MCI Ratifies New Corporate Governance Regime But Faces More Lawsuits

by Glen Shapiro, LawAndTax-News.com, New York

28 August 2003

Even as MCI (ex-WorldCom) yesterday voted unamimously to adopt new corporate governance guidelines designed for it by Richard C. Breeden, former chairman of the Securities and Exchange Commission, news emerged in Oklahoma that the State Attorney General plans to file criminal charges against the company, its former chief executive Bernard Ebbers and five other individuals in connection with its $11 billion accounting fraud.

Although a number of states have been investigating MCI, this would be the first state lawsuit against the company, which reached a $2.25bn settlement with the SEC after it filed charges in June 2002, alleging $11bn worth of accounting frauds. The court approved this settlement last month, and also accepted a report by Richard Breeden, who had been appointed as a kind of legal custodian over the company, which included the corporate governance guidelines.

The 78 recommendations in Breeden's Restoring Trust report cover the selection of directors, qualification, conflicts and independence standards for board members, the functioning of the board and its committees, establishment of the position of non-executive chairman, specific limits on compensation practices, equity compensation programs, accounting and disclosure issues, ethics and legal compliance programs, and other areas.

Breeden said the new guidelines should give MCI a set of corporate governance policies and procedures that go beyond those of any other major public company -- all in an effort to prevent future abuses like those which led to what WorldCom investigators believe to be the largest accounting fraud in U.S. history.

"Many of these standards are followed by other companies, though a few, like the process for selecting new directors, will be unique to MCI when put into place," Breeden said in his report. "However, in corporate governance, it is the totality of the system, not its individual parts, that counts. The totality of the governance system at MCI as a result of implementing all the recommendations of Restoring Trust will be a set of policies and procedures that go beyond what any major public company has in place today. The result will be a stronger, more capable and more independent board of directors, limits on problematic compensation practices, and a much greater emphasis on transparency and integrity in the company's internal operations. Shareholders will in the future have a much stronger voice in setting limits of behavior."

The Oklahoma charges are expected to say that MCI and six of its former executives violated the Oklahoma Securities Act by willfully presenting investors falsified information about the company, based on which the company offered the sale of its stock. Federal prosecutors decided not to charge the company based on its good behaviour since entering bankruptcy, and taking into account the effect of the company going out of business on its creditors, its more than 50,000 employees and 20 million individual and thousands of business customers. If one state breaks ranks, there must be a danger of a tidal wave of claims which will swamp efforts being made by the company to re-establish itself.

In the report filed with the court Tuesday, Breeden praised the efforts of new CEO Michael Capellas and the company to turn the company around. "Hopefully, these recommendations, coupled with the strong efforts of the new management team led by CEO Michael Capellas and the new board of directors, will enable MCI to succeed in its goal of becoming a model of excellence in corporate governance," Breeden said. "There is a deep commitment at the company to eradicating the practices of the past that harmed so many, and in their place to follow new standards representing the very best ideas for responsible governance."

In recent weeks, MCI has also faced allegations brought by its rivals that it avoided paying access fees to local phone carriers. And a group of bond-holders is alleging that WorldCom avoided hundreds of millions of dollars in state taxes through a special tax shelter, claiming that the company may have routed $19 billion in revenue through one of its units to cut down on state tax bills, as part of a strategy devised by KPMG and used in the years following WorldCom's acquisition of MCI. The bondholders claim the plan shifted income away from high-tax states by charging royalties for the use of intangible assets assigned to MCI WorldCom Brands, which is licensed in Delaware and pays no state tax.

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