Combining Johnson Controls with Tyco, Alex Molinaroli gets out from under his cloud

Johnson Controls’ Alex Molinaroli crafts a merger to rock the cynics “It’s a surprise he’s running JCI, let alone the combined company”

First came the extramarital affair with a consultant. Then the Ponzi scheme. Mere association with such controversies often can be terminal for a chief executive officer of a big public company. But they haven’t ended the career of Alex Molinaroli, CEO of Johnson Controls ( JCI). He’s been able to retain both his job and a free hand to radically remake his company. His latest move: a $28.8 billion merger with Tyco International.

The marriage of two venerable corporate names caps a remarkable— and remarkably unusual—run by Molinaroli, a 33-year JCI veteran. The 56-year-old has twice been investigated by his board of directors and once was found in violation of the company’s ethics policy. Yet, even though the company’s stock price has lagged the Standard & Poor’s 500-stock index by about 30 percent during his tenure, Molinaroli received a big raise last year and now will run a combined enterprise set to become the 14th-largest industrial company in the U.S. by market value.

“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,” says Erik Gordon, a business law professor at the University of

Michigan’s Ross School of Business. Molinaroli’s personal missteps fell short of legal wrongdoing but nonetheless prompted scrutiny by JCI’S directors. In 2014, 11 months after he ascended to the top job, the board cut his bonus by about 20 percent because he failed to disclose an affair with the principal of a consulting firm that worked with the company. Although an external investigation determined that corporate assets weren’t misused, the relationship was deemed to violate Johnson Controls’ ethics policy. It also led to divorce proceedings against him. Molinaroli declined interview requests.

The CEO again found himself touched by controversy in 2015, when it came to light that he was the victim of Ponzi scheme artist Joseph Zada and provided Zada with financial support after the fraudster was charged. Victims of Zada’s investment scam included retired hockey star Sergei Fedorov and a gaggle of Florida firefighters and doctors.

After Zada’s conviction in September, a federal prosecutor disclosed that Molinaroli had purchased the swindler’s home in Grosse Pointe Shores, Mich., 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 Journal Sentinel, Molinaroli said he didn’t know why he allowed Zada to stay 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 denied offering restitution.

The JCI board hired outside counsel to examine the unusual relationship 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,” said Jeffrey Joerres, who became lead board director on Jan. 1, in an e-mailed statement. Johnson Controls took the matter “extremely seriously,” Joerres said, adding that Molinaroli enjoys the board’s support.

Indeed, the directors awarded him an 18 percent raise in 2015. Of his $19.4 million pay 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 Molinaroli’s 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. As for his performance, Engerman says the deals Molinaroli has made show that he’s a “change agent” who’s transformed Johnson Controls.

The company last year also increased spending on Molinaroli’s personal security tenfold, to $151,019, from $14,662 in 2014. That’s the biggest increase within the 19-company peer group JCI uses to benchmark its financials and set compensation, other than defense-oriented Northrop Grumman and Honeywell International, according to data compiled by Bloomberg. Molinaroli “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,” Engerman says.

Amid the controversies, Molinaroli has dramatically overhauled the company, which began life in 1885 with an electric-thermostat patent and became one of the largest makers of automotive seating in the world. The company has shed many automotive assets under Molinaroli, who’s using JCI’S more profitable energy-efficiency and energy-storage businesses to recast it as a building technology company. A spinoff of the remaining automotive business is scheduled for late 2016.

After the merger with Tyco is completed, Molinaroli will run the combined company for 18 months as CEO and serve as executive chairman for a year after that. In the latest in a series of controversial so- called tax inversions, 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.

It’s all a profitable outcome for Molinaroli, whose 425,320 shares in JCI can be exchanged for shares in the new company or cashed out. That’s worth $14.8 million—not counting his unvested equity awards worth at least $10 million and a pension valued at $13.6 million, which he can start collecting once he retires. �David Welch and Jennifer Surane

Molinaroli