The following article appeared in the October 10, 2003 edition of ISS's The Friday Report:

Breeden: WorldCom to be Governance Proving Ground
By Michael P. Bruno, Staff Writer

BOSTON, Oct. 8—Richard C. Breeden thinks it's a bad sign when your CEO has more in common with Julius Caesar than with his employees.

A prime example is Bernie Ebbers, the fallen chief of WorldCom Inc., the telecommunications services provider at the center of the largest bankruptcy and accounting fraud case ever. Ebbers was given "near imperial reign" according to Breeden, a former SEC chairman and the telecom company's court-appointed corporate monitor.

"Wearing the laurel wreaths is also another clue that you have a CEO who perceives his role as being more akin to that of a Roman emperor than to a business leader, and that certainly was something that went on for years at WorldCom," said Breeden.

Breeden kicked off the ComplianceSolutions Boston 2003 conference with a keynote address about lessons learned from WorldCom and the 124-page legal tome called "Restoring Trust," where he laid out 78 governance changes the company must make. In turn, WorldCom, which is changing its name to MCI, will become the leading testing ground for corporate governance ideas, he said.

"Over the next two years, as these recommendations are phased in, you're going to have a very large laboratory because every one of them is going to be followed," the chief executive of Richard C. Breeden & Co. told conference attendees.

The turnaround consultant didn't mince words in rehashing what should have been clues to WorldCom employees and watchers that the business was in trouble. "Bernie Ebbers was as incompetent and unqualified to be a chief executive officer as any person who ever held that post," Breeden said.

Among his list of clues was Ebbers' "pathological aversion and an immunodeficiency" to the company's legal department. The company had lawyers everywhere, just not in Clinton, Miss., where Ebbers worked, Breeden said. "The tone at the top there was, ‘Take what you can get;' not respect for the law and concerns about little issues like ethics or integrity."

The board of directors, while it had some "good" members, was on the whole "weak and ineffective," according to Breeden. While eight of the 10 directors officially met the New York Stock Exchange's standards of independence, in reality only "1.6" were detached.

"WorldCom was a classic case where the board was rife with cronyism. One of the directors was there for a really good reason: He was the next-door neighbor of Bernie Ebbers," Breeden said.

Moreover, in the year leading up to WorldCom's implosion, the board's compensation committee met 17 times while the whole board met just four times. And while the board approved a $238 million "sack of cash" for Ebbers to hand out for employee retention—"talk about hush money," Breeden said—there wasn't a contract in place for severance if Ebbers were fired.

"The idea of being fired never occurred to Mr. Ebbers," he said. (When Ebbers was fired, the board agreed to a severance package that would have been worth about $250 million had it been honored at the time, on top of a $408 million loan that was forgiven.)

WorldCom will emerge from bankruptcy around Jan. 2, 2004, with around $20 billion on its balance sheet, Breeden said. That's down from the $104 billion that was reported, and apparently much inflated, in March 2002. He said the new MCI "will" emerge despite complaints from rivals Verizon Communications Inc. and AT&T Corp., and the roughly $20 billion will make for the largest emergence in history. Meanwhile, the "victim trust"—the $250 million equity stake under the SEC's $750 million settlement for injured investors—will own 3.3 percent of the telecom company after bankruptcy.

Under Breeden's report, the company must install new internal controls. But even with "hundreds" of consultants helping the company, it will take at least five years to fully install them, he said. Meantime, MCI CEOs from now on must pledge to an ethics agreement and can be fired if they violate it.

"The WorldCom case is worth study at all our universities and all of our major companies because it really did happen," Breeden said.