Company Critic Puts Blame On Winnick, Weak Board

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Company Critic Puts Blame On Winnick, Weak Board

By MICHAEL STREMFEL

Staff Reporter

Back in 1999, Nell Minow, editor of The Corporate Library, a watchdog Web site, was among the very first to publicly criticize Global Crossing Ltd.

At that time, the company’s stock was soaring, making insiders and early investors instant centimillionaires or billionaires. Future prospects were so bright that Global Crossing was able to woo industry veteran Robert Annunziata, then a high-ranking AT & T; Corp. executive, to join as the chief executive.

Minow declared Annunziata’s contract the worst of the year, in terms of shareholder value. Just for showing up, Annunziata got a $10 million signing bonus and 2 million stock options at $10 a share below market price. “How hungry is he going to be after getting $30 million up front,” Minow pointed out.

Annunziata also got a guaranteed bonus of at least $500,000 a year, a new Mercedes SL 500, use of the corporate jet for commuting until he moved, and first-class airfare for his entire family, including his mother, to come visit once a month. Predictably, Minow is now being hailed for seeing red flags where others saw only blue skies.

Question: What is your overall impression of Global Crossing?

Answer: It’s a company that from the very start has been plagued by a general sense of chaos at the top they’ve never been really sure of what their strategy is.

Q: But wasn’t their strategy to get real big, real fast to build a fiber-optic network vast enough to dominate digital transmissions worldwide?

A: Yes, but that’s a trickier strategy than it sounds. If you get big more slowly, you have an opportunity to think about who you are and what kind of company you want to be. It was in the pattern of their growth that I got a sense of chaos. They didn’t seem be able to create any kind of consistent plan for generating revenue that would meet the expectations of the people who invested in them. And then, of course, there was the unbelievably high rate of CEO turnover, which in itself creates a sense of chaos.

Q: What do you think was the root cause of that CEO turnover?

A: Too much of the wrong kind of involvement from the chairman. There is only one way you’re going to have that kind of turnover, and that’s if the person who is really in charge, Gary Winnick, doesn’t have a clear sense of what he wants or what it takes to get there. The result is a kind of “You’re a star; no your not. Our savior has arrived; no he hasn’t,” phenomenon. These are symptoms of an inability to decide who you are as a company. It is like looking in a mirror and trying on different hats. Once you bring in somebody as CEO, it’s going take him three to six months just to remember everybody’s name and decide whether the ideas he had before coming to the company will really work, much less put them into place. By that time, Winnick was already looking for the next CEO.

Q: But weren’t those changes subject to approval by the board?

A: I got no sense that the Global Crossing board was capable of providing any kind of oversight.

Q: Were they all Winnick puppets?

A: Whether it was psychological control or financial control, he had control of the company.

Q: If Winnick had called you in 1999, after reading your denunciation of Annunziata’s contract, and asked you to be his advisor, what would you have told him?

A: Hire a search firm and put on four extremely qualified, tough directors. Do not put the same people on the board of Global Crossing and the affiliates and subsidiaries. And maybe you should get off the board, Gary.

Q: What else?

A: Change the company’s place of incorporation to the United States. While far from perfect, the U.S. does have the most extensive disclosure requirements and most thoroughly worked-out standards for director obligations of any country in the world. To take what is essentially an American company and have it incorporated in Bermuda sends a strong signal to the investor community that you want to remove a layer of accountability.

Q: Getting back to the need to avoid overlapping directorships. Why is that important?

A: To avoid conflicts of interest in appearance and reality.

Q: Was there at least the perception of such conflicts at Global Crossing and its related companies?

A: Yes, particularly with the high level of insider transactions and related party transactions.

Q: What do you think of the “non-cash” revenue swaps by Global Crossing and Qwest now being investigated by securities regulators?

A: That is the kind of thing that could be a violation of accounting rules. Nothing I have seen so far would make it rise to the level of fraud, but that’s what the investigation is designed to pursue.

Q: How about Global Crossing’s requirement that employees keep a portion of their 401(k)s in company stock, which is now essentially worthless?

A: That is very similar to the Enron situation, and I am sure that will be addressed through changes to legislation. The idea behind 401(k)s has always been that you want to give employees as much flexibility as possible, so we are going to have some new laws that will protect people from themselves. There will be a diversification requirement prohibiting any employee from having more than, say, 10 percent of their 401(k) money in any one company’s stock.

Q: I can already hear Libertarians screaming about government intrusion.

A: Government is only telling you how you can invest your 401(k) money. Anybody can still invest in anything they want with their regular money, but if they are going to get the benefit of favorable tax treatment, they are going to have to meet some requirements. One you are already familiar with you can’t take the money out for a while. Another is going to be that you diversify. If we’re going to give you the benefits to provide for your retirement, we better make sure that you are actually doing that.

Q: So what lessons should we take away from the Global Crossing saga?

A: For common shareholders, the lesson is: Don’t be a momentum player and buy stock just because it’s going up fast. Buy stock because you understand the fundamentals. And if you’re not a full-time investor, invest in an index fund. For Global Crossing employees: Don’t put all your retirement eggs in one basket, and if the company has five CEOs in five years, look for another job. For the media: If a thing sounds like it’s too good to be true, it is. The press should have been more skeptical about this company early on.

Q: What about the lesson for Gary Winnick?

A: (Laughs) He certainly doesn’t need to hear from me about what lessons he needs to learn. But I would say his lesson might be: You can’t fool all of the people all of the time.

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