Five Lessons of the Worldcom Debacle

Five Lessons of the WorldCom Debacle

By Steve Rosenbush

The rise and fall of WorldCom founder Bernard Ebbers likely will be studied for years to come. Certainly, Ebbers' Mar. 15 conviction on nine counts of fraud, conspiracy, and filing false documents marked a major victory in the government's war on white-collar corruption (see BW Online 3/16/05, "Ebbers: Giant Fraud, Simple Conclusion").

Ebbers' "I-knew-nothing-about-the-books" defense failed to persuade the jury. "This is absolutely going to raise the level of expectation that CEOs should know everything that's going on inside their companies, because they will be held responsible for it," says Dan Reingold, a former telecom analyst with Credit Suisse First Boston.

WorldCom's collapse already has had a profound impact on the business climate in the U.S. It was one of the major reasons lawmakers passed the Sarbanes-Oxley Act, which requires companies to share more information with investors, says Reingold, who witnessed the trial and plans to publish a book on it later this year.

But WorldCom was more than just a tale of lax accounting principles or substandard reporting requirements. Some important lessons can be gleaned from the testimony in the trial for investors, B-school students, and aspiring execs alike. Here are five:

Beware of companies with cult-like corporate cultures.

From the start, telecom upstart WorldCom functioned more like a tribe than a business. Its operations centered around a charismatic leader, the imposing former basketball coach Ebbers. If Ebbers was the oracle, Chief Financial Officer Scott Sullivan was his high priest. Together, they exercised unquestioned authority and demanded unquestioned loyalty from employees.

Both men imbued WorldCom shares with enormous symbolism. Each employee received a grant of stock, a form of initiation into the tribe. But the culture created by Ebbers and Sullivan prevented them from selling the stock, lest the employees be...