WorldCom Case Study: Lack of Leadership, Lack of Ethics A multitude of choices made by executives at WorldCom led to the ultimate demise of the company as it was previously known, the employees and their livelihoods’, and the trust of the American people. In a time when corporations fail to set ethical standards and provide transparency to investors, how do we change corporate culture on a national level? By analyzing choices made to improve stock prices and company image that ultimately result in failure– we can guide leaders towards long-term success and corporate stability.
The Growth of WorldCom The WorldCom business began as a small long distance company providing service at a discounted rate. WorldCom grew through acquisitions and mergers throughout the 1990’s, becoming the second-largest long distance phone company in the United States. By acquiring certain strategic companies as MFS Communications and MCI, WorldCom set itself up as a supplier of Internet service and corporate and household telephone service. As WorldCom acquired corporations, the board of directors grew to include executives from these corporations.
This action puts WorldCom in a situation without outside input and oversight. When companies merge and acquire many smaller companies with different computer systems, different management styles, and different cultures the transition can be a rocky one. Differences in corporate cultures and values are often one of the major grounds for mergers to fail (Tichy, 1997). In 1999 WorldCom made a concerted effort to purchase Sprint, however regulators in the U. S. were concerned with the formation of a large telecom company. When this merger was unsuccessful it was noted that the company needed focus from its leadership. as cited by Kaplan & Kiron, 2007). WorldCom provided no printed guiding principles and the management was not aligned throughout the locations.
The culture disseminated from top management was a form of “ready-fire-aim” (Robbins & Coulter, 2007, p. 51). WorldCom passed on a culture of lack of trust of employees and used a controlling style of leadership. Culture at WorldCom This type of environment left employees with no avenue to express apprehension in regard to company practices. Employees faced personal harassment if they disputed upper management’s decisions. Kaplan and Kiron, 2007). When employees cannot express concern and frustration they become disengaged from the company and this may spread throughout the organization. If WorldCom had a strong ethical culture, more employees and managers would likely report misconduct and maintain compliance to ethical standards. This type of environment might have prevented the accounting practices that occurred throughout the organization. As the unethical accounting practices became entrenched in the WorldCom organizations, few managed to speak up.
As employees expressed concerns, they were told this was a one-time event and that it would not happen again by the CEO (Kaplan and Kiron, 2007). Certain employees considered resigning, but ultimately decided against it. As the accounting practices continued some employees even received promotions for continuing to changed figures as requested. This type of business practice does not build a “values-based” (Robbins & Coulter, 2009, p. 101) corporation. Cynthia Cooper was head of the internal audit department.
She began to uncover the accounting practices in use at WorldCom during internal audits. As the audit continued Cooper presented findings to the audit committee, but was told by the CFO to leave certain areas alone. (Kaplan and Kiron, 2007). Cooper was strong enough to continue on her quest for answers surrounding the accounting practices. As the company declined into bankruptcy and many executives left, Cooper remained at WorldCom through 2004. In this time Cooper was never thanked for her effort to maintain ethical business practices and to report inappropriate actions.
Cooper has since moved on and left the company. WorldCom acquired Arthur Andersen as the independent external auditing for the company. As WorldCom grew after the merger with MCI, Andersen began to invoice less than they should have. The charges were defended as an opportunity to prolong business with WorldCom. (Kaplan and Kiron, 2007). This is an immediate red flag for a company. Where were the ethical practices of the independent auditor? If the auditor has no ethics, how can one possibly be assured that the company is performing its intended function appropriately?
The board of directors should have immediately been informed of Andersen’s practices and made a decision to confront Andersen’s practices and possibly obtain new independent auditors. The Board of non-Directors WorldCom’s board of directors was comprised mostly of “former owners, officers, or directors of companies acquired by WorldCom” (Kaplan and Kiron, 2007 p. 10). The Board and its Committees did not function in a way that made it likely that they would notice red flags. The outside Directors had little or no involvement in the Company’ s business other than through attendance at Board meetings.
Nearly all of the Directors were legacies of companies that WorldCom, under Ebbers’ leadership, had acquired. They had ceded leadership to Ebbers when their companies were acquired, and in some cases viewed their role as diminished. Ebbers controlled the Board’s agenda, its discussions, and its decisions. He created, and the Board permitted, a corporate environment in which the pressure to meet the numbers was high, the departments that served as controls were weak, and the word of senior management was final and not to be challenged. Beresford, Katzenbach, Rogers, Report of Investigation by the Special Investigating Committee of the Board of Directors of WoldCom, Inc. , 2003, p. 30). This investigation clearly points how a lack of leadership and involvement from the Board led to the downfall of WorldCom. Sullivan and Ebbers ruled WorldCom with an iron fist. Had the Board been involved in the day-to-day actions of the company it would have become apparent that it was not possible for the company to be reporting the numbers it had. The board played an insignificant function in the corporate culture.
When top management provides no sense of urgency the organization becomes complacent. “Complacency is almost always the product of success or perceived success” (Kotter, 2008 p. 20). The board of directors for WorldCom was likely always complacent as the company had been successful for a long time. In order for WorldCom to have a strong ethical culture, it needs to start from the top. Creating an ethical company In order for a company to have a sustainable ethical culture there are many tasks to be completed, followed up on, and adjusted for necessary change.
Top management needs to provide the basis of the environment for employees. When the board is actively involved and sets expectations for ethical behavior, it is easier for this culture to be learned by everyone. When the board takes action against employees performing in an unethical way (fines, demotion, or even termination) the culture becomes stronger. The CEO directs ethical standards, and the actions of top management speak louder than their words. (Robbins & Coulter, 2009). WorldCom needed an open door policy, where an employee feels protected when needing to express concerns.
A strong culture can create a feeling of being a part of something bigger. Employees’ behaviors then benefit the organization as a whole (Sinek, 2009). In support of this open door policy would be an anonymous ethical hotline for employees to report issues. Not all employees are comfortable speaking up and may fear repercussions. Offering an anonymous way to report problems lets employees feel heard, without fear of losing their job. Treating employees with respect, honesty and openness provides the opportunity for them to proudly act in the same manner. WorldCom provide no opportunity for an ethical culture.
Ebbers set the company up for failure as it acquired many companies quickly and with no plan for merging different styles, cultures, and business models. Had more employees taken action to report violations and concerns, maybe thousands of employees wouldn’t have lost their jobs and their life savings. Acting on the bigger picture often provides more individual results than we often consider. Corporations must act ethically and instruct their employees how to act ethically if they want to survive in today’s competitive environment, this is clear based on the numerous ethical scandals and business collapses in the last 10 years.