Knowledge@Wharton: Tyco’s Ed Breen

During a Crisis, ‘Spend a Lot of Time on the Big Swings’

Published February 13, 2013

In a career spanning 34 years, Edward Breen has faced many difficult situations, perhaps none as challenging as his most recent assignment — CEO of Tyco International — which he took on when the company was facing bankruptcy. In an interview with Michael Useem, director of Wharton’s Center for Leadership and Change Management, Breen, who just stepped down from Tyco, talks about the importance of knowing when and how to make the “bold, big decisions,” mentoring and always raising your hand for assignments, among other topics.

An edited transcript of the conversation follows. To watch a video of the interview, click here.

Michael Useem: We’re going to talk about your rather amazing career. You worked at General Instruments. You were the president of Motorola. For the past 10 years, you have run Tyco. I’m going to begin in the middle. Tyco got into a lot of trouble with malfeasance at the top. You were recruited to come in as chief executive at the end of July 2002. As I recall, you were in your office at Motorola knowing that, at the end of the day, you were going to be announced as the new chief of Tyco, then a company of almost a quarter million employees — a huge enterprise. Across the ticker on the screen on your desk it said: “Tyco to declare bankruptcy.” So picking up on that, tell us about that day.

Edward Breen: I think it was a Thursday in late July that it came across the screen that Tyco was looking at declaring bankruptcy. It showed me what was about to happen. It was just chaos the first months, and events were like that every day. What was kind of scary is that the stock continued to plunge. If I remember the numbers right, on that day, the stock had opened around $12 and ended around $8. That’s a huge percentage drop in a company that’s already got a lot of other chaos going on around it. So that was the backdrop to the announcement a couple hours later that I was taking over as chairman and CEO of the company.

I was going to take a week off, but I was advised by many people, including the outside lawyers at Tyco: “You had better not; there’s no time.” So I got back from Chicago and started the next Monday. It was sort of surreal because when you go into a crisis situation like that, one of your concerns is whom you can trust, whom you can rely on. Here I was with a corporate team, a lot of whom knew what was going on because you can’t pull off the shenanigans that happened without other people helping you. To me, that was a big concern: How would I work my way through that situation, who could I trust and how could I start to rebuild the team?

Useem: Let me ask about that because, within months, of the 300 top people at Tyco, some 290 had gone. Within eight months, the board that had hired you was gone. Looking back, do you have any regrets?

Breen: You know, I’ve been asked that question a lot. There are different ways to handle it. But I came to the conclusion very quickly that, with what had occurred at Tyco, no one was going to believe this was a different company if it wasn’t a different management team and a different board. What really helped me, to give you one example, is that we had five or six agencies investigating us. If the board of directors isn’t different, how do you go to the Justice Department or the SEC [Securities and Exchange Commission] and say, “Look, we really are a different company; we’re going to manage differently.”

Useem: Why the wholesale housecleaning over the next six months?

Breen: A lot of senior people in a company, especially in a conglomerate the size of Tyco, reside at the corporate office. So you have your tax group, your treasury group, your accounting group, your controllership group. Within days, I said: “They know what happened here. They were complicit in some way in it.” You can’t have people around you you’re not going to trust. I didn’t have the time to figure out, did I get everyone right or not? I just decided we had to rebuild every department from scratch, and that I would do it over the first year. You can’t just ask everyone to walk out the door. You can’t run a company. But over about a year, maybe a year-and-a-half, we turned the whole team over and hired who we wanted on our team.

Useem: Several of your directors who resisted exiting the board did argue that there was going to be a lot of tacit information lost if they and all the top management left. Since everybody did leave, how impactful was it to have almost nobody left who knew all the informal things that are not written down but are critical for any company to operate?

Breen: Well, one of the things we did, one of the compromises we made, was that we would keep two directors from the prior board to transition for one year with the new Tyco board. But they weren’t voting members of the board. They came to all the board meetings, because you do need institutional knowledge. “How did this deal happen?” A lot of questions can come up. So we had a very nice transition with them, two of the directors, for that period of time.

What I relied on a lot was outside people to help us. We had investment bankers in. We had a consulting company in. I had David Boies. I’d say he’s one of the best lawyers that there is. I had a PR firm that we brought in. I called it rent-a-corporate-team for a while. They got to know the company well, and they helped me through the transition.

Useem: To convince the attorneys general of the states that were thinking about possibly indicting Tyco, to convince the big institutional holders that you had really transformed governance at Tyco, you made a whole range of changes. It took a couple years to do that. Working with you was lead director Jack Krol. You had senior VP for corporate governance Eric Pillmore. The three of you really remade governance at Tyco. What was the essence of the remake?

Breen: What was exciting about it was that we got to take the book clean and rewrite it. We came up with all our own governance principles. We researched the best practices. We picked them from different companies. We picked the best state-of-the-art solutions, and over my 10 years, we have continued to add things to our governance policies and procedures that I think have been very impactful. One of the firms that rates you on governance rated us with only a handful of companies with a 10 score a few years after I was there.

Among the things we did, which at the time was very unique, was we had actual positions in the company report directly to the board and not to me. So for instance, we had Eric Pillmore, who was head of corporate governance. Most companies didn’t have a head of corporate governance. We had Eric report to the board of directors. We had the head of our audit committee report to the audit committee. What happened at Tyco and some of the other companies that blew up with some of the malfeasance was that there was no system around the CEO, who was all powerful. In our case, we changed that by reporting structures as one key example. Many companies have done that today, but back then it was very unique.

