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Early one morning last summer, Richard Breeden got a phone call from Michael Capellas, MCI Inc.’s president and chief executive. Late the night before, Breeden, MCI’s court-appointed corporate monitor, e-mailed Capellas the final draft of “Restoring Trust,” an exhaustive 150-page prescription for overhauling the telecommunications company’s corporate governance regime. Initially, Capellas had resented Breeden’s role as the company’s watchdog. But over time, he had grown to accept it, albeit begrudgingly. Still, Breeden feared that his voluminous report, with its 78 recommendations, might not be well received. But Capellas’s reaction surprised Breeden. “Right away, he told me he loved it,” recalls Breeden. “He said it was exactly the kind of blueprint the company needed to restore confidence in MCI, and that the company was going to adopt it, chapter and verse.” (Capellas declined to speak for this story.) It was a hard-fought victory for Breeden. MCI’s three nonexecutive board members had spent much of the previous summer sparring with Breeden over sections of his early drafts. The directors had only been partly successful; many of the toughest proposals made it into the final version. Breeden has injected himself in other ways, too. He shot down the board’s first proposed pay package for Capellas, and he weighed in on decisions about compensation for several of the company’s other big hires. Now “Restoring Trust” promises to regulate the company even more. The sweeping document is unlike anything ever seen in corporate governance. It reaches into all corners of MCI’s operations. It bans stock options, caps executive salaries, and strips Capellas, the former Compaq Computer Corp. chairman and CEO, of his MCI board chairmanship. Says Joseph Grundfest, a professor at Stanford Law School: “The Breeden report reads like a compendium of every idea that corporate governance proponents have ever dreamed up, and then some. Rather than an analytic approach, Richard took an encyclopedic one.” The Ashburn, Va.-based company wasn’t obligated to swallow the report whole. It could have asked U.S. District Court Judge Jed Rakoff, who appointed Breeden, to scale back the report, although that might not have gone over well with corporate governance watchdogs and the press. Instead, Capellas and Anastasia “Stasia” Kelly, the company’s new general counsel, decided to play along. Soon after Capellas’ call to Breeden, Kelly began incorporating the report into the company’s corporate charter and figuring out how to implement all of it. Embracing the report “says we’re dead serious about repairing the ethical reputation of this company,” says Kelly. Accepting the entire report — even welcoming it — was a canny move. Both Capellas and Kelly, the former GC at Fannie Mae and Sears, Roebuck & Co., are known as skilled corporate political players. And here, they read Breeden perfectly. Kelly brought to MCI a reputation as one of the nation’s savviest in-house lawyers, and in Breeden’s eyes, Kelly lived up to the hype. When she was hired, MCI “was fighting survival-stakes litigation with our competitors, battling through bankruptcy, and lobbying to stay in good standing as a government contractor,” recalls Breeden, “and she [continues] to handle it all with an amazing amount of skill.” But more importantly, the company’s genuflection was sure to appeal to Breeden, the Securities and Exchange Commission chairman under the first President George Bush. Breeden’s legendary ego and imperious style had, during his SEC days, earned him the nickname “King Richard.” Breeden — who has pocketed over $2 million for his MCI work — has a larger personal stake in the success of “Restoring Trust,” too. During his tenure at the SEC, which ended in 1993, his calls for tighter corporate oversight were met with only moderate success. According to many in the securities industry, Breeden views the recent accounting scandals as vindication for his earlier positions. Breeden says that he hopes “Restoring Trust” leaves a lasting mark on American business. “Ten years from now, I really think lots of companies will be studying it and using its recommendations.” Given Breeden’s lofty self-regard, Laurence Harris, a current MCI board member and Patton Boggs partner, says it made sense for Capellas and Kelly “to go along with the report — try like hell to get it implemented — then to continue [sparring] with [Breeden].” In the meantime, Kelly and her team are struggling with several of the document’s more far-reaching provisions, like the one that requires the company to set up a Web site for shareholders that allows them to make (and vote upon) proposals to the board. “These are difficult issues, and for a number of them, it’s slow going,” says Nicole Jones, the company’s vice president of corporate securities and a member of Kelly’s team. “Sometimes, I just want to say to Richard, ‘How did you expect us to [put this into practice]?’” What happens if MCI disappoints the king? “If we get only 80-90 percent of it implemented — which I think is likely — it’ll be interesting to see how [Breeden] reacts,” says Dennis Beresford, a professor of accounting at the University of