PHOENIX - WorldCom Inc., lambasted as the epitome of cronyism, accounting shenanigans and lavish executive perks and pay, will emerge as a model for good corporate governance, said Richard C. Breeden, the bankrupt firm's corporate monitor.
In a speech to the Association for Investment Management and Research's annual conference in Phoenix, Mr. Breeden, who was chairman of the U.S. Securities and Exchange Commission under President Reagan, outlined a far-reaching program for overhauling the company's corporate governance practices, including giving major shareholders the right to nominate directors.
Mr. Breeden placed much of the blame for what happened at WorldCom on "the cancer of compensation abuse" among top management, led by former Chairman and Chief Executive Bernard J. Ebbers, and the failure of the board to exercise adequate oversight.
But the former SEC chairman did not spare investors. He noted that at least $82 billion of WorldCom's $104 billion in assets will be written off when the company emerges from Chapter 11 of the U.S. Bankruptcy Code. "It's striking to me that scientists can find holes in the ozone layer but analysts, auditors, rating agencies couldn't seem to find an $80 billion hole in a $100 billion balance sheet."
Too bad it took so long
Mr. Breeden's clarion call for good corporate governance might matter little to investors who have lost hundreds of billions of dollars in WorldCom stocks and bonds. After filing for protection from creditors last July, the company has cut costs assiduously and has proposed a reorganization plan that would trim its debts by 90%. The firm also rebranded itself as MCI, has relocated its headquarters to Ashburn, Va., from Clinton, Miss., and named Michael D. Capellas as CEO.
Last week, the company agreed to pay investors $500 million to settle massive accounting-fraud allegations brought by the SEC. And telecommunications industry competitors argue the firm should be forced to liquidate as punishment for its sins, instead of being allowed to emerge from bankruptcy proceedings.
The company's 60,000 employees and existing debtholders should not be further penalized for the misdeeds of fewer than 100 employees, said Mr. Breeden, who now chairs an eponymous Greenwich, Conn., firm that consults to troubled companies.
Mr. Breeden said good corporate governance goes beyond checklists issued by such organizations as the New York Stock Exchange and the Conference Board Inc., New York. WorldCom "had met almost every one of the checklists," he said. "And yet, as a group, they failed, and failed miserably, to establish even a modicum of discipline, a modicum of balances."
The fact that WorldCom's audit committee met for a total of four hours in 2001, while its compensation committee met 17 times for hundreds of hours, made the firm's priorities "fairly clear," he said.
Mr. Breeden also blasted compensation consultants who advocate higher and higher pay packages for top management. "We need to ban, as much as we can, compensation consultants and their 75th percentile studies," he said. Retention-pay plans should be barred forever, he added.
Mr. Breeden criticized excessive perks granted to many chief executives, citing former General Electric Co. Chief Executive Jack Welch.
"It should be clear: If you need flowers and a good bottle of wine and a pair of courtside tickets, that's why you got paid $20 million last year," Mr. Breeden said.
Host of reforms
Mr. Breeden said the reincarnated WorldCom is pursuing a host of corporate governance reforms, including:
- eliminating use of stock options, which dilute shareholder value. Instead, the company has opted for restricted stock, of which 75% will have to be held for at least six months after an employee leaves the company. That should eliminate incentives to buoy results in the short term.
- requiring the board to consist of 10 independent directors and the CEO, well beyond the simple-majority standard set by the NYSE. Directors would have to meet a tough standard of independence and would have to bring specific expertise to the board
- paying directors substantially more than the current $35,000 a year, but no longer doling out equity. Instead, directors would "be required to plow about 50% of all cash retainers they receive into open-market purchases of the company stock
- possibly requiring that at least one new director be elected every year so there always is fresh blood on the board
- potentially allowing major shareholders to nominate directors, a measure major institutional investors, such as the $131 billion California Public Employees' Retirement System, Sacramento, now are clamoring for.
- separating the roles of chairman and chief executive, which, while "not a silver bullet for corporate governance, it is a step in the right direction."
- imposing a term limit of 10 years for outside auditors and not using auditors for consulting projects, except for tax preparation.
Mr. Breeden said the WorldCom experience will show that "you can reshape corporate cultures, that you can establish and must establish values as a major part of the corporate agenda in any company.
"Bottom line, I think as a society it's better for us to try to prevent iceberg collisions than to improve the size and comfort of the lifeboats."