Global Crossing Hurt by Board’s Cronyism

Global Crossing Ltd.’s board of directors was unable to rein in profligate spending, put a stop to questionable accounting practices, or head off the fourth-largest bankruptcy filing in U.S. history in part because it was compromised by cronyism and chronic instability.

Since the end of 1998, Global Crossing has had at least 30 directors on a board whose size has ranged from eight to 17 members. Five of them also served as chief executive of the ambitious telecommunications upstart. Half the board’s eight current directors joined within the last year, according to company filings.

“Going through that many directors is definitely unusual,” said Jackie Brown, a researcher for Boardroom Analysis, a Seattle firm that specializes in corporate governance issues. “You wouldn’t expect to see turnover of more than two directors a year. If there is too much turnover, that means nobody gets to know the company that well.”

Most of the directors also had economic or social ties to the company or its founder, Gary Winnick. Those who weren’t employed directly by Global Crossing often did business with the company or Winnick’s private investment firm, Pacific Capital Group.

It’s not unusual for founders and CEOs to pack their boards with friends and business associates. And no one is saying Global Crossing’s board was single-handedly responsible for the company’s dramatic descent into bankruptcy.

But the clubby nature of boards of directors is receiving closer scrutiny in the wake of the Enron Corp. scandal.

Winnick declined to comment about his relationships with Global Crossing directors. Company spokeswoman Becky Yeamans said, “Information about our board is in our filings. We have no further comment.”

Global Crossing’s current board includes Winnick and longtime friends Lodwrick Cook, a former Arco chairman; Mark Attanasio, an executive at Trust Co. of the West; Geoffrey J.W. Kent, owner of an Illinois travel agency; and Steven J. Green, former U.S. ambassador to Singapore. Also on the board are Global Crossing CEO John Legere; Joseph P. Clayton, head of the firm’s North American unit; and former U.S. Defense Secretary William S. Cohen.

Previous directors include Winnick’s personal banker, Maria Elena Lagomasino of J.P. Morgan Private Bank; childhood friend and Denver lawyer Norman Brownstein; and several former co-workers at Drexel Burnham Lambert, the junk bond firm that collapsed amid a scandal in the 1980s.

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Directors’ Firms Gained Business

Global Crossing did business with several of the directors’ companies. For example, Global Crossing paid Brownstein’s law firm, Brownstein, Hyatt & Farber, $1.35 million in lobbying fees over three years, and Pacific Capital paid it $10,000.

Kent’s firm, Ilinois travel agency Abercrombie & Kent Inc., “arranged exotic events for Gary and the guys,” a former executive said. It’s not clear how much Abercrombie was paid.

The company also paid Cohen Group, headed by the former defense secretary, $500,000 in consulting fees in 2001, according to a regulatory filing.

Eight past and present directors of Global Crossing who spoke to The Times reject comparisons to Enron, which has sparked federal investigations of misleading accounting, off-the-books partnerships and phantom sales. All agreed to speak only if they weren’t identified by name.

“Directors are not full-time employees of the company,” said one former director. “They are only as good as the information that is given to them. That’s it. You’re sitting there and the CFO [chief financial officer] comes in and makes a presentation. The CFO either gives you information or he doesn’t. You don’t know if he’s withholding something. You have absolutely no idea. Same with the accountants.”

In the case of Global Crossing, shareholders are questioning why the board sanctioned a string of exorbitant pay packages for top executives and failed to press for details about serious negotiations to sell the company when market conditions were more favorable.

They also wonder how the firm could have logged so many questionable deals to swap capacity on its fiber-optic network without raising suspicion on the board until nearly six months after a former finance vice president raised concerns with company management. Those deals now are being investigated by the Securities and Exchange Commission and the FBI.

The Global Crossing directors say the deals that have been questioned were legitimate and were good for the business.

“These transactions were all washed out on the [board’s] audit committee and there never was an issue of improper accounting,” one former director said.

Several shareholder suits, however, paint a picture of a board that merely cruised along on autopilot while the worldwide telecommunications market imploded, taking with it hopes for Global Crossing to recoup its multibillion-dollar investment on its vast undersea fiber-optic network that connects 27 countries on four continents.

