Independent monitor recommends MCI governance changes

A court-appointed independent monitor has released a list of 78 changes, including creating an independent board of directors and establishing compensation limits on executives, that MCI must make in its corporate governance structure as part of government sanctions for accounting fraud.

The report, titled “Restoring Trust,” was filed Tuesday in U.S. District Court by Richard C. Breeden, the court-appointed corporate monitor for MCI and former chairman of the U.S. Securities and Exchange Commission. After an SEC investigation into MCI, still legally known by its pre-bankruptcy name of WorldCom, the company is required to implement all recommendations of the governance report unless it gets permission from the judge to ignore a specific recommendation.

MCI Tuesday said it has worked with Breeden on the report and is well on its way to implementing the 78 items. Its board of directors has unanimously approved all the items, according to MCI.

“Mr. Breeden’s report not only sets new standards for good corporate governance but also establishes a road map that helps us build our foundation for the future,” MCI Chairman and CEO Michael Capellas said in a statement. “The company has already implemented many of the proposed corporate reforms, but we know we have to do even more to regain public trust.”

MCI filed for bankruptcy in July 2002 after revelations of a multibillion-dollar accounting fraud scandal. The Breeden report is part of an enforcement action brought against MCI by the SEC. Under terms approved by the district court earlier this month, victims of MCI’s fraud are to receive $500 million in cash and $250 million in stock shares.

Among the recommendations Breeden makes:

* Increased shareholder communication: Shareholder votes are now required for certain actions, such as changing a new set of governance standards, and approving some compensation programs, including any waivers of the $15 million annual per executive compensation limit. The board of directors is required to establish an electronic “town hall,” where shareholders will be free to communicate with the board and to propose resolutions.

* Changes in the way board directors are nominated: The recommendations require at least one new director to be elected each year, and for the first time, shareholders will now will have the power to nominate directors if they are unsatisfied with the chosen candidates.

* A chairman of the board who is not a company executive: MCI is required to create the position of non-executive chairman of the board. The non-executive chairman has defined responsibilities relating to coordinating the board’s work, chairing meetings and organizing chief executive officer and board performance reviews.

Capellas said in his statement that he has advocated the separation of the chairman and CEO roles, although he retains both titles. Capellas said in his statement the board plans to name new members of its board of directors by early September, although his statement didn’t indicate when he plans to step down as chairman.

“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 in a statement. “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.”

MCI also noted that it has begun to improve its corporate governance structure. The company hired Capellas, who was not there during the accounting scandal, in November, and this month, the company named Richard R. Roscitt, a former AT&T executive, as its president and COO.

The company said it also has replaced its entire board of directors who were present when the fraud was discovered, closed the finance and accounting department in MCI’s former Clinton, Mississippi, headquarters, where most of the fraudulent activities were conducted, and fired dozens of employees, including a number of senior officers, who either participated in inappropriate activities or appeared to look the other way in the face of indications of suspicious activity.