Examining Business Failure 1

Abstract

The author of this paper will present an examination of the business failure of WorldCom Incorporated and also compare and contrast the leadership management and organizational structures and failures.

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Introduction

WorldCom was the second largest long distance provider and on July 19, 2002 filed the largest bankruptcy ever in U.S. history with its $41 billion dollar debt load, and more than $107 billion dollars in assets. In 1999 WorldCom’s profits began to decrease when WorldCom reduced budgets on telecom services and equipment. The former CEO of WorldCom, Bernie Ebbers, submitted his resignation from his position. Being CEO, he was the leader of WorldCom, and as such, should help an employee feel supported and safe enough to discuss openly or acknowledge the problem he or she is responsible for. When he resigned from the company, it raised questions because Ebbers had about $366 million dollars in personal loans from the company. Upon the revealing of his resignation to the employees, they were alarmed that something important was happening within the company, but had not yet been exposed.

Bernie Ebbers started out in the telecommunications industry in 1983 providing long distance services in Jackson, Mississippi at a company formally known as LDDS. Over the years, the company grew through a series of business deals. In 1995, the name of the company was changed from LDDS to WorldCom. At the time, MCI was the second long distance provider and AT&T was number one. Ebber purchased MCI in 1998, for the amount of $37 billion dollars. With the
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purchase of the MCI, WorldCom became the telecommunications giant. This changed seemed to be the success story of the 1990s, because of how well the company was doing financially and with the job opportunities that the company had to offer. WorldCom wanted to become the strongest company in the industry. Their plan to do this included their putting a bid in to purchase Sprint Corp for $129 billion dollars. The deal was unsuccessful because it was blocked by regulators due to the reducing market for telecom services, and this weakened the company’s performance.

WorldCom implemented some major accounting distortions that deceptively covered up the true financial situation of the organization to a large degree. In a report that was printed out on March 31, 2003 named, "Report of Investigation" it described the accounts as: "... As enormous as the fraud was, it was accomplished in a relatively mundane way: more than $9 billion in false or unsupported accounting entries were made in WorldCom's financial systems in order to achieve desired reported financial results. WorldCom failed to file Chapter 11 Bankruptcy because of fraud, the mis-documenting of accounting information, and a lack of leadership on behalf of the board of directors. Bernie Ebbers was the backbone behind the fraud of the company because he was the CEO. In order to make the business grow, Ebbers focused on business deals in the 1990s. He used WorldCom’s valuable stock to fund his “habit” known as his business deals. The use of the stock was inappropriate on his behalf. To
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accomplish this purchasing spree, the company stock had to continuously increase financially.

The WorldCom went after a series of extremely large business acquisitions. The plan achieved its climax when WorldCom obtained the business acquisition of MCI Communications in the year of 1998; a company with revenues that were more than double the revenues of WorldCom’s. In 2000, the government refused to allow WorldCom's acquisition of Sprint. The denial stopped the carousel, put an end to WorldCom's acquisition-without-consolidation strategy and left management with a stark choice between focusing on creating value from the previous acquisitions with the possible loss of share value or trying to find other creative ways to sustain and increase the share price.

What made matters worse for Ebbers’ situation was the downward spiral in telecommunications. During this time, Wall Street predicted that the company would continue to be successful and that the company would be in the double digits. The reason for this is the company was so successful in such a short matter of time so it was only right that the company would continue. The truth of the matter was that WorldCom wasn’t ready for what Wall Street had predicted. The company’s management needed to take a “time out” to catch up with the business that the company had gained. They needed to learn how to run and manage both companies. Instead of being honest and letting Wall Street know
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what needed to be done, Ebbers changed the accounting documents to make it seem like the company was being successful and making a profit. Because Ebber was the CEO and in being that, he took full responsibility of what went on in the workplace. His taking responsibility should have meant more than a statement of leadership, but needed to be an action of some sort. The company’s stakeholders, who included investors, regulators, the public, and line employees, should have been able to count on senior leadership’s active engagement in the operations of the organization (Finnamore, 2004). An organization must effectively present itself as a socially responsible entity. If Ebbers was honest about what was taking place, he would not be in jail facing a life sentence and WorldCom would be here today and likely be number one in the telecommunications industry. Ebbers was too worried about living up to the expectations that Wall Street placed on WorldCom and was also too consumed by looking out for his own personal financial growth. The company would have had the possibility of still being in service had the board stepped up and stopped Ebbers from the fraud activity he did.

There are regulations put in place to protect companies from this type of crime. Had the government practices been in practice, that whole situation could have been avoided. The Board of Directors was inactive in correctly and effectively responding during this controversy. This could have been fully avoided if WorldCom’s Board of Directors would have intervened and stopped the unethical

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and fraudulent behaviors of Ebbers. The evidence of fraud was also clear and was indeed a consequence of WorldCom’s C.E.O., Bernie Ebbers, who had run the company since 1983. Because he was the source behind its culture, with the addition of the increased pressure from Wall Street, Ebbers held complete blame for this particular case of fraud.

References:

http://www.ecommercetimes.com/story/45542.html?wlc=1226154688

http://Money.cnn.com/2002/07/19/news/worldcom_bankruptcy

"Report of Investigation" dated March 31, 2003.