“I think a lot of people have the mistaken notion that [serving on a board] is almost like being a member of a country club and getting paid for it,” said Henry Hu, a securities-law professor at the University of Texas at Austin. “You’d be crazy to view it like that.”

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Board Meetings Held in Bermuda, L.A.

Past and present board members said they took their jobs seriously, but their obligations weren’t overly rigorous. One former director said the board met in person once a quarter in locales such as Bermuda, where Global Crossing is officially based; Beverly Hills, where the executive offices are located; and New York and Washington.

Gatherings typically would begin with a dinner, followed by a three-hour meeting the next morning. The board often would adjourn after lunch.

About one-third of the meeting would be spent discussing the company’s financial health.

“We had in front of us a set of financials, and people would ask questions about whether the company met its projections, whether there were any audit issues,” one former director said.

In addition to the in-person gatherings, board members would meet up to four more times a quarter via teleconference.

As compensation, board members received 120,000 stock options, along with $2,500 for each board meeting they attended and $1,500 for each committee meeting. Committee chairs who were not Global Crossing employees received an additional payment of $5,000 a year.

Board members are charged with exercising “due care in terms of supervising the management of the company,” said securities-law expert Hu. Among their responsibilities was “to set up appropriate control systems so that you cannot have some rogue executive or executives causing problems. They have to ask enough questions that these kinds of things don’t happen.”

Some board members have reaped millions by cashing in their Global Crossing stock. Winnick netted $359.5 million from his sales, according to an analysis of public filings by Thomson/Lancer Analytics. Hillel Weinberger, senior vice president and senior portfolio manager for Loews/CNA Holdings Corp., profited to the tune of $204.1 million. Altogether, 12 board members made more than $991 million buying and selling Global Crossing stock since the company went public.

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Named as Defendants in Shareholder Suits

Criminal prosecutions of directors are extremely rare and are not expected in the Global Crossing case. Directors can be sent to prison for up to 10 years if they engaged in “willful and knowing violations” of federal securities laws, such as fraud statutes, Hu said.

However, Global Crossing’s directors have been named as defendants in several of the more than a dozen civil suits brought by shareholders.

It is common for shareholders to blame the directors for providing misleading or fraudulent data in financial reports, said Christopher Bebel, a former prosecutor with the SEC and Justice Department who now practices securities law in Houston.

A litigator could argue that the board’s instability and lack of independence prevented the firm from making complete and honest disclosures and looking out for the best interests of shareholders.

For example, in 2000, when much of the investment community knew that then-Chief Executive Leo J. Hindery Jr. was trying to sell the company, potential deals were quashed by Winnick without consulting the board. A board less deferential to Winnick might have pressed for more information and forced the chairman to consider the deals.

A year earlier, over the strong objections of then-CEO Robert Annunziata, the board approved a deal backed by Winnick to acquire IXnet. Typically a board would defer to the chief executive on key strategic matters. Global Crossing later sold a large part of the firm.

The degree of turnover on the board was unusual for a public company, said George Ott, president of the Southern California chapter of the National Assn. of Corporate Directors, a nonprofit group that focuses on issues of corporate governance.

Only Winnick has served on the board since the company’s inception in 1997. A close second is co-founder and former Arco Chairman Cook, who joined in early 1998. The longest stint by a Global Crossing CEO was one year.

Former directors offer several explanations for the steady churn. They note that the company quickly grew from start-up phase to a massive construction period and finally an operating entity that needed to make sales to businesses. As the company matured, new skills were needed on the board.

New directors also were added as Global Crossing grew through acquisitions and needed to represent new groups of investors, according to a former director. One of the largest growth spurts came after the purchase of phone company Frontier Communications Corp. in 1999, causing four new directors to join the board at once.

Directors sometimes left the board when the investors or institutions they represented wanted to sell their Global Crossing shares without appearing to have a conflict of interest. For instance, CIBC Oppenheimer provided financing for the company and worked on its initial public offering in 1998. The Canadian bank had five representatives on the board in 1997, but they were all gone by 2000.

“All their people got off the board before they sold their shares,” said one former board member. “That’s why they left.” Similarly, Weinberger left the board in 1999 so the Tisch family, which controls the Loews conglomerate, could sell shares “without any conflicts or insider information.”