Georgia and MCI board member since mid-2002. “We’re trying, but it’s not easy.” So far Capellas and Kelly’s charm offensive is working. Breeden hasn’t yet set any hard deadlines for implementing his requirements or filed any progress reports with Judge Rakoff. Breeden says that the judge didn’t require specific deadline or updates. “I’m wearing a whistle around my neck, but I haven’t needed to use it,” he says. If the company fails to comply, the results could be harsh. Judge Rakoff could punish MCI, either by fine or injunctive relief. But the public relations fallout of such a move would likely provide a tougher sentence. “We’ve had our one bite at the apple,” says Kelly. “In the eyes of the public, we don’t get another one.” Of course, Breeden’s report won’t matter a bit if the company doesn’t improve its balance sheet. In May, less than a month after MCI emerged from bankruptcy, the telecom reported first-quarter revenues of $6.3 billion, a decrease of 13 percent over 2003′s first quarter. The company also announced a first-quarter loss of $388 million and layoffs of 7,500 workers. But if Capellas turns the business around, and Kelly gets “Restoring Trust” up and running, the ramifications could be enormous. Breeden’s report “absolutely could become the model corporate governance blueprint,” says Charles Elson, a professor of corporate governance at the University of Delaware. “And I’m not sure many [other companies] are ready for that.” MCI’s corporate governance overhaul began in July 2002, shortly after the company, then called WorldCom Inc., announced it had overstated its 2000 and 2001 earnings by some $3.8 billion. The alleged fraud was the largest in the history of corporate America, and fingers immediately pointed to two individuals, chief executive Bernard Ebbers and chief financial officer Scott Sullivan. (In March, Sullivan pleaded guilty to fraud charges, while Ebbers pleaded not guilty. In late May, Ebbers was indicted on six counts of fraud; his trial is scheduled for November.) Ultimately, the size and scope of the fraud turned out to be even larger than initially thought: The $3.8 billion ballooned to $11 billion, and investigators proved that corporate governance was basically nonexistent at WorldCom. For instance, a small group of board members approved some $400 million in personal loans to Ebbers. Right away, the SEC sued WorldCom. Given the scope of the alleged fraud and the failure in governance, Judge Rakoff decided to guard against further shenanigans by appointing a corporate monitor. Breeden was given the authority to nose around in the company’s affairs and demand changes wherever he saw fit. (Breeden, who runs a Connecticut-based financial restructuring firm, was paid $800 an hour.) At the outset, the scope of Breeden’s job was relatively narrow — to monitor the behavior of WorldCom’s brass during the SEC suit. But last July the company and the SEC agreed to a settlement, part of which required the telecom to tighten its corporate governance regime. MCI coughed up $750 million in fines and restitution, and Rakoff handed Breeden the job of drafting corporate governance to fit the postbankruptcy MCI. At the time, corporate America was adjusting to Sarbanes-Oxley — the sweeping federal law that set forth new corporate governance standards for all public companies. And the two major exchanges, the New York Stock Exchange and Nasdaq, were talking about tightening the reporting requirements for listed companies. But to Breeden, keeping up with the rest of the Fortune 500 wasn’t enough for MCI (the company officially changed its name to MCI in April 2003). “When you’re the world’s symbol for fraud and governance abuse, you can’t do the bare minimum and expect to regain your credibility,” he says. “I knew I had to come up with something bigger.” So Breeden took full advantage of his mandate. “Restoring Trust” pulls power away from the chief executive and redistributes it among the board of directors, the general counsel’s office and the shareholders. It builds in checks and balances. The report provides that each year shareholders swap one existing director with someone new. It mandates semiannual meetings between the general counsel and the audit committee of the board, outside the CEO’s presence. And it gives shareholders the power to vote proposals directly onto company proxy statements. Breeden didn’t draft the report in isolation. Periodically, he e-mailed snippets of his work to the board’s nonexecutive directors and solicited comments. (Capellas mostly chose to stay out of the process, saying he wanted to focus on other elements of the business, says Breeden.) The board members obliged. “When we realized he was going to try to get in the kitchen sink, we dug in and lobbied on a lot of different points,” says Nicholas deB. Katzenbach, the current board chairman and U.S. attorney general under President Lyndon Johnson. Breeden “changed his mind on some points, but in the end, he made it very clear that this was his report, and that he had the final say.” “It wasn’t my favorite experience,” adds audit committee chair Beresford, who concedes that the tone of the e-mails often got heated. “I felt that Richard was putting forth far too