1. Case Study: WorldCom’s Corporate
Governance Failure
Subject:21874 Corporate
Governance and Sustainability
Professor: Thomas Clarke
Students:
Charlie Chen (#00004301)

2. Table of Contents
•
•
•
•
•
•
•
•
•
•
•
Objective Summary
Brief history of the Company
The consequences of its failure
The Response of President and Parliament
Incompetence of the Company Board
Toxic culture of the Senior Management Team
Corrupted Senior Management Team
Unrealistic and unsustainable Business Model
Cooperate Governance Framework
Conclusion
References

3. Objective Summary
• Analysis of corporate governance failure in WorldCom
case Using forensic skills to find out what went wrong
• Analysis of:
• The history of the company and its Business model
• the performance of the company, CEO and board, to the
business values, objectives, behaviour and their
Relationship with corporate governance
• Introduces:
• Recommended Corporate governance principles and
framework

4. The Rising Star
• From 1995 until 2000, WorldCom purchased over sixty other telecom firms.
In 1997 it bought MCI for $37 billion. It was the largest corporate merger of
US history.
• In the mid 90s WorldCom moved from long distance discount voice carrier
into Internet and data communications carrier market, It was handling 50
percent of all United States Internet traffic and 50 percent of all emails worldwide.
• By 2001, WorldCom owned one-third of all data cables in the United States.
• Its Market Value 125 Billion and stock price @$63.50(WorldCom, Capital
Edge, Kshitiji 2012)
• On Oct. 5, 1999 Sprint Corp and MCI WorldCom announced a $129 Billion
merger agreement. It would be the largest corporate merger in the history.
However, the deal was not finalized because of objections of US
Department of Justice and European Union.
(http://en.wikipedia.org/wiki/Worldcom)

5. The Falling Star
• Beginning modestly during mid-year 1999 and
continuing at an accelerated pace through
May 2002, the company (directed by Bernie
Ebbers (CEO), Scott Sullivan(CFO), David Myers
(Controller) and Buford Yates (Director of
General Accounting)) used fraudulent
accounting methods to disguise its decreasing
earnings to maintain the price of WorldCom’s
stock. The fraud was accomplished primarily in
two ways:
• Booking ‘line costs’ (interconnection
expenses with other telecommunication
companies) as capital expenditure on the
balance sheet instead of expenses.
• Inflating revenues with bogus accounting
entries from "corporate unallocated
revenue accounts".
Source:
http://en.wikipedia.org/wiki/WorldCom
The stock price had fallen from
around 60$ in 1999 to $1 in 2002

6. The Catastrophies of its Failure
1.On July 21, 2002, WorldCom Filed for Chapter 11
bankruptcy protection which was the largest such
filing in the United States History at the time ($4.58
bn in liabilities)
• The company defaulted within two months of the
decline to “junk” status
• The largest corporate accounting scandal in the
United States, estimated at $11BN as of March 2004
• Almost 20,0000 employees lost their jobs
• Investors lost more than 180bn
(Harmantzis, 2004)

7. The Response of President and Parliament
• President Bush called for tough new
legislation to restore faith in American
business. Mr Bush said those guilty of
corporate fraud should be sent to jail
for the sake of US capitalism. He
argued that people guilty of such
abuses should be prevented from
holding high-level business positions
again.
• SOX: Sarbanes-Oxley act 2002, was
precipitated by Enron , Arthur
Andersen , Tyco , Global Crossing and
WorldCom. WorlCom was seen as the
last straw in driving through legislation.

8. Lacking Corporate Governance was Root
Cause of WorldCom’s Failure
• The WorldCom case has become a kind of poster
child and a genuine case study in the failure of
corporate governance, in this new century. (Dick
Thornburgh, Former Attorney General of the United States
and Court-Appointed Examiner in the WorldCom Bankruptcy
Proceedings)

9. Incompetence of the Board of WorldCom
• The company’s board of directors were not paying attention to how
the company was running. Along the way, WorldCom amassed
billions of dollars in debt, weighing down its sagging cash flow with
massive debt-service obligations. WorldCom were having an
incredibly devaluated asset next to $30bn debt.
• Starting in late 2000 and continuing throughout 2001, the board
made a series of loans to Ebbers to prevent him selling his stock to
meet margin calls. (Harmantzis, 2004)
• Board of directors had a “habit of rubber stamping senior
management decisions without scrutinising” (Capital Edge, 2012)
(T. Clarke 2013)

10. Toxic Culture of Senior Management Team
• Believed that their actions were not “really” illegal
• Unrealistic financial targets and inability to meet them
• Recording of a/c entries without any evidence
• Company was capitalizing its line costs. Line costs were operating
expenses but WorldCom classified as capital expenditure
• In 2000 and 2001, WorldCom claimed pre tax revenue of 7.6 and 2.4
Bn $ respectively. Later discovered as loss of 49.9 and14.5 Bn $ for
the respective years
• Reserve accounts were manipulated to increase figures
• Two versions of accounts the actual version and the Final version for
investors

11. Corrupted Senior Management Team
• Chief Financial Officer Scott Sullivan and Controller David Myers arrested.
Myer’s pleads guilty to three counts of conspiracy
• Chief Executive John W. Sidgmore steps aside from his post
• Buford Yates Jr. pleads guilty to two counts of securities fraud and conspiracy
• At his peak in early 1999, Ebbers was worth an estimated $1.4 billion and listed
at number 174 on the Forbes 400.
• CNBC named Ebbers as the fifth-worst CEO in American history; Time Magazine
named him the tenth most corrupt CEO of all time.
What will it profit a man if he gains the world but loses his own soul?
(Mark 8:36, Jesus Christ)

