Subject: Corporate Governance
Date: April 29, 2011
This memo discusses the corporate governance policies that board of directors should have had in place to successfully evade the crisis.
The telecom industry in the US is regulated by FCC to encourage competition and they also forced big carriers to allow their networks to local exchange carriers1. With comparatively less entry to barrier resulted in many small startups and many of them then merged in WorldCom to make it the second largest carrier in 1998. Industry analysts usually focus on some specific ratios like E/R ratio in case of WorldCom and so the company was also forced to manage costs and growing revenue. During the economic crisis the E/R ratio was increasing and led to the fraud of over $7 Billion2 done by some executives at WorldCom. They manipulated the financial statements to make this ratio look good. However they would not have succeeded if the board of directors had some of the policies and procedures discussed below.
Analysis and Recommendations
WorldCom as a company in 2000 seems to be in the infancy of proper corporate governance. The company is a classic example of what could go wrong when you don’t have proper policies and procedure in place to facilitate the company in making the best decision that maximizes the shareholder value.
Board of Directors
The board members at WorldCom were usually the directors or owners of the companies acquired by WorldCom. The chairman of board only had an honorary role and CEO presided over the board meetings3. In the crisis, when board was expecting cuts in capital expenditures and were told that there was a steady decrease (which were fraudulent) they didn’t go ahead and asked the question ‘Why’ in much detail.
1. Include independent Board of Directors as members4. This helps make sure that their actions are not influenced by the company. It will also attract more active participation because...