Tyco's Edward Breen: When Leadership Means Firing Top Management and the Entire BoardPublished: November 30, 2005 in Knowledge@Wharton
Edward D. Breen understood that he was taking on one of the toughest jobs in corporate America when he agreed to become chairman and chief executive officer of Tyco International in July 2002. The former CEO had resigned and was under investigation for stealing hundreds of millions from the company. Then, hours before Breen was to announce his new position, CNBC reported that Tyco might file for bankruptcy. The company's stock fell 18% that day.
"I knew I was going to be in the fire," Breen recalled during a recent talk on campus as part of the Wharton Leadership Lecture Series. "But you never know the intensity until you are really there."
Intensity may be an understatement. Tyco was on the list of notorious companies gripped by greed and accounting fraud along with Enron, WorldCom and Global Crossing. Its former CEO, L. Dennis Kozlowski, has since been sentenced to up to 25 years in New York state prison for plundering the company. In addition to a top layer of managers with questionable ethical bearings, Tyco was saddled with debt and struggling to integrate 400 acquisitions made during the previous five years.
Breen dug in. He fired 290 of the company's top 300 executives. Then he turned around and fired the board that had just hired him. He closed Tyco's posh Manhattan offices and moved to West Windsor, N.J. He ordered consolidations throughout the company, paid down debt and, lately, has begun to focus on growth rather than simple survival.
Breen told his audience that the courage to make decisions -- right or wrong -- along with the talent to both cut expenses and increase revenues are the hallmarks of a great chief executive. And most important, he said, managers need to show passion and compassion to lead successfully. "I keep in mind that any problem can be resolved. It might be ugly, but that's the mindset I went into this with. I'm not afraid to make decisions and I'm not afraid to make a few mistakes along the way."
Today he manages a company with $40 billion in revenues and 250,000 employees worldwide. Tyco operates five main businesses: Fire and Security, including the ADT brand, electronics, healthcare, engineered products and services, and plastics and adhesives.
Making the Tough Decisions
At 48, Breen was already a seasoned executive when he came to Tyco. As president and chief operating officer of Motorola, Breen had made painful cuts following a drop-off in technology spending after 2000. Prior to that, he had engineered the buyout of General Instrument Corp., which he had joined fresh out of Pennsylvania's Grove City College and where he rose to become chief executive in 1996 at age 40.
His experience at those companies gave him the confidence to take on deeply troubled Tyco. He thought: "Okay. So it's just a bigger problem.... It's not as if I'm a gambler," Breen said. "I went in thinking, '98% I can pull this off, 2% I can't.' Whether it was logical or not, that's the way I thought."
The situation at Tyco required swift and bold decision-making, he noted. "As a leader you need to be willing to make the tough decisions. It's not always pleasant. It's not always easy, but at the end of the day we're paid to fix problems. The higher in the company you are, the more problems you hear about."
According to Breen, too many corporate executives are so fearful of making a bad decision that they study and analyze a problem until they become completely stymied. That can be just as bad for a company as a wrong decision. Typically eight out of ten decisions turn out to be right, he estimated, and one of the two others can probably be fixed.
Breen said his decision to sack his entire top management and board made life difficult, but was necessary to restore credibility to the tainted Tyco name. "People were concerned that we weren't going to make it. It was decisions like this that started to tell people it was a new day -- that we were serious. It set the tone that gave us the breathing room to fix the company."
Breen's most immediate problem was $28 billion in debt -- including 11 billion due in the next 12 months. The stock's downward spiral following the bankruptcy rumors pushed the company out of compliance on loan agreements. "A lot of things happen you don't think about," he said. "Our accounts payable skyrocketed. Our suppliers asked us to pay cash or C.O.D. You owe $11 billion and there is no cash in the bank. The system was seizing up on us. We had some big customers and it is amazing they stuck with us."
The CNBC bankruptcy report, he added, was plausible. "It wasn't happening, but there was some semblance of truth that it might." The company pared down operations, closing 980 facilities amounting to 25 million square feet of real estate. "What we realized was there's a lot of waste here. We said, 'We can make it profitable just by focusing on the waste while we try to grow the company,'" Breen recalled.
