Commentary: Sprint's Board Needs a Good Sweeping, Too

Long before it moved to boot its top two executives over questionable tax shelters, Sprint Corp.'s (FON ) board of directors had a reputation for weak corporate governance. In fact, Sprint's name was synonymous with many things shareholder activists love to hate, including massive stock option grants and option repricings. One former Sprint exec describes it as clubby, entrenched, and passive. It was only a matter of time before the board's weak oversight caught up with the company.

When it did, it was ugly. On Feb. 2, Sprint announced that Chairman and CEO William T. Esrey and his likely successor, President Ronald T. LeMay, were leaving. Their Sprint careers were cut short by a questionable tax shelter, set up by Sprint auditors Ernst & Young, that the two execs used to shield more than $100 million in stock option gains. But if the board finally acted more decisively in ousting them, the housecleaning shouldn't stop there. Sprint's board itself needs to be reformed. The tax-shelter tale is just one more mistake of a board that was too close to management and too slow to ask the right questions.

Start with the makeup of the board itself. At just eight people, it's simply too small: Insiders Esrey and LeMay represented one-quarter of the total. It also lacks anyone with CFO or auditing experience. And corporate governance experts say some other directors don't exactly meet standards for independence, either. Director DuBose Ausley's Florida law firm received $723,292 in legal fees from Sprint in 2001. Irvine O. Hockaday Jr., the former Hallmark Cards Inc. CEO who sits on the compensation committee, is the most prominent outside director. A member of the board for five years, he's also Esrey's next-door neighbor and friend. The other two compensation committee members each have been on the board for more than two decades. "The board is too cozy," says Ned Regan, Baruch College president and ex-New York State comptroller.

The tax problems plaguing Esrey and LeMay--and the managerial crisis they have brought on Sprint--stem in part from the board's earlier compensation decisions. Simply put, the board inundated Esrey and LeMay with options, then accelerated their vesting schedule after shareholders approved a merger with WorldCom Inc.--even though regulators ultimately blocked the deal. After exercising many of their options, both execs agreed to the tax shelters. Sprint is being sued by shareholders over the accelerated vesting.

That wasn't the board's only misstep. In 2000, the company devised a stealth repricing technique that let employees trade in under-water options for new ones while Sprint avoided a charge to earn- ings. And when the company spun off its PCS tracking stock, the board awarded tracking-stock options that netted seven top execs an additional $185 million in three years. Says Patrick McGurn, senior vice-president and senior counsel at proxy adviser Institutional Shareholder Services Inc.: "This company is a serial governance abuser." Sprint says it repriced the options to keep execs from leaving. "It's a very inquisitive, hardworking board that is willing to make the tough judgment calls," says Sprint chief legal counsel J. Richard Devlin. Board members did not return calls.

Sprint's woes are hardly over. Its wireless unit is hemorrhaging customers, and its long-distance unit is losing market share. The company also needs an arbitrator's help to hire a CEO, since BellSouth Corp. (BLS ) filed suit to stop its vice-chairman, Gary D. Forsee, from joining Sprint.

Sprint's most compelling need is for a new CEO. But the board itself could use more truly independent directors. It needs more truly independent directors, including at least one with auditing expertise. Long-serving directors ought to go, and ties to Ausley's law firm must end. A new compensation committee, one not afraid to say no, should be appointed. An independent chairman willing to take on the new CEO is a must. Until those things happen, Sprint's investors will have little reason to believe that their interests rank highest around the boardroom table.

By Louis Lavelle

With Roger O. Crockett in Chicago

— With assistance by Roger O Crockett

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