Harsh spotlight for new WorldCom chief

John Sidgmore has been promising a fresh start and a bright future for the telecom giant ever since he stepped in as chief exec nearly two months ago. That job just got a lot harder.

6 min read
John Sidgmore has been promising a fresh start and a bright future for telecommunications giant WorldCom ever since he stepped in as chief executive nearly two months ago after founder Bernie Ebbers left under a cloud.

That job just got a lot harder. Even before auditors disclosed Tuesday that WorldCom improperly booked nearly $4 billion in expenses over the last five quarters, Sidgmore had the Herculean task of convincing customers and shareholders that WorldCom could recover despite being $25 billion in debt and facing an inquiry by federal securities regulators--and all amid a gasping telecommunications sector.

News that the company intentionally misstated its expenses has led to the stock being halted after dropping to 9 cents. Also, the Justice Department is investigating, President Bush is calling the company's behavior "outrageous," and customers are speed-dialing the competition.

And Sidgmore is repeating his message of rebirth: "I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter, and our dedication to meeting customer needs remains unwavering," he said in a statement Tuesday.

The former WorldCom vice chairman said late Tuesday that he and other managers were "shocked" by the discoveries--potentially the largest fraud in the history of corporate America.

"I have committed to driving fundamental change at WorldCom," the 51-year-old CEO said in a statement, "and this matter will not deter the management team from fulfilling our plans."

Sidgmore was not available for comment Wednesday.

The Securities and Exchange Commission was already investigating the Clinton, Miss.-based telecommunications giant, the United States' No. 2 long-distance provider and controller of a large portion of the nation's Internet backbone. At the time of Ebbers' ouster in late April, the company had $30 billion in debt and was in rocky negotiations with banks over a $5 billion line of credit.

During his first two days at the helm of WorldCom, Sidgmore called the company's largest customers to reassure them. He also launched a 30-day assessment of assets and told staffers that he expected to sell off several pieces of WorldCom to raise cash. And during his first conference call as CEO on April 30, Sidgmore was candid about WorldCom's uphill battle to boost profits and restore faith among shareholders.

"I'm not here to say I'm going to single-handedly turn things around," Sidgmore said at the time. "But the company has a much more negative face and a negative perception than it deserves...In terms of restoring credibility, I think I and the management might be able to turn things around."

But it's unclear if Sidgmore, who came to WorldCom with its 1996 acquisition of MFS Communications, knew exactly how difficult the task of turning WorldCom around would prove.

In his first two months on the job, he talked to dozens of journalists and Wall Street analysts, in some cases persuading them that WorldCom could reverse its fortunes over the long term. Articles in publications ranging from The Washington Post to Business Week were cautiously optimistic about Sidgmore, who was seen as a decent counterbalance to Ebbers' eccentric style and highly publicized management gaffes.

It's also difficult to tell whether the public will view Tuesday's disclosure of fraudulent bookings as the ultimate attempt by Sidgmore to rebuild trust--or whether the hasty announcement will go down as an indictment of Sidgmore and all senior managers at the company.

Wall Street clearly took a pessimistic view, and President Bush echoed the lack of confidence, saying he was "deeply concerned" about the WorldCom scandal.

"We will fully investigate and hold people accountable for misleading not only shareholders, but employees as well," Bush said while attending the Group of Eight Summit in Alberta, Canada. "Those entrusted with shareholders' money must--must--strive for the highest of high standards."

Business experts are pessimistic about how long Sidgmore will remain at WorldCom's helm. Sidgmore was one of the loudest telecommunications boosters throughout the 1990s and founder of UUNet, which built an enormous system of cables and electronic switches that allows access to Internet e-mail and Web pages. But his two months at the top of WorldCom may end in disaster.

"The numbers are so big that it's going to be difficult to re-establish credibility. At the minimum, the entire top management team will have to be removed," said Richard A. D'Aveni, professor of strategic management at the Amos Tuck School of Business Administration at Dartmouth College in Hanover, N.H. "All of this happened on Sidgmore's watch, recently as CEO and before that as vice chairman. How can you trust somebody to watch now if it seems like he didn't watch before?"

Sector scandals
The WorldCom scandal comes less than two weeks after the ouster of Qwest Communications International Chief Executive Joseph Nacchio, who resigned June 17 at the request of the company's board.

Denver-based Qwest is under SEC investigation of accounting practices and has been forced to put its assets up for sale. The company was criticized roundly for what some shareholders called Nacchio's "outrageous" compensation--$27 million last year, excluding stock options--even as the stock plummeted. The package was more than six times his $4.22 million pay in 2000.

D'Aveni said Sidgmore might have preserved some of his professional reputation by swiftly firing Chief Financial Officer Scott Sullivan after announcing the $3.8 billion error. The company also accepted Tuesday the resignation of David Myers, its senior vice president and controller.

And Sidgmore's predecessor at the top of the company--the man Sidgmore described to journalists as a "good friend"--is also likely to come under fire.

Ebbers, whose strategy of rampant acquisition led WorldCom into telecommunications' top ranks, left Sidgmore a company that was laboring under $30 billion in debt and was being investigated by federal securities regulators. WorldCom had lost more than 80 percent of its value when Sidgmore took over after several years in a low-profile role as vice chairman.

The idiosyncratic Ebbers, 60, also eroded trust in the company and its board of directors because of a personal loan from WorldCom for $366 million. And he greatly sapped morale among employees during a staff meeting in March, when according to media reports, he accused employees of stealing coffee bags from company break rooms. At the same meeting, he allegedly told workers that the Mississippi company would cut its costs by turning up office thermostats in the humid summer.

Some business experts said shareholders or government regulators would be foolish to lay the lion's share of the blame in the WorldCom meltdown on Sidgmore or any single set of executives--even if several insiders are found to have intentionally misled investors.

W. Michael Hoffman, executive director of the Center for Business Ethics at Waltham, Mass.-based Bentley College, said no less than the incestuous nature of corporate America is to blame for the WorldCom morass. Theoretically, he said, WorldCom's board of directors should have been more critical of senior management's financial estimates long before it recorded $3.8 billion in expenses improperly booked as capital expenditures. But such criticism is often lacking because CEOs generally handpick board members based on existing friendships--not necessarily their business acumen, he said.

"The concern that I and other investors have about the Enrons, Global Crossings, Tycos and WorldComs, among others, is this: Where are the boards of directors of these corporations--the people who were supposed to be the watchdogs to make sure corporations are acting appropriately and that investors are getting accurate information about the companies' financial status?" Hoffman asked Wednesday.

"We're dealing with a systemic failure where the whole barrel of apples is rotten--not just a few pieces of fruit," Hoffman said. "Millions of people are concerned whether we should keep our money in the stock market, and this could be the tip of the iceberg when it comes to consumer confidence in the stock market and in corporate governance."