During WorldCom Inc.'s bankruptcy proceedings, Richard C. Breeden wielded control over the company's monthly budget. He vetted executive pay and helped pick a new board of directors for the company, now known as MCI Inc.
After the company's $11 billion accounting fraud, the former chairman of the Securities and Exchange Commission cast the new MCI into what he hoped would become a model of how shareholders should be protected and how companies should be run.
Now, three years later, Breeden's rules for corporate fairness are being put to the test.
Every time MCI delves into delicate discussions over whether to merge with Qwest Communications International Inc. or Verizon Communications Inc., it is doing so under the close watch of the man a federal judge appointed as the company's watchdog on corporate governance and ethics. Ashburn-based MCI is run under 78 rules Breeden laid out to safeguard against capricious and self-serving management decisions. It consults three separate investment banks and two law firms that prepare cost-benefit analyses with every new offer. The board meets frequently -- more than 40 times so far this year -- and its members are compensated mostly in cash in an effort to separate their judgment about company policy as much as possible from their self-interest in its stock price or prospects.
MCI "has gone through an extraordinary process," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "Its founder [Bernard J. Ebbers] is headed for jail -- and it's in an extraordinary situation." Most companies don't retain so many advisers, so many lawyers, or conduct so many meetings, Elson said.
The bidding process between Qwest and Verizon is not over, so it's not clear how those measures have helped MCI or its shareholders. Nor is everyone pleased with Breeden's $800-an-hour advice, with some shareholders arguing that he has been biased toward Verizon's offer from the start.
But by at least one measure, the protracted deliberations are yielding results: MCI shares, which closed at $26.70 yesterday, are worth 36 percent more than before a possible merger was reported in February. MCI has gone from endorsing Verizon's initial offer of $6.75 billion to embracing Qwest's thrice-sweetened bid of $9.74 billion. Sources close to Verizon say the New York-based company could still increase its bid, with the next deadline Friday.
"I am confident that for years to come, people will say shareholders got the best deal out of the MCI board," Breeden said, "We set out to recruit a board of exceptional talent that would roll up their sleeves, and we got that."
Breeden, a lawyer who ran the SEC from 1989 to 1993, was appointed by U.S. District Judge Jed S. Rakoff in July 2002 to act as the public's eyes and ears at WorldCom. Among other things, he was supposed to make sure that no one destroyed documents associated with WorldCom's fraud.
"I tried to be the honest broker, to be there to tell it straight," Breeden said in a recent interview. The goal was to give customers and shareholders "the confidence to deal with a company that had a sheriff in its midst."
Terry Savage, an investment banker with Lazard Freres & Co., one of MCI's banks, said having Breeden oversee the board during the merger negotiations is akin to having a referee assuring the board that it is not running afoul of the rules. "At one point he said, 'I think this process has been as clear as possible. We can't fear doing the right thing,' " even if the decision would be unpopular with one company or the other, or even with shareholders, Savage said.
MCI's board already faces several shareholder lawsuits stemming from the merger discussions, and it probably will face more no matter what it decides. But experts say the situation doesn't compare with other controversial mergers, such as Time Inc.'s 1989 deal with Warner Communications Inc. Many shareholders favored a cash deal with Paramount Communications Inc. and were angered when Time's board engineered the deal to deny a shareholder vote and refused to meet with Paramount.