much detail in areas that need to stay open-ended.” Beresford, for example, says he understands the need for “fresh blood” on the board. “But as far as shareholders voting one of us off each year, well, I’m not really sure what that accomplishes.” Despite the criticisms, Breeden stuck to his vision. By the end of last July, Breeden wrapped up his first complete draft. It contained 78 separate “recommendations” and ran 150 pages long. When Kelly arrived at MCI in early August 2003, Breeden had yet to issue his report. But she and deputy Carol Ann Petren had plenty to do, including winning back MCI’s government contractor’s license. Once the report came down, Kelly set to work, first with an assemblage of lawyers from Weil, Gotshal & Manges, and later with her own team, including corporate secretary Jennifer McGarey, and chief ethics officer Nancy Higgins. By the spring of this year, the lawyers had implemented most of Breeden’s simpler provisions, such as hiring board members with accounting and previous board experience, and setting up a board “risk committee” to review any potential litigation or other looming problems. But with other prescriptions, relating chiefly to shareholder participation and board composition, the company has run into problems. The report requires MCI to alert the public two days before any of its directors sell company stock, a departure from the current SEC rule, which only requires quarterly disclosure of director sales (unless directors own more than 5 percent of a company’s shares). In March, the provision caused two board members, both of whom had snapped up big batches of MCI debt during the company’s bankruptcy, to quit the board. Neither member, David Matlin of New York-based MatlinPatterson Global Advisers LLC nor Glenn Hutchins of Menlo Park, Calif.-based Silver Lake Partners, were available for comment. But a source close to the situation confirmed that both Matlin and Hutchins were “very concerned” with how that provision would have affected their ability to sell shares. Breeden’s “electronic town meeting” plan could have an even bigger impact on board members. The report requires the company to set up a Web site for shareholders. Through the site, shareholders will have the opportunity to make proposals on just about any issue pertaining to the company and to vote on them. If a certain percentage (it’s not settled what that percentage should be) of shareholders vote for the proposal, it automatically goes on MCI’s next proxy statement. Kelly and McGarey have been brainstorming on the town meeting provision since the start of the year. At this point their challenges are largely logistical: controlling access, setting up voting procedures, and the like. But board members have larger concerns. The Web site idea, if widely used, could strip the board of some of of its power. “Part of me hopes that when the Web site [goes live], it’s a party that nobody comes to,” says Beresford. Wishful thinking won’t make one of Breeden’s harshest mandates disappear: that shareholders replace a board member every year. Kelly’s immediate challenge is to keep the annual election from becoming a sort of “Survivor: In the Boardroom,” a popularity contest based on criteria that may not correlate to boardroom performance. The hurdles are big. How do the shareholders decide who’s best to add and who’s best to toss? What kind of “campaigning” will board members be allowed? And in the face of this, how will the board keep from splintering into factions? If Kelly has the answers to these questions, she isn’t talking. “We really aren’t sure how we’re going to put this one in,” she says. And how is the board reacting to the requirement? Again, partly by hoping the recommendation never becomes reality. “The board might experience enough attrition throughout the years [such that] we don’t have to use it,” says board member C.B. “Jack” Rogers Jr. Despite all the struggles, Kelly hopes to have most of the recommendations in place by the company’s first postbankruptcy annual shareholders meeting, which is likely to occur sometime in early- to mid-2005. (At press time MCI planned to relist on Nasdaq by midsummer.) What happens if next year rolls around, and Breeden’s tougher requirements still haven’t moved off the page? Will Kelly ask the judge to save her and the company from Breeden? “Not a chance,” Kelly says. Instead, she says, she’d go back to Breeden: “If he sees that we’ve tried hard to put something in, and it hasn’t worked, I think he’s going to be flexible.” How will Breeden react to this? He seems amenable to the suggestion — at least for now. “Will there be tweaks and modifications along the way?” he asks. “Perhaps.” Just what Capellas and Kelly hoped he’d say.
The 411 on MCI Company: MCI Inc. (formerly WorldCom Inc.) Headquarters: Ashburn, Va. CEO: Michael Capellas Chairman: Nicholas deB. Katzenbach GC: Anastasia “Stasia” Kelly Deputy GCs: Carol Ann Petren and Paul Eskildsen Size of legal department: 200 attorneys, 150 support employees Employees: 50,000 Filed for bankruptcy: July 21, 2002 Emerged from bankruptcy: April 20, 2004 Total value, WorldCom fraud: $10.8 billion Source: CC research and MCI

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