A tough message to corporate America

WorldCom, the largest corporate failure in America's history, should cap its directors' pay at $15m, give shareholders more power and bolster its board after the $11bn accounting fraud that drove the telecommunications company to its knees, a United States court investigator recommended yesterday.

As he published his 150-page report, Richard Breeden, appointed by a New York court, made it clear his recommendations for WorldCom should be adopted by the rest of corporate America, which was damaged by a wave of scandals after the collapse of the dotcom boom.

His 78 recommendations are aimed at bolstering corporate governance at the new-look WorldCom, now known as MCI, to prevent a re-run of the "odious practices" that allowed the company to amass $41bn (£26bn) of debt in the US's largest accounting fraud.

Mr Breeden, a former chairman of US regulator the securities and exchange commission, painted a damning picture of the company under its previous chief executive and founder, Bernie Ebbers, who was allowed a "nearly imperial reign" over the company.

Mr Ebbers, who left with a golden goodbye of an estimated $50m, was allowed to run a "giant compensation slush fund" to hand out to favoured executives and convinced the board to "lend" him $400m personally. He was also allowed use of the corporate jet for $1 a month.

Mr Breeden said such levels of pay "went beyond any rational calculation of value added by senior executives".

To ensure they are not repeated, he recommends that executives should be allowed to earn more than $15m a year only with the prior approval of shareholders.

Mr Breeden made it clear that WorldCom was not alone among telecoms companies during the dotcom boom in handing out large pay cheques.

"Certainly, the largesse for Ebbers was part of a broader pattern across the industry and the large US corporations generally of stratospheric compensation levels," Mr Breeden said.

He cast doubt on the effectiveness of the practice in boardrooms of giving options and shares to directors, recommending more payment in cash and bonuses rather than shares or options.

But the report does not advocate more intervention from government in the form of new laws.

The Sarbane-Oxley laws to boost company boards, introduced in the wake of corporate scandals such as WorldCom, Enron and Tyco, have been harshly criticised on both sides of the Atlantic for being overly zealous.

"This report calls for more democracy for shareholders so that they can more effectively protect themselves," Mr Breeden said. While he notes "shareholder activism" is a not a panacea for corporate governance problems, he believes investors should be given more opportunity to make their views known to the board.

As well as being given a vote on directors' pay, shareholders should be allowed to veto new directors and be given an electronic "town hall" form of communication with the board.

He also suggested sweeping changes to the way in which the board itself is structured to end the "cronyism" of the past. No director should serve for more than 10 years and a new one should join every year.

In addition, the chairman and chief executive role - traditionally combined at US companies - should be separated. This is already regarded as best corporate governance in the UK. The chairman should be non-executive and serve for no more than six years.

Michael Capellas, the new MCI chairman, said: "The company has already implemented many of the proposed corporate reforms, but we know we have to do even more to regain public trust".

The company is bound by the recommendations unless it applies to the court.

Despite WorldCom's problems, MCI is expected to emerge from chapter 11 bankruptcy protection later this year.

Restoring trust: main proposals

Boardroom

The role of chairman and chief executive should be separate; the chairman should be non-executive

Directors should not serve for more than 10 years

An independent audit committee of not less than three members should be created

A governance committee of three members should be set up to oversee nominations to the board

Shareholders

An electronic "town hall" should be established to enable shareholders to communicate with the board

They should be given a vote on directors' pay

Pay

Pay should be limited to $15m without shareholders' prior approval

It should be in cash, rather than shares or options; not less than 50% but ideally 60-75% of total compensation should be in cash

Payoffs should be limited to $10m for the chief executive and no more than $5m for any other employee

There should be no personal use of corporate aircraft

Accounting

A target should be set of paying 25% of net income in dividends to shareholders