Director Defendants Settlement in WorldCom Identified as "Turning Point" in Corporate Governance

1/16/2014 - In 2005, a month before the WorldCom case was set to go to trial, BR&B client, the New York State Common Retirement Fund, reached a settlement with ten of the twelve non-management WorldCom board member defendants.  The settlement required these defendants to pay money from their own pockets in settlement of the claims of purchasers of WorldCom bonds.  As noted in a recent book review in The Wall Street Journal, experts in the field of corporate governance view the settlement with the non-management WorldCom board members as a landmark achievement in the struggle to ensure that corporate boards and their individual members act in order to protect shareholder interests and guard against fraud within the companies on whose board they sit.

In the January 16, 2014, edition of the paper, Alan Murray, the President of the Pew Research Center in Washington, D.C. reviewed “Boards That Lead” by Ram Charan, Dennis Carey and Michael Useem.  In the book review Murray wrote that corporate boards “came alive” barely a decade ago with the WorldCom settlement.  Murray wrote:

Corporate boards of directors have been around for centuries, but for most of that time they were inert — rubber-stamping CEO proposals with minimal oversight.  They came alive, like Geppetto's puppet, barely a decade ago.  I trace their animation to Jan. 7, 2005, when 10 former directors of WorldCom agreed to pay investors $18 million out of their own pockets as part of a settlement in the giant accounting-fraud case.  Before then, a book called "Boards That Lead" — as Ram Charan, Dennis Carey and Michael Useem have titled their latest — would have seemed oxymoronic and probably triggered protests from the Business Roundtable.  Boards weren't supposed to lead.  They were supposed to monitor — and they didn't even do that very well.

But post-Worldcom, post-Enron, post-Sarbanes-Oxley, post-Dodd-Frank, boards have become the big guys on the block.  The new laws and stock-market listing standards have forced them to take greater oversight roles, and the court cases have raised the stakes if they fail.  They responded by taking charge, in part to protect their own pocketbooks, and this has changed the governance equation of America's big businesses.

The book examines notable instances where boards of public companies appear to have taken corporate governance seriously, including the highly beneficial collaboration between the board and management in Procter & Gamble’s decision to acquire Gillette.   The book's authors also describe instances of apparent board member neglect and harm to their shareholders, including “monumental failures of the Hewlett-Packard board, which brought in a succession of CEOs from the outside, and became bogged down in infamous intramural spats, including a spying scandal” and stories about the board of Motorola Inc., which the authors blame for “destroying the company.”

In fact, the $18 million WorldCom settlement with the director defendants expanded over the next two months to include all twelve non-management directors who paid $24.75 million from their own pockets, which, when added to the $36 milliion paid by the D&O insurance carriers, resulted in a total settlement of $60.75 million from and on behalf of the director defendants.

BR&B is gratified and proud to have served as a lead counsel for the New York State Common Retirement Fund and the class in the WorldCom case where the total recovery from all defendants exceeded $6.1 billion.  WorldCom continues to be recognized as a significant achievement in corporate governance through securities class action litigation.