Johnson Controls' CEO Brings His Own Scandal to Tycoby and
Alex Molinaroli survives scandals to take control after merger
Johnson Controls transformed from car seats to building tech
First came the affair. Then the Ponzi scheme. Now -- a $28.8 billion transaction involving two storied American corporations.
It’s been a remarkable -- and remarkably unusual -- run for Alex Molinaroli, CEO of Johnson Controls Inc., which yesterday confirmed a deal to join forces with Tyco International Plc, a company that has known controversy on an even grander scale.
After spending 33 mostly quiet years at the Milwaukee-based conglomerate, Molinaroli’s two years at the helm have been marked both by the transformation of Johnson Controls and one lurid headline after another, often in ways few might have ever thought possible. Or possible to survive.
Twice the 56-year-old executive was investigated by his board of directors and once was found in violation of the company’s ethics policy. Even though his company’s stock price has badly lagged the Standard & Poor’s 500 Index, he ended up receiving a big raise and now will run a combined industrial powerhouse that immediately becomes the 14th largest industrial in the U.S. by market capitalization.
“In an era when investors and the public expect earnings performance to be accompanied by ethical conduct, it’s a surprise he’s running JCI let alone the combined company,” said Erik Gordon, a business law professor at the University of Michigan’s Ross School of Business.
No Legal Wrongdoing
Molinaroli’s personal missteps fell short of legal wrongdoing but nonetheless prompted scrutiny by Johnson Controls. In 2014, 11 months after ascending to the top job, the board cut his bonus by about 20 percent because he failed to disclose an extramarital affair with the principal of a consulting firm that worked with Johnson Controls. Although an external investigation determined that corporate assets weren’t misused, the relationship was deemed to violate the company’s ethics policy.
It also led to divorce proceedings.
Molinaroli found himself touched by controversy again in 2015 when it came to light that he was both the victim of Ponzi scheme artist Joseph Zada and provided financial support after the fraudster was charged. Other marks included retired hockey star Sergei Fedorov and a gaggle of Florida firefighters and doctors.
After Zada’s conviction in September, the federal prosecutor disclosed that Molinaroli had purchased the swindler’s home in Grosse Pointe Shores, Michigan, and allowed him to continue to live there rent-free, covered Zada’s legal bills and offered to provide millions of dollars in restitution for victims, according to a court transcript.
In an October interview with the Milwaukee Sentinel-Journal, Molinaroli said he didn’t know why he allowed Zada to continue to live in the mansion, which he said he’d purchased as an investment. “I think we all make mistakes in our life,” he told the paper. He also denied offering restitution.
The board hired outside counsel to examine the unusual relationship with a con artist and found the “association was personal in nature, did not involve misuse of corporate assets or a violation of company policies, and did not appear to involve a violation of law,” Jeffrey Joerres, who became lead director Jan. 1, told Bloomberg in a Dec. 14 e-mailed statement. Johnson Controls took the matter “extremely seriously,” Joerres said, adding Molinaroli enjoys the board’s support.
Pay For Performance
Indeed, the board awarded him an 18 percent raise in 2015. Of his $19.4 million package, a quarter was in bonuses and a third in stock. His base salary rose 13 percent to $1.58 million. In its proxy statement, the company said it increased his compensation “in recognition of his performance and contributions, and to better align with the median level.”
Fraser Engerman, a company spokesman, declined to comment on Molinaroli’s personal issues, and the CEO declined to be interviewed. As for his performance running the company, he said the deals Molinaroli has made show that he’s a “change agent” who has transformed Johnson Controls.
JCI shares have under-performed the Standard & Poor’s 500 by 29 percent since Molinaroli became CEO.
The company also increased spending on Molinaroli’s personal security 10-fold to $151,019 from $14,662 in 2014, more than any of its 19-member peer group other than defense-oriented Northrop Grumman Corp. and Honeywell International Inc., according to data compiled by Bloomberg.
The JCI CEO “travels a lot and we want to make sure his security is consistent with his personal needs and with the threat assessments that the security team does on a regular basis,” said Engerman.
Amid all the controversy, Molinaroli has accomplished his goal to transform the company, which began life in 1885 with an electric-thermostat patent and is one of the largest makers of automotive seating in the world. In an era when diversified industrials have been selling off assets to focus on one core line of business, Molinaroli has shed automotive assets while using JCI’s more profitable energy efficiency and battery and energy-storage businesses to recast it as a building technology company.
Now comes the merger with Tyco, the onetime conglomerate that divided into multiple companies after former CEO Dennis Kozlowski was forced out in 2002 and later went to prison. Molinaroli will run the combined company for 18 months as CEO and serve as executive chairman for a year after that. The company will also take up Tyco’s tax domicile in Ireland, where the corporate tax rate is 12.5 percent compared with the U.S. rate of 35 percent -- the latest in a series of contentious so-called tax inversions.
Given all the controversy, Molinaroli is living a charmed corporate life. While the company’s shares fell 3.9 percent Monday -- before rebounding on Tuesday -- and he missed out on the $39 million cash severance that would have come his way if he’s been the odd man out in the deal, things seem to have a way of working out for him.
His 425,320 shares in JCI can be exchanged for a share each in the new company or be cashed out at $34.88 apiece. That’s worth $14.8 million -- not counting unvested equity awards worth at least $10 million and a pension valued at $13.6 million from which he can start collecting once he retires.
Not bad for surviving such a wild ride.
(An earlier version of this story corrected the value of stock holdings in the penultimate paragraph.)