How Ebbers Kept the Board in His Pocket

WorldCom's CEO showered directors with perks and won their devotion

For two years, WorldCom Inc. director Max E. Bobbitt looked on while his $300 million stake in the company vaporized. But last April, the former Alltel Corp. president was fed up. In a boardroom maneuver not reported until now, he began plotting to oust friend and WorldCom founder Bernard J. Ebbers and to take his place as CEO. According to current and former executives and two other directors, Bobbitt offered Chief Operating Officer Ronald R. Beaumont, Vice-Chairman John W. Sidgmore, and Chief Financial Officer Scott D. Sullivan retention packages of about $1 million annually for life if they backed him as CEO.

The plot blew up. Word of Bobbitt's maneuvers leaked to Chairman Bert C. Roberts Jr., who rallied others on WorldCom's then-11-member board to thwart Bobbitt, say WorldCom insiders. When the board ousted Ebbers on Apr. 30, his replacement was Sidgmore, who continued in his new role to battle with Bobbitt. Sidgmore and Roberts declined comment on the continuing power struggles. Beaumont and Sullivan could not be reached for comment.

Bobbitt's attempted coup was a shocking turn of events for a board that had for years backed Ebbers unquestioningly--to stockholders' detriment. The 57-year-old Arkansas native had been one of four longtime directors who were Ebbers loyalists, according to about a dozen current and former WorldCom directors and executives who mapped out the inner workings of the board for BusinessWeek. Together with three insiders, this foursome operated as a millionaires club. They collected plenty of perks--from use of a corporate jet to financial support from Ebbers' in their pet projects. And they piled up loads of WorldCom stock. Spearheaded by this group, the board O.K.'d megaloans to Ebbers. They backed him through the stupendous expansion of WorldCom--to the brink of its collapse. They so trusted Ebbers' that they held on to most of their WorldCom shares while they gradually became worthless.

Corporate-governance experts say this boardroom saga illustrates the pitfalls of a big company operating without truly independent directors. "It seems that directors were so beholden to the CEO that no one came forward to say: `Hey, we're in serious trouble here, and what are we doing to do about it?"' says Charles M. Elson, a governance professor at the University of Delaware.

Like Ebbers himself, the CEO's four sidekicks on the board had jumped into telecom when Ma Bell was dismantled in the 1980s. As president of Alltel, Bobbitt helped turn it into the largest phone company serving small-town America and invested in WorldCom. Francesco Galesi, a real estate magnate from Upstate New York, and Stiles A. Kellett Jr., an Atlanta investor who had made a fortune in nursing homes during the 1970s, ran telecom startups. The two came on the board when their companies were bought by Ebbers as part of a string of 70-plus acquisitions that turned fledgling Long Distance Discount Service Inc. (LDDS) into the $35 billion WorldCom. The fourth confederate, Carl J. Aycock, worked with Ebbers at a hotel-management company and then became one of the founders of LDDS. The four directors, and Ebbers, declined to comment on board actions.

Now, the entire board could be purged, say creditors and former executives. Court-appointed monitor Richard C. Breeden is investigating directors' roles in the company's collapse, and the Justice Dept. is asking if they knew about accounting irregularities. Says a creditor: "Directors are feeling intense pressure to leave."

That's quite a switch. For a decade, Ebbers and the board had the wind at their backs. In 1989, Ebbers bought Atlanta long-distance carrier Advanced Telecommunications Corp., in which Galesi held a 25% stake. Galesi joined the WorldCom board. Ebbers repeated this pattern over and over, typically inviting executives of the acquired companies to take a turn on the board. Through the '90s, the then-nine-member board was composed of insiders and execs from acquired companies.

At the heart of the group were "Bernie's Boys"--a nickname WorldCom execs gave his four pals. Like other directors, they collected as many as 10,000 stock options per year--on top of the shares they received when their companies were acquired. Their stakes swelled to hundreds of millions of dollars on paper as WorldCom's stock soared to a high of $60.50 in July of 1999. Ebbers frowned on unloading WorldCom stock, say former directors, so there was little selling by directors.

While the stock climbed, few complained. Ebbers stroked their egos. They took turns holding the chairman title, with Roberts, a former MCI president, getting the honorary post after Ebbers bought MCI. As CEO, Ebbers ran the board and doled out special treats to his inner circle. Kellett was permitted to rent company aircraft for $1 a month, plus a $400-an-hour usage fee. The arrangement saved him more than $1 million in a year, according to a bankruptcy court memo written by monitor Breeden. In the memo, Breeden, who would not comment, called for Kellett's removal because he wasn't paying what it cost to operate the aircraft. A source close to Kellett counters that he "did not keep the lease of the aircraft as a secret nor did he consider it a gift."

A week before Ebbers' ouster, Aycock asked for a $600,000 personal loan from the company. Ebbers informally O.K.'d the financing, according to a director and creditors' representatives. The loan was never granted.

When it came to board members, Ebbers could be insensitive to apparent conflicts of interest. He didn't object when Galesi invested $15 million in a suburban-Chicago long-distance carrier, Telesphere Communications Inc., that was trying to grab share in a market WorldCom wanted to dominate. "Ebbers looked the other way as long as Galesi supported him without question," says a former WorldCom executive who competed against Telesphere.

Ebbers wielded the stick as well as the carrot. He publicly belittled any director who dared question him, according to current and former board members. That included his close confidant, ex-CFO and director Sullivan, who was indicted in August on fraud charges. Two years ago, Sullivan queried Ebbers' cutback in a capital-spending project, say two ex-directors. After the meeting, Ebbers gathered info that undermined Sullivan's position, then revealed it at the next board meeting. That shut him up. "Ebbers treated you like a prince--as long as you never forgot who was king," says a former director.

The board took him at his word, say directors, when Ebbers told them in 2001 that the sudden collapse of the telecom industry was a passing squall. At meetings, no one urged Ebbers to reduce the company's $41 billion in debt, say directors. And they did not spot accounting tricks that resulted in $7 billion in bogus revenues.

Even after the directors finally ousted a stunned Ebbers, Bernie's Boys battled on. Bobbitt, say creditors and directors, rallied Kellett, Galesi, and Aycock to resist Sidgmore--opposing his plans to spin off parts of the company and, ultimately, seek protection from creditors in federal court.

Again, Bobbitt played a losing hand. Just before WorldCom filed for bankruptcy protection on July 21, he enlisted directors Kellett and Galesi to write Verizon Communications CEO Ivan G. Seidenberg, offering him WorldCom for about $1 a share, according to a board member. Seidenberg wasn't interested, say sources close to Verizon. WorldCom executives were outraged. "They never sold their shares during the collapse and were desperate to recoup at least a pittance--the interests of the company be damned," says a director.

With WorldCom in bankruptcy, the directors have little say over what happens next. The creditors' committee is essentially running the company, and the WorldCom that reemerges will likely have a new board. Their stock is worthless. So, like Ebbers and everybody else who went down with him, the once-pampered directors are now members of a fraternity with no exclusivity whatsoever--the losers' club.

By Charles Haddad in Atlanta

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