tyco in June amid charges that he evaded paying New York state sales tax on artwork he had purchased.

In a letter to employees after market close on Thursday, Tyco’s new CEO, Edward Breen, said Swart will leave the conglomerate once a successor can be found. “Mark Swartz has talked with me about his plans and said he has decided to leave the company,” Breen reportedly wrote. “He will continue to serve in his present role as I settle into my job, and until we complete a search for a new CFO, which we are starting immediately.”

Breen, who worked previously from Motorola, started his new job as Tyco CEO on Monday.

Swartz is one of the best known — and best paid — finance executives, in the U.S. According to this year’s CFO.com/Mercer Compensation Survey, Swartz was the third highest paid finance chief in the country in 2001. Last year, Swartz pulled in total direct compensation of $32 million. In 2000, Swartz’s total direct compensation was $62 million, including $49 million from exercised stock options.

(Editor’s note: How much did the best-paid CFOs make last year? To see our exclusive CFO compensation ranking, done in conjunction with Mercer Human Resource Consulting, click here.”)

Big Board’s Big Changes

The governance revolution is spreading to Wall Street.

Less than a week after President Bush signed a sweeping corporate reform bill — and on the same day two former WorldCom finance executives were taken away in handcuffs — the New York Stock Exchange board of directors approved a number of dramatic changes to its listing standards. The reason? With the Dow Jones Industrial Average, now trading around 8,500, the answer is obvious.

“American investors have had their faith in corporate America badly shaken in recent months,” noted NYSE Chairman Dick Grasso. “Their confidence and participation are essential to the strength of our markets and economy. Our board had 85 million good reasons — each and every individual investor in the United States — as the basis to take strong action today.”

Under the NYSE’s final rules:

  • Independent directors must comprise a majority of a board. Companies must have a nominating committee, compensation committee (or committees of the company’s own denomination with the same responsibilities) and an audit committee, each comprised solely of independent directors.
  • Non-management directors must meet without management in regular executive sessions.
  • For a director to be deemed “independent,” the board must affirmatively determine the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
  • Independence also requires a five-year “cooling-off” period for former employees of the listed company, or of its independent auditor; for former employees of any company whose compensation committee includes an officer of the listed company; and for immediate family members of the above.
  • Every listed company must have an internal audit function.
  • Director’s compensation must be the sole remuneration from the listed company for audit-committee members.
  • Listed companies must adopt a code of business conduct and ethics, and must promptly disclose any waivers of the code for directors or executive officers.
  • Shareholders must be given the opportunity to vote on all stock-option plans, except employment-inducement options, option plans acquired through mergers and tax-qualified plans such as ESOPs and 401(k)s. Brokers may vote customer shares on proposals for such plans only pursuant to customer instructions.

The NYSE got a bit of a black eye recently when board member and TV personality Martha Stewart was dragged into the insider trading scandal at ImClone. So far, no charges have been leveled against Stewart, the CEO of Martha Stewart Living Omnimedia.

Governance on Parade

Walt Disney has joined a handful of other companies that have voluntarily strengthened corporate governance policies.

The media giant’s chairman Michael Eisner Thursday said in a statement accompanying the company’s earnings report that he supported the trend toward requiring companies to expense stock options.

But the Disney chairman said such a change “calls for consistent and clear guidelines to be adopted by both FASB and International Accounting Standards Board so that all companies use the same methods to both value and expense options and so that investors may interpret those expenses with confidence as to how they are derived.”

In addition, Eisner reportedly told analysts in a conference call the company will reduce the size of its board of directors and board committees and take other measures that would strengthen its corporate governance.

Eisner told the analysts that Disney currently requires non-employee board members to own at least $100,000 worth of company stock.

He also said he soon plans to strengthen the role of the board’s independent directors.

“These steps will take time, not too much time, and will further evidence our commitment to serve our shareholders,” Eisner reportedly said.

Meanwhile, yet another major company is about to voluntarily expense options. Merrill Lynch & Co. Chief Executive David Komansky said Thursday it’s “inevitable” that employee stock options will be treated as an expense.

“We’re studying the situation right now, and I would fully expect in the future we will (expense them),” he said during a roundtable discussion on public television’s Nightly Business Report.

Merrill could use a little good PR right now. In May, the largest securities firm in the U.S. agreed to pay $100 million to settle conflict-of-interest charges brought by New York Attorney General Eliot Spitzer. Spitzer claimed Merrill’s investment bankers coerced the firm’s sell-side analysts into giving buy ratings to potential banking clients. (see “Near the Corner of Church and State.”)

In addition, bankers from Merrill Lynch went before a Congressional committee recently to explain their role in the debacle at Enron Corp.

Warnaco: SEC May Level Charges

On the day that ex-WorldCom finance managers were hauled into court, Warnaco Group Inc., said the SEC may soon bring charges against the bankrupt clothing maker.

The company’s management added that SEC lawyers informed the company on July 18 that they intend to recommend that the SEC authorize an enforcement action against Warnaco and certain individuals, alleging violations of the federal securities laws.

Warnaco management said it has been cooperating with the investigation.

As CFO.com reported, back in April 2001, Warnaco announced the SEC was launching an investigation into the company’s financial practices.

Elsewhere, Qwest Communications International Inc. is reportedly trying to hammer out a settlement with the SEC, which is probing its accounting practices, according to The Wall Street Journal, quoting an unnamed source.

Companies Cutting Liability Coverage

Here’s a surprise.

Less than a year after the 9/11 terrorist attacks, businesses cut their liability insurance for the first time in six years. This, according to a new report by Marsh Inc.

The risk and insurance services firm reported that companies cut their liability insurance limits by an average of 6 percent in 2002. The reason: Rising insurance costs, which increased even more after the attacks.

Companies that have experienced large losses, or those in industries considered to be “high-risk,” faced the most dramatic price hikes. These companies reduced their insurance limits the most, according to the insurer.

For example, chemical and pharmaceutical companies experienced, on average, a 22 percent decline in coverage limits, Marsh pointed out.

Which companies experienced the most significant reduction in limits? Companies with annual revenues of more than $10 billion. Those businesses reported a 10.4 percent decline in maximum potential payoffs from liability policies.

That’s quite a turnaround from 2001, when large revenue companies increased their limits by a little over 11.2 percent.

Not all companies cut their limits, however. Those with annual revenues of $1 billion to $10 billion showed virtually no change in limits purchased in 2002 compared with the prior year.

“For the largest companies, higher insurance costs were the biggest drivers for the cutback in limits,” said Timothy Brady, a managing director of Marsh. “For smaller and mid-sized businesses, budgetary issues in a sluggish economy continue to be a challenge as costs for all lines of commercial insurance continue to escalate.”

The Marsh report was based on information gathered from over 3,600 companies. The survey was limited to general commercial liability insurance, automobile liability, and workers compensation.

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