The failure of corporate governance : Qwest Communication

1. Qwest Communication Scandal A failure of Corporate Governance Presented by: Akash Jauhari (56), Varun Sehgal(92), Lokesh Chaudhary (75) A

2. Company Profile Founded in 1996 by Philip Anschutz Based in Colorado in US Industry : Telecommunication Services : Telephony, Internet, Television Dominant player in 14 states of the Western US. Total assets: $ 22.5 billion (2007) Revenue: $ 13.7 billion Employees: 27,000 Was acquired by Century link in April 2010, with 50.5 % share.

3. Accounting Scandal 1999-01 In 1999, Joseph Nacchio was appointed as CEO and company thereby adopted “ aggressive accounting”. Falsely repeatedly booking revenue by one time sale of equipment and fiber optic swaps. Inflated revenue between April 1999 – March 2001 by $ 2.2 billion. Inflated earning by $ 358 million. This facilitated their acquisition of US West in 2000. boosted stock price on manipulated numbers

4. Shareholder Concern – Stock price

5. Violation of Law and Code of Conduct Excessive internal trading by board members and senior executives from 1999 to 2001. Purchase of share just before financial statements and selling after inflated revenue and profit figures were out. May 99 : Board made $1.5 billion by selling shares. Founder / Promoter Philip Anschutz sold shares worth $ 2 billion in period of three years, From 1999-2001, Joseph Nacchio, CEO made $52million and Robert Woodruff, CFO made $29 million.

6. Founder American Entrepreneur Philip Anschutz Various business interest in Petroleum, Entertainment, Rail road and Soccer Leagues. Forbes rated as 34th richest American with total wealth above $ 7 billion in 2010. Charismatic personality Very close to Ex US president George W. Bush, big time Republican donor.

7. Role of Founder “ ceremonial co-chairman, relying on executives and accountants.” Insider Trading ?? Sold shares worth $ 2 billion between 1999 – 2001. ( 17 % change) Fear factor ?? Resigned from post of co-chairman after first allegation by Morgan Stanley in June 2001. In Investigation one of Ex Executive said “ Anschutz single handedly manipulated Qwest policies.. “ Example of rubber stamp board.

8. Role of Audit Committee Audit committee member Jordan Haines was long time family friend of Anschutz. Haines simply rejected to take responsibility, blaming External Auditor Arthur Andersen practices. Haines maintained that P. Anschutz was unaware of the accounting issues. Clear cut case of ineffective audit committee, with suspicious role in the scandal.

9. Remuneration Committee Suspicious decision making Said to be working on Philip Anschutz Instruction. Qwest was firing 4000 employees due to poor performance At the same time hired CEO Nacchio a five year contract Salary and bonus to CEO - $ 5.2 million a year Qwest share worth $ 7 million. This was after Nacchio was alleged with “illegal” and “unethical” practices by experts.

10. External Auditors Qwest Official statement: Misapplied accounting practices resulted in overstated revenues and profits. All financial statements were duly approved and verified by External Auditor Arthur Andersen. After the Enron Scandal in 2001, Qwest fired Arthur Andersen and hired KPMG. In an agreement between with Qwest shareholder, Arthur Andersen agreed to pay $ 10 million. ( Nov 2005)

11. External Auditors In investigations Lead Auditor Mark Iwan said he reported the IRU irregularity to audit committee many a times. But the reply he got was “Management and the board conceive, initiate, and structure business transactions and determine accounting policy, not the auditor," Shows the authoritative attitude of aids of Anschutz. Since Quest was a major client of Andersen, he could not act

12. Shareholder Concern Minority shareholder opposed the acquisition of US West in 2000, which left Qwest in debt of $2 billion Qwest Stock fell the high of $ 60 in Jan 2000 to low of $ 2 in Feb. 2002. Investors lost over $ 576 million between this period. In AGM held on June 3,2001, shareholder removed Nacchio, subsequently Richard C. Notebaert was appointed.

13. Role of Institutional Investor . Major institutional investor initiated change in structure and working of BOD. Major public pension firm Cal. St. Teach., initiated the process before the May 2004 AGM.

14. Role of Govt. and Regulator SEC sued seven executives including CEO Nacchio, CFO and COO. Nacchio was convicted in 19 criminal insider trading instances and 23 other cases. In 2005, Company has settled SEC lawsuit for $ 200 million and shareholder lawsuit for $ 450 million. In 2007, Nacchio was sentenced to six year imprisonment and $ 71 million as fine.

15. Role of Govt. and Regulator ? Why action was not taken against Philip Anschutz ? Why statements of Ex executives of Qwest and Arthur Andersen were not presented against Anschutz ?

16. What could have been done to avoid the situation? Proactive role by NED and ID – inquisitive and probing attitude. Strong stand by Arthur Andersen – discontinue or threat to expose. Whistle blower – appropriate platform for information. Non compliance by COO or CFO. Concern for minority shareholder – BOD or Regulator role.

17. Ethical Principle that came out Over ambition of one individual results in loss to thousands of ordinary investors. Short term unprincipled benefits lead to long term disasters. Minority shareholder’s interest unprotected in a promoter dominated BOD. “Slow and Steady wins the race”.

18. Thank you.