Useem: There was a lot of hard work in the first 12 to 18 months. You had a huge debt coming due, $11 billion due in January and February the coming year. Within a year or so, you had stabilized, cash flow became regular and all of the investigations were behind you. Ten years later, you’re executive chair of the board. Looking back on those 10 years, which big decision are you most proud of?

Breen: I guess the most rewarding one would be saving Tyco. It really got close. We didn’t know we had saved it until the second week of January. So I’d been there six months when we did. I think at that time it was the largest convertible bond offering ever done. And that night I realized, wow, people are behind us. They want to invest in the company. And they just gave us the breathing room to go fix all these issues. So that was the proudest moment.

I’d say the most difficult decision, which I’m extremely proud of also, is taking Tyco and making six companies out of it. Five are public, one is private and all the companies are doing extremely well and trading at all-time highs. I think it was absolutely the right strategy. But that’s not an easy decision to make.

Useem: Looking back to your time before you came to Tyco, maybe even much earlier in your career, is there an individual or maybe even a couple who helped you become the person you are? A mentor? A coach? Somebody who influenced your life in that sense?

Breen: I think I was very fortunate at a young age. I was at General Instrument (GI), the largest supplier of cable technology to the nascent cable industry. So I grew up around all these entrepreneurs who created these big media companies: John Malone; he owned a part of GI. The Roberts family at Comcast. My great mentor Frank Drendel who’s run CommScope for 40 years. They were entrepreneurs. What I learned from them, and I think I’ve taken forward through my career, was they were very decisive. They studied things but they knew how to make a decision, the bold, big decisions that need to be made. And I’ve watched a lot of management; they can’t make the big decisions. They drag and delay. And there’s always a competitor crawling right behind you wanting to pass you. I think that was a great experience for me in my 20s.

Then we took GI private with Forstmann Little, one of the great private equity firms. In a private situation, it’s almost like it’s your company. What do you want to do with your company? It’s an interesting way to look at it. You don’t worry about every constituency.

The right decision at the end of the day is what creates long-term sustainable shareholder value. If you keep that line at the tip of your tongue when you make a decision, you’re generally going to have some pretty good results.

Useem: Let’s pick up on that. I’d like you to describe a moment of decision, a time when your leadership was on the line, maybe at Tyco, maybe at GI, maybe at Motorola. Pick a moment that best exemplifies your leadership, how you approach things.

Breen: Well, let’s take GI. By the way, in my whole 34-year career, I’ve probably made 10 big decisions that really, really mattered, that moved the needle in a big way. One was at GI when we developed the first digital technology for the whole industry, and it was too expensive for anyone to want to buy. Everyone was trying to take our position away from us: Microsoft, Cisco, Samsung, Sony. We decided to sell warrants in our company to our customers, or give them the warrants, if they would buy our digital set-top boxes from us. We locked up two-thirds of the industry within a couple weeks. The industry ended up owning 15% of the company. If you go back and look at GI’s history, that’s what made the company take off. We won the digital war, and a company that was valued at $1.6 billion to $1.7 billion, we sold to Motorola for $18 billion. So that’s a situation when, if you worry about every other issue besides creating long-term shareholder value, a lot of people wouldn’t do that kind of deal. It was absolutely the right deal for us.

Useem: Let me have you look back on your career in a different way. What do you know now about leading private enterprise, especially after 10 years at Tyco, that you would not necessarily have appreciated earlier in your career?

Breen: There are a couple things I think are big. What you learn when you’re in the top seat is that there are a lot of constituents. When there is a big decision, you have to think this through. I always look at long-term shareholder value. But after that, it’s how I address the employees, how I address our suppliers, how I address our investors, the analysts … And you go right down the list. There are a lot of things that you need to think about and take into account when you make some of the big decisions.

People have put me in situations where there’s a crisis. I am a big believer in spending a lot of time on the big swings, the big strategy questions. What tends to happen is we fight fires all day. The phone is ringing. We’re sending e-mails. This happened. That happened. And you have to deal with those things. But the wheels just keep spinning. There is no time to think about the big swings that are really going to move the needle. I think I learned that at a younger age because of some of the things I went through. If you focus on those, things will really progress.

Useem: Let’s turn the question on its head. Is there some aspect of leadership, again in your recent experience, or some precept of leadership that turns out not to be as true as you thought it was?

Breen: I guess the thing I learned along the way is you have to work on talent management and people and their development and care about your team. I always use a sports analogy. Sports teams talk about who’s going to play in the next game. That’s all they talk about. How do I win the game? Who’s going to play? A lot of companies don’t think like that. They don’t spend time on the people stuff. There’s no one individual going to make a company. So I always want to put people around me who I think are better than me, who will challenge me. By the way, five of them have. We’ve created five public company CEOs.

Useem: Let’s take that same question and think about somebody coming out of an undergraduate business program or an MBA graduate. What advice would you have for them?

Breen: I think you have to be passionate about what you’re going to do or you’re never going to get to the top seat. Second is to be a team player. The third thing, I would say, and I’m looking back on my experience, raise your hand for as many assignments as you can.

Useem: A final question: Looking back at GI, at Motorola, at your 10 years at Tyco, what was your most outstanding, most rewarding, best remembered experience?

Breen: Well, it was actually six months into being at Tyco. We were going to raise money. We did a conference call from our boardroom, and then my CFO and I were going to go on a road trip for a week and a half to raise the money. At the end of that call, someone walked to my office and said, “Ed, this deal’s 30 times oversubscribed.”

That night I went out with most of my team. I remember calling up my wife and I said, “You know what, we’re going to make it. Now I have the time to fix the company.” That to me was probably the most rewarding because, those first six months, it was tough looking in the mirror some mornings.