Absentee LEADERSHIP : Boards of directors are rarely seen and seldom heard during telecom's time of turmoil

America's Network, Sept 1, 2001 by Kirk Laughlin

What went wrong?

For hundreds of telecom companies that have collapsed or still gasp for life-support, the well-worn reply is: The market did us in.

Take Joe Elchakien. He founded Sedona Networks in 1998 with the expectation of selling loads of equipment to upstart competitive local exchange carriers (CLECs). When demand from the struggling class of carriers failed to materialize, Sedona had nowhere to turn.

Three years and $30 million later, CEO Elchakien closed the coffin door on Sedona. "I will never again focus on an emerging market without a diversified revenue base to fall back on," says Elchakien, 39, who blames his company's demise on "the perfect storm." He didn't see it coming, and neither did his board of directors.

"It was hell. To begin with, I started the whole thing. When you are the founder and the CEO, you are articulating the vision and you grow with it," says Elchakien. "There is a tremendous emotional investment. It becomes personalized."

The jerky acceleration and sudden flameout of Sedona is characteristic of the wide-eyed assumptions that formed the wobbly foundations of countless emerging telecom companies. Such unchecked exuberance led to reliance on out-of-touch market projections, gave birth to flawed business plans and created companies that are sustained only by fulfilling their gargantuan appetites for capital.

As bankruptcies increase and announcements of accounting irregularities rise, the executive teams of such organizations are put in the line of fire. CEOs are expected to justify the problems and, if still possible, compose swift solutions.

Meanwhile, boards of directors, the panel of individuals entrusted to protect shareholder interests, stand on the sidelines and out of the revealing light of up-close evaluation.

Who's to blame?

While directors wield tremendous power over companies, having the authority to summarily dismiss CEOs, they are seldom considered culpable for the troubles of telecom firms. The CEO may be propped up as the fall guy when an organization starts to crumble, but directors -- some of whom may be only a few years out of business school -- are seldom questioned and, short of criminal activity and the savings and loan crisis of the '80s, never pay a dime for having a hand in driving a company into insolvency.

"Remember you can't sit in business and not place a bet. Nobody should demand brilliance or perfect judgement from a director," says Gary Lutin, a corporate governance analyst with Lutin and Co. "All you should reasonably demand is absolute responsibility and that involves a rigorous effort to be informed and to exercise some kind of rational judgment."

Boards rely heavily on CEOs for information and insight. During periods when young businesses face revenue problems, directors depend on senior executives to reveal as much as possible, putting often cozy relationships to the test. As the industry's intoxicating frenzy illustrates, directors became increasingly willing to rubber-stamp aggressive strategies. New directors learned to back the overarching mission of full-throttle growth.

Efforts to achieve balanced composition on boards may also have been hampered by the simple lack of qualified talent, given the extraordinary industry explosion of new equipment makers and competitive service providers.

Few measurements exist to evaluate boards, although the cumulative result of endorsing a business approach, the hiring of CEOs with specific backgrounds and the performance of board auditing committees are some of the most accessible ways to track a board's effectiveness.

Some analysts and academics have started to probe the histories of directors themselves, discovering that some have slim practical experience managing organizations, no less telecom companies.

The boards of many newly hatched firms are loaded with individuals from the private equity arena, suggesting some boards are missing the insights and instincts of veterans whose decision-making stems from diverse professional experience. Others stress that boards should have more "outside" representation such as individuals from other industries, especially when signing-off on financial statements.

When the best isn't good enough

Global Metro Networks, a Maryland firm that is using more than $200 million in financing to bury costly last mile pipes in US and European cities, is an example of a newly launched organization that leans heavily on venture capital directors. Four of the eight board members are partners or directors with two private equity firms, Columbia Capital and Providence Equity Partners.

Network construction is nearly complete in four European cities, says Sheila Blackwell, of Global Metro, while work is in progress in eight US cities. The company will likely need more funding by the end of the year to keep on track, but Blackwell says an IPO is unlikely.

Instead, one of the VC firms will probably be called upon to kick in more money.

The board recently hired industry veteran Bob Bicksler to serve as CEO. Bicksler previously served as executive vice president and chief financial officer for AT&T Canada.