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Restoring Trust of WorldCom

Corporate Governance
by

Ruben Ahedo

on 19 August 2015

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Transcript of Restoring Trust of WorldCom

Restoring Trust of WorldCom
Chosen by
SEC
to act as corporate monitor to WorldCom

- “The sheriff in the middle of the company”

-Restore credibility

-Restore stability

-Restoring Trust: Corporate Governance for the Future of WorldCom

Audit Committee

-No fewer than three people

-Financial expertise

-Eight meetings per year

-Annual review of CFO and outside auditors



Which of Breeden’s areas of reform are the most important for creating a
sound governance structure and why?

Board Re-Structure

-Continued separation of CEO and chairman duties

-A six-year term limit for the non-executive chairman

-The board consisting of up to 10 members

-The conducting of meetings at least 8 times per year

-The company electing not less than one new director each calendar year

-No fewer than three independent directors on each committee

Question 2:
Which of Breeden’s areas of reform are the most important for creating a sound governance structure and why?

Disengaged Board of Directors

- “defer to Ebber’s preference”
-Mostly comprised of insiders
-WorldCom legacy
-MCI legacy
-Dysfunctional and Divided

Employees

-In an effort to keep their jobs, did not raise objections

How did Breeden see the balance of power among WorldCom’s CEO, its board, and its shareholders? How was the power distributed?

Bernie Ebbers, CEO

-Treated like a King

-Self-involved

-Excessive spending

-Grow WorldCom through acquisitions

Question 1:
How did Breeden see the balance of power among WorldCom’s CEO, its board, and its shareholders? How was the power distributed?

Richard Breeden
Executive Compensation

-Caps

-Limit on compensation in any single year for any individual

-Severance packages capped at both low and high ends

-60-75% cash

Which of Breeden’s areas of reform are the most important for creating a
sound governance structure and why?

Our view

-Breeden’s recommendations are valid

-Could see resistance from directors initially

-Essential for long-term success

- “institutionalized ethics”

Which of Breeden’s areas of reform are the most important for creating a
sound governance structure and why?

Shareholders Involvement

-Shareholder consent when governance changes were made internally

-Nominate directors to the board

- “Town Meetings”

-Open up communication between executives and shareholders

Which of Breeden’s areas of reform are the most important for creating a
sound governance structure and why?

One hand -yes
WorldCom(WC) collapse due to poor corporate governance
Ebbers emphasizes this
Specific reforms to WC
Capella new leader


Effective proposals?

Question 4:
Will these proposals be effective in preventing another WorldCom or will they evolve into a checklist?

Other hand-no
Turn into a checklist
Capella & Ebbers
Ethical business practices
Rests on each individual
Always a way

Effective proposals

Question 6:
Are Breeden’s recommendations aimed at avoiding major misconduct or at improving firm performance?

Class: Do you think these proposals will be effective or will they be ignored?

Aimed at avoiding major mistakes which in turn improve firm performance
Effort to improve functioning
Create a culture of transparency and integrity
Ethical behavior maximizes profitability and sustainability in the long-term

Recommendations
aimed
at?

Question 7:
Which of the five possible board models is ideal from the perspective of Capellas, the newly appointed CEO?

Patron Model
Advisory Board Model
Management Team Model
Co-Operative Model
Policy Board Model
Yes!
Q8:
Would you sign the Undertaking and Pledge as Capellas did?
As CEO of any public company?
Employee?
As a prospective director?
Is the pledge a good
compliance
tool?
Thank you!

Questions?
Establish the guiding principles and policies for the organization. Characterized by a high-level of trust in the CEO.
This model emphasizes the helping and supportive role of the Board and frequently occurs where the CEO is the founder of
the organization. The Board's role is
primarily that of helper/advisor
to the CEO.
Similar to the Advisory Board model,
the board of directors in the Patron Model
have even less influence over the organization
than an advisory board. Composed of
wealthy and influential individuals
with a commitment to the mission
of the organization, the Patron Board
serves primarily as a figurehead for
fund raising purposes.
In this model, all responsibility is shared and there is no Chief Executive Officer. Decision-making
is normally by consensus and
no individual has power
over another.
Organization of committees and activities along functional lines.
Kenneth Mohan
Ruben Ahedo

Undertaking and Pledge
All good things... such as:
Ensuring the company complies with all legal requirement and the company has an environment of transparency and integrity
Continuously enforce Code of Ethics
Provide strong personal commitment to candor and truthfulness
Implement reliable internal controls
Ensuring the BOD represents shareholder interests...etc., etc.

Question 5:
What happened and what is the role of the board?

Financial Wrongdoing
Improperly reported $3.9 Billion
Reported everyday "line-costs" as capital investments
Malfunctioning Board
Let Bernie Ebbers to whatever he wanted
Disengaged
Question 3:
What are the 4 central objectives that Breeden hopes to achieve with the proposals in "Restoring Trust"?
"Restoring Trust"
Specifically to address WorldCom's unique problems

Controlling severance pay
Better methods of having compensation linked to long-term performance rather than short-term stock price swings
Related party issues involving senior officers or members of the board

Outline

Brief Summary of Case
Video
Questions
Q&A
Full transcript