12. Insatiable Appetite for Acquisition
• The 1996 Telecommunications Act opened up new markets for WorldCom by allowing longdistance providers and local telephone companies to compete in other territories. The Act
spurred WorldCom into a renewed frenzy of deal making. Among the biggest were MFS
Communications (which had previously acquired UUNET, an Internet backbone company; the deal
made WorldCom a major Internet player), and MCI, the second –largest telecommunications
company in the U.S. after AT&T. at the time, the MCI merger was the largest in history
(Harmantzis, 2004)
Date Target Company
Price ($billions)
Dec-96 MFS, UUNET
Jan-98 Brooks, Fiber
2.4
Feb-98 CompuServe
1.3
WorldCom Acquisitions
12.5
ANS Communications
40
30
0.5
20
Aug-98 Embratel
2.3
Sep-98 MCI
40
10
Oct-99 SkyTel
1.7
0
Jul-11 Digex
5.8
WorldCom Acquisitions, Dec. 1996 to July 2011 Value
(Thomas Clarke, International Corporate Governance, 2007)
66.5

13. Unrealistic and Unsustainable Business Model
• WorldCom raced to make more than 70 acquisitions in two decades
• acquisitions were never consolidated into a single, seamless enterprise. The company was incapable of
functioning properly. Moreover, because of accounting manoeuvres, each new acquisition allowed the
company to report higher per-share profits, even when its core business was barely growing, or losing
ground (Eichenwald, 2002)
• The unrealistic growth target via massive acquisition introduced significant operational problem such as
meagre customers, accounting systems, Telecommunication backbones infrastructures
(Thomas Clarke, 2013)

14. Proposed US Corporate Governance Principles
Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 17, 2012 at9:22 am
•select a chief executive officer and to oversee the CEO and senior management in the competent and
ethical operation
•establishes a culture of legal compliance and integrity.
•develop and implement the corporation’s strategic plans, and to identify, evaluate and manage the risks
inherent in the corporation’s strategy.
•oversight of the audit committee and the board, to produce financial statements that fairly present the
financial condition and results of operations of the corporation
•engage an independent accounting firm to audit the financial statements prepared by management and
issue an opinion that those statements are fairly stated in accordance with Generally Accepted Accounting
Principles
•through its corporate governance committee, to play a leadership role in shaping the corporate
governance of the corporation and the composition and leadership of the board.
•compensation committee, to adopt and oversee the implementation of compensation policies, establish
goals for performance-based compensation, and determine the compensation of the CEO and senior
management.
•deal with its employees, customers, suppliers and other constituencies in a fair and equitable manner

15. Cooperate Governance Framework
• COSO: Committee of Sponsoring
Organizations of the Treadway Commission
(http://en.wikipedia.org/wiki/Committee_of_
Sponsoring_Organizations_of_the_Treadway_
Commission)
• King III: Corporate Governance - King III report
- Introduction and overview
(http://www.pwc.co.za/en/king3/index.jhtml)
• SOX: Sarbanes–Oxley Act-Public Company
Accounting Reform and Investor Protection
Act' (in the Senate) and 'Corporate and
Auditing Accountability and Responsibility
Act' (in the House);
http://en.wikipedia.org/wiki/Sarbanes%E2%8
0%93Oxley_Act
• Basel II: banking supervision Accords recommendations on banking regulations
(http://en.wikipedia.org/wiki/Basel_II)
http://www.analytix.co.za/Consulting/CorporateGovernance.aspx

16. Conclusion
• Many contemporary cases in US and Australia told us that corporate governance is
extremely important in the developed world
• Without or lack of corporate governance, in many cases, equivalent to issue CEO a
licence to failure
• Good corporate governance is the mechanism to ensure the sustainability of the
company (balance shot term gain and long term prospect)
• Shleifer and Vishny(1997) assert that good corporate governance systems are rooted in a
appropriate combination of legal protection of investors and some form of concentrated
ownership(Denis, Diane & McConnell, John 2001)
• Key factors for effective Corporate governance(Kakabadse, 2009) should focus on:
Vision
Transparency
Performance Monitoring
Effectiveness
Values
Accountability
http://www.youtube.com/watch?v=7g_d-hoUrU

18. References
• BBC News on WorldCom:
• http://news.bbc.co.uk/2/hi/business/2182201.stm
• http://news.bbc.co.uk/2/hi/business/2073641.stm
• Clarke, T. (2007), ‘International Corporate Governance’, Routledge, London and New York
• Eichenwald, K. (2002), ‘For WorldCom, Acquisitions Were Behind Its Rise and Fall’, http://pythonkit.com/For-WorldCom,Acquisitions-Were-Behind-Its-Rise-and-Fall-download-w18533.pdf
• Harmantzis, F.C. (2004). ‘Inside the Telecom Crash: Bankruptcies, Fallacies and Scandals – A Closer look at the WorldCom
case’, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=575881
• Kakabadse, N.K. (2009), ‘Corporate Governance: Global Issues for the Future’, Northampton Business School, University
College Northampton
• Khanna, Vikramaditya S. 2003. ‘Should the top behaviour of top management matter?’ Georgetown Law Journal. 91.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=339940
• Noked N. (2012), ‘Principles of Corporate Governance2012’, The Harvard Las School Forum on Corporate Governance
and Financial Regulation, http://blogs.law.harvard.edu/corpgov/2012/08/17/principles-of-corporate-governance-2012/
• Sidak, J. Gregory. (2003). ‘The failure of good intentions: The WorldCom fraud and the collapse of the American
telecommunications after deregulation’, Yale Journal on Regulation. 20.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=335180
• Thornburgh, D. (2004), ‘A Crisis in Corporate Governance? The WorldCom Experience’, California Institute of Technology
• Wikipedia on WorldCom: http://en.wikipedia.org/wiki/Worldcom