Breeden: “Director who assume that

Breeden: “Director who assume that a fraud like WorldCom’s couldn’t happen here’ are being too complacent. While most people are honest, the face is that fact is that fraud can happen anywhere. Inattention to healthy practices in compensation and internal controls, for example, can allow problems to grow without a corrective response. In many of the worst cases, even good directors have proven to be too trusting of management. Lack of healthy skepticism always creates risk, and it can sometimes lead to devastating consequences. The tragedy is that earlier corrective action can usually cure the problems, or at least keep them to a manageable size.
“Directors should be willing to pick up and read the CEO’s contract and compensation package, for example, and to make sure that it is fair and justifiable in all the circumstances. Sometimes compensation consultants or lawyers for executive push for provisions that go too far in guaranteeing rewards at the expense of removing the authority of the board to assess performance and decide what is appropriate. Directors are stewards of other people’s money, and they need to act like it.”
Other compensation practices were also an abuse of shareholder interests. Massive volumes of stock options were granted to Ebbers, Sullivan, Beaumont and other executives, representing hundreds of millions of dollars in value at the time.
The board also allowed Ebbers to pay $238 million in “retention” grants to favored executives and employees in2000, without standards or supervision. Ebbers allocated these grants to whomever he wished, in whatever amounts. The retention program was in effect a giant compensation slush fund.
When Ebbers was finally fired by the board ( which did not yet know about the fraud that had been committed, but that did know the company had massive levels of debt), the board awarded an ad hoc severance program involving as much as $250 million. Ebbers and his wife could have received cash payment during their lives of more than $50 million. The package also gave Ebbers interest subsidies on his shareholder loans that appear to have been worth $30 to $40 million per year for five years.