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Last week’s report on how to clean up bankrupt MCI reads like a to-do list for its new general counsel, Anastasia Kelly. Former Securities and Exchange Commission Chairman Richard Breeden, a court-appointed monitor overseeing the company, set forth 78 recommendations on Aug. 26 that MCI is legally required to follow under a court order. Breeden’s proposals range from the routine to the audacious and form the backbone of a blistering 148-page document. He lambastes the former officials and directors of what was then WorldCom for running “what appears to be the largest accounting fraud in history” and “a giant compensation slush fund.” The report makes clear the central role he expects Kelly to play in pulling MCI out of one of the most spectacular corporate flameouts in recent memory. The report virtually assures that she gets front-line access to corporate leadership — a regular audience with the company’s board of directors without the chief executive in the room. Kelly, who started work at MCI last month, says that she and her staff will play an important role in responding to Breeden’s report. “MCI has already undertaken many of the reforms, and MCI’s legal department will continue to work” to implement Breeden’s recommendations, Kelly says. Some observers think that Breeden’s recommendations will become a model for a new form of corporate governance that divests top executives of some of their power and transfers it to shareholders and independent directors — not to mention the general counsel. MCI’s new chairman and CEO, Michael Capellas, and his new board will adopt all of Breeden’s recommendations. “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,” Capellas said last week in a statement. A good deal of the day-to-day work of implementing the Breeden report will fall squarely within Kelly’s domain, corporate governance specialists say. “It would be quite likely that a report like this would be sitting on top of the desk of the corporate GC,” says David Martin, head of the corporate practice at Covington & Burling. “In the first place, the GC would have the job of helping everyone in the company understand what it signed up for,” says Martin, who is not involved in the MCI matter. “Then there will be judgment calls for her as far as what constitutes full compliance. And she may well be the one asked to be responsible for creating the action plan for implementation.” The sweeping recommendations for MCI include: • Creating a board of completely independent directors who cannot sit on more than three corporate boards at the same time. • Separating the post of chief executive officer from that of chairman, thus creating a new position of nonexecutive chairman. • Requiring the company to switch its outside auditors at least every 10 years. • Prohibiting any executive from earning more than $15 million per year. • Banning all stock options for the next five years. • Setting up procedures under which shareholders can nominate alternative board candidates to those proposed by management. The report, while not mentioning her by name, praises the choice of Kelly, noting her “substantial experience in a variety of settings, including private law practice and serving as general counsel in two other large public companies.” And it recommends the appointment of a companywide ethics office to be located within the general counsel’s office in order to “insure it has the institutional strength and clout of that department.” This point is high on Kelly’s to-do list. She says she is now “especially focused on the appointment of a new chief ethics officer, who will head up our ethics office and our ethics training programs.” One Breeden recommendation that may place Kelly in an unusually powerful role is the requirement that the board of directors meet with her at least once a year, in the absence of the CEO and other officers, to discuss the legal department’s resources and the level of company compliance with the plan. Martin says that although this kind of meeting is not common in U.S. companies, it’s far from unheard of. “Boards are increasingly feeling that they need to hear directly from staff members who are the eyes and ears of the company,” Martin says. “It’s an exciting development in corporate governance. MCI can be a real laboratory for change, which is a good thing.” Beyond the immediate matter of rebuilding MCI, the most important question swirling around Breeden’s report is whether it should and will form a pattern for the restructuring of U.S. corporations, even those without a history of widespread abuses. The Breeden report itself raises the issue, saying that its recommendations “hopefully may prove of benefit to other companies as well. The entire country has a stake in finding ways to improve what is already a very good system, and to make it even better for the future.” Jacob Frenkel, a securities and corporate partner in the D.C. office of Smith, Gambrell & Russell, says the report will have a dramatic effect on corporate governance nationwide. “Because of Richard’s stature, and the thoughtfulness and clarity of the report,” Frenkel says, “it absolutely will become a template.” He adds, “The whole climate these days is one that demands tighter and tighter standards. Given what has come before, the shareholder demand now is not to follow minimal standards but to look for the strictest guidance available. You can rest assured that every plaintiff’s lawyer is going to ask senior management of every company whether they have read and discussed Richard’s report.” Covington’s Martin says, however, that it’s neither inevitable nor desirable that every public company will follow Breeden’s plan. “No company should set a template for others,” Martin says. “One size really doesn’t fit all. Each company is different. This is a very robust corporate governance plan, but many companies will feel they just don’t need to go to it. In fact, it would be dangerous if we, like lemmings, all go there.”

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