Growth would need to come from within, at least for a time. "A lot of management people around the world love doing acquisitions. I said, 'No acquisitions for three years.' That wasn't a pleasant conversation for people. I wanted the company to be operationally fixed. Then when we add acquisitions on top of it, we have the right systems in place."
After severing the company's entire top management, Breen hired outsiders to perform specific jobs in his early days at Tyco. "It's very difficult at our size and complexity, but what we did was rent a department." He hired accountants, lawyers, and a public relations firm to manage the company. He also commissioned an executive recruiting company to serve as Tyco's human resources department. "I had a cadre around me of very senior, respected talent that had been through many wars in their lives. What I liked about it was nobody got rattled."
When it came to remaking the Tyco board, Breen pointed to the arrival of Jack Krol, former chairman of DuPont Co., and Jerome York, who had worked with Kirk Kerkorian at Chrysler Corp., as critical ingredients. "Once I had those two, things started to fall into place and we got to build the team." Given the company's scandalous recent past, Breen focused intently on building new governance structures. "A leader needs to be transparent. If you're not, it will catch you over time," he noted, adding that sometimes doing the right thing is not even good enough. "The leader must not only always do the right thing, but the leader must be perceived to be doing the right thing."
Underlings, too, have responsibilities. "A point we stressed more than other companies -- because of where we came from with the problems a few people had created -- is that there's a leader imperative and a follower imperative," said Breen. "If you see something you don't like, 'Speak up.' That's important for you. That's your integrity in life and that's vitally important for the company going forward."
By his second year at Tyco, revenue was up from $34.8 billion to $40.2 billion, and net income was up from a $9.2 billion loss in 2002 to a profit of $2.9 billion in 2004.
Passion Is Number One
Once Tyco was stabilized, Breen could begin to think about growth. "A lot of CEOs are great at coming into companies and cutting costs," he pointed out. "I love that part, and for a lot of CEOs that's what they know is within their control and it improves the numbers." Other CEOs have the opposite bent. "Some think, 'Grow. Grow. Grow.' And they have an inefficient company. But to me, the great CEOs get the operating intensity piece and they also get the growth piece. They are not mutually exclusive." At Tyco, the company has a clearly defined growth plan, he said, and managers are asked to invest for growth and are measured by their success.
Tyco executives are often asked whether the company's divisions would be stronger on their own. "That's the age-old conglomerate question," said Breen. "You have to be really honest with yourself and constantly ask that question. What is the corporate shell adding in value? Otherwise [the divisions] should be on their own."
Breen noted that in most of the recent business debacles, companies wound up working their problems out in bankruptcy court. Enron, WorldCom and Global Crossing all filed for bankruptcy court protection. Not Tyco. "What normally happens in a case like Tyco, the company has to file for a prepackaged bankruptcy. That's how you get out of these problems. I'm really proud we never did that," said Breen, although "we got close."
After paying down Tyco's debt, Breen said some investors are now concerned the company is not leveraged highly enough. He recalled that, following a call from analysts, his staff had asked him why he didn't lay out more details about how the company will deploy its cash to defuse analysts' concerns. "It felt so good to hear that question," Breen told them. "I wanted to hear it a few more times."
Breen stressed that CEOs and managers at all levels must feel passion and compassion. "These are the two words I always keep in my mind [even though] they might seem like soft words coming from a hard-hitting CEO." Whenever he interviews a job seeker, Breen can tell within five minutes if the candidate possesses a passion for work. "If they have passion, you see it in their eyes. It's just something that bubbles up. Passion to me is the number-one thing."
Compassion is also important, he said, especially in today's business environment where ethics are more appreciated than in the pre-Breen days at Tyco. "As you move up, you need to be a team player. You need to care about other people. If you don't, you won't move up.... Believe me, people see. They know who the team players are and who the individual players are." Breen recalled an early meeting with employees where a woman stood up and said she was embarrassed to wear her Tyco t-shirt to her child's soccer games. He had to tell her, "I don't blame you."