VideoDo the Right Thing
Impressive as it was, cleaning up the fraud wasn't enough to restore the confidence of WorldCom's customers; Blakely had to make sure that nothing remotely like Sullivan's manipulations could ever happen again. In July 2003, WorldCom's largest customer, the federal government, had barred it from bidding on federal contracts while it reviewed whether the company should be placed on an "excluded parties" list. "Getting that [ban] lifted was the highest priority," says Blakely. "If the government doesn't want to do business with you, why should anyone else?"
The two main concerns identified by the General Services Administration, which administers the list, were controls and ethics. Indeed, KPMG, which succeeded Arthur Andersen as WorldCom's auditor, had identified 96 control issues, and a separate assessment by Deloitte zeroed in on several other "high risk" areas. With help from both accounting firms, Blakely's finance team put together a "heat map" that listed high-priority risk areas, and then went about fixing them. The solutions included adding basic checks and balances such as segregation of duties among finance staffers, limited access, and documented policies. The company then implemented a much more stringent, and inclusive, policy for closing the books. "It is impossible to completely eliminate the possibility of fraud," says Blakely. But, he says, the hundreds of added controls will greatly diminish the chances of it reoccurring.
MCI was also forced to implement what is likely the most stringent set of corporate-governance practices ever adopted. As part of WorldCom's $750 million cash and stock settlement with the SEC, it agreed to accept all the recommendations of the court-appointed monitor. Breeden's 150-page report on corporate governance, "Restoring Trust," lists 78 recommendations, including the separation of the CEO and chairman roles, and the required removal of one board member each year to make room for a new director. "Some [of the requirements] go beyond what is reasonable," contends Beresford. "But we have no choice but to accept them."
As for ethics training, MCI put the entire company of 50,000 employees through a course designed for it by professors at New York University's Stern School of Business. In addition, 90 executives attended a two-day ethics program at the University of Virginia's Darden School. Not surprisingly, MCI is trying to keep ethics in the foreground. Large banners proclaiming the company's "guiding principles" festoon the halls of its Ashburn, Virginia, headquarters. They include such mottos as "Everyone should feel comfortable to speak his or her mind" and "Do the right thing." The principles are also printed on the back of employee security badges.
All these measures were enough to convince the government that MCI had reformed. Last January, it lifted the debarment just in time for the renewal of a contract worth as much as $400 million.
There would be more to celebrate. On April 20, the company emerged from bankruptcy, officially taking the name MCI Inc., with its debt slashed from $41 billion to $5.8 billion, and with $6 billion in cash reserves. Its stock was scheduled to begin trading again on Nasdaq this month. "A lot of people didn't think we could get it done," says Beresford. "It took a Herculean effort to get to that point." (Not to mention the $800 million in fees MCI spent during its sojourn in Chapter 11, for lawyers, accountants, appraisers, tax experts, and other consultants.)
But the work on the controls isn't finished. Like most companies, MCI is busy documenting its controls in compliance with Section 404c of the Sarbanes-Oxley Act. More than 60 people are working on the project, and PricewaterhouseCoopers is providing outside assistance. "We've still got a long summer ahead to get to where we need to be," says Blakely.
Was It Worth It?
Right now, MCI is trailing the field. "They are third in a race of three," says Muayyad Al-Chalabi, managing director of San Francisco-based telecom research firm RHK Inc. Compared with archrivals AT&T and Sprint, MCI has lower margins, pays more (as a percentage of total revenues) to other carriers in access fees, and has the fastest-declining revenues (17 percent in the past year alone, year over year). "I don't know if MCI was worth saving," says Al-Chalabi.
The company will also have to fend off competition from Baby Bells like Verizon and SBC Communications, which are looking to provide enterprise telecom services to small and midsize businesses — a key customer base for MCI. And another setback came in June, when a federal court ruled that Baby Bells no longer had to lease access to their local networks to the likes of MCI at deep discounts, increasing MCI's cost to provide consumer long distance.
In May, MCI announced a $388 million loss for the first quarter of 2004, compared with a $52 million profit for Q1 2003. The company said it would cut 7,500 jobs, or 15 percent of its workforce. But Al-Chalabi says reducing head count alone won't solve MCI's problems. He points out that the company has a patchwork of networks left over from the acquisitions — the same problem that plagued the finance department — which impedes its efforts to obtain operating efficiencies. "They have a thousand or more systems that all need to be supported," says Al-Chalabi. "That increases the number of suppliers they have to deal with, and there is a lot of duplication in the systems."
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