In early 2002, Bernie Ebbers, the CEO of WorldCom Group, a major telecommunicati
ID: 2346859 • Letter: I
Question
In early 2002, Bernie Ebbers, the CEO of WorldCom Group, a major telecommunications company, was having personal financial troubles. Ebbers pledged a large stake of his Worldcom stock as security for some personal loans. As the price of the Worldcom stock sank, Ebbers' bankers threatened to sell his stock in order to protect their loans. To avoid having his stock sold, Ebbers asked the board of directors of Worldcom to loan him nearly $400 million of corporate assets at 2.5% interest to pay off his bankers. The board agreed to lend him the money.Comment on the decision of the board of directors in this situation.
Explanation / Answer
First of all, the board of directors must be aware of the fact that Bernie Ebbers, the CEO of WorldCom, has pledged the stake of the company for his personal loans security purpose. In this situation, few points comes up :
1. Either the board of directors has given their permission the pledge the company shares to bank for his personal loan purpose.
2. Or the CEO is that capable, there is no alternative to him, that the board of directors have oversight the facts while agreeing to lend him $400 million @ 2.5% interest.
3. Or it could be the case that the company's cost of capital is less than 2.5%, so the board of directors has efficiently applied the company's $400 million assets.
4. Or the board of directors do not care for shareholders fund and used to utilize the fund what-so-ever purpose.
So, the decision of the board of directors would have been influenced by either of above mentioned points.