Qwest Communications is the latest among a growing number of companies to agree to significantly alter its corporate governance as part of a settlement agreement in a shareholder lawsuit—but the novel pact received scant attention in the national press and contains several unusual provisions.

The embattled telecom company agreed to shell out $25 million to settle five shareholder lawsuits accusing the company and 16 former and current executives and directors, including former Chief Executive Officer Joe Nacchio and founder and billionaire Philip Anschutz, of making millions of dollars from trading with illegal insider information.

In 2002, Nacchio quit while Anschutz resigned as non-executive chairman but remains on the board.

Interestingly, the $25 million comes from a $200 million insurance fund negotiated among representatives of Qwest, a number of insurance companies and individuals who were covered by the insurance, according to reports.

The other $175 million will be used to pay costs of legal actions against current and former Qwest officers and directors.

The compromise agreement was approved by Denver District Court Judge Lawrence Manzanares even though two institutional shareholders objected, saying it was premature and gives Qwest too little, according to the report.

The most interesting part of the settlement, however, is that Qwest, which acquired U S West in 2000, agreed to adopt a slew of corporate governance changes. They include:

Mandatory retirement age of 72 for directors.

The board will consider separating the chairman and CEO positions.

The CEO will not be present when his compensation is considered by the compensation committee.

The nominating and governance committees will annually review the compensation of directors.

Subject to the adoption of guidelines by FASB and in compliance with any such guidelines, the company will either fully expense all stock options or will provide sufficient disclosure in its periodic annual reports to allow shareholder to determine the expense impact of granted options.

A corporate governance officer will be appointed to inform the board of corporate governance matters.

The company will appoint a trading compliance officer and establish a Trading Compliance Program to ensure that all employees comply with the company's insider trading policy.

"This is becoming more of a phenomenon," acknowledges Abe Friedman, chief policy officer of Glass, Lewis, the proxy research firm. "Companies are agreeing to governance reforms to show they are willing and ready to make internal change and protect shareholder interests."

As pointed out in Compliance Week several weeks ago, about a dozen companies have hammered out governance compromises to settle lawsuits in the past year or two, including Cendant Corp., MCI, Siebel Systems, Citrix, Hanover Compressor, Enterasys Networks Inc., Homestore.com, NTS-Properties Associates, Sprint Corp. and Foamex International.

Perhaps the most significant deal was reached in May 2003 between Hanover Compressor and its shareholders. As part of their in May 2003, shareholders who own more than 1 percent of the company's shares were able to nominate two independent directors to the company's board.

"That was a real landmark," says Richard Koppes, of counsel to Jones Day Reavis & Pogue and former general counsel of CalPERS.

The insider trading lawsuit, however, is independent of Qwest's ongoing accounting scandal.

The U.S. attorney's office and the Securities and Exchange Commission have been investigating possible accounting irregularities at the telecom giant.

Last week, The Wall Street Journal reported that Qwest is negotiating a potential multimillion dollar settlement related to its accounting problems. Also last week, the SEC settled civil fraud charges against two former Qwest officers stemming from charges involving their alleged roles in helping the telecom company overstate revenues.

Augustine Cruciotti, a former senior vice president of Qwestlink, the company's fiber-optic construction unit, agreed to pay $350,000, including the disgorgement of $200,000 in illegally obtained gains and a civil penalty of $150,000. Steven Haggerty, the unit's former regional vice president, agreed to pay a $30,000 penalty.

Also last week, Thomas Hall, a former Qwest executive, pleaded not guilty to fraud charges in an alleged scheme to improperly book nearly $34 million in revenue. In April, after a seven-week trial, a jury ended up deadlocked in its attempt to decide on a similar set of charges against Hall.

Back in April, Bryan Treadway, a former assistant controller, and John Walker, a former vice president, were found not guilty on three counts and the jury was deadlocked on the other eight.

 

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