Jeri Aiello feels like she grew up at the phone company.
She started at the Mountain States Telephone Company in 1962, when she was just sixteen. A friend of her mother's worked there and told her the company was hiring operators. The job was part-time but had full benefits, so Mountain States could be picky.
"In those days, the chief operator came to visit your home" to check your background, recalls Aiello.
When she began at the phone company's ornate, travertine-clad headquarters building at 14th and Curtis streets, she was awed by the surroundings. But the teenager soon found herself enveloped in a cozy matriarchy with firm rules of conduct.
"There were a lot of older women in their late forties to late fifties" who had spent years with the company, says Aiello. "Those women raised us, bless their souls. They were very gracious and very professional."
The new girl underwent six weeks of training to become an operator. She also was instructed in ladylike behavior: Female operators could only wear dresses to the office and could only cross their legs at the ankle. If she had to stay past 9:30 at night, the company called a cab to take her home. There was a kitchen with a refrigerator and stove, and kitchen matrons cleaned up after employees. The office even had a quiet room where the operators could take a nap at break time, and there were showers and lockers in the basement.
Aiello worked six-hour shifts with a thirty-minute break and took home $50 a week, a nice sum of money for a teenager. But there were also uncompromising expectations.
"Three lates and you had a talking-to," she remembers. "You learned your work ethics."
The phone company encouraged its young operators to work part-time during college. Aiello did, and she wound up staying with the utility for the next three decades in a variety of positions, from clerk to supervisor.
Along the way, she witnessed a dramatic shift in corporate management as the company changed its name to Mountain Bell, then US West and, finally, Qwest. It was common for company executives to climb through the ranks from entry-level jobs. Even Sol Trujillo, the much-criticized CEO of US West, got his start as a Mountain Bell lineman.
But all of that changed two years ago, when the upstart telecom company Qwest took over US West and proclaimed the old days of the monopoly phone company to have gone the way of the hand-cranked squawk box. Qwest was founded in 1995 by Denver billionaire Philip Anschutz, who launched an ambitious plan to create a national telecom company using the right-of-way along his Southern Pacific railroad lines to lay fiber-optic cables. Qwest soon became a favorite of investors, who pushed up the stock price based on the expectation that, in the age of the Internet, the demand for telecom services would be inexhaustible.
Noting US West's nickname of "US Worst" and sneering at many of the old-style managers, Qwest executives could hardly conceal their disdain for the company. Qwest CEO Joe Nacchio was reportedly so eager to get the US West logo off the company's downtown headquarters that he threatened to fire the workers in charge of removing it if they didn't get it done pronto.
Qwest fostered a corporate culture of testosterone-fueled swagger. They were entrepreneurs who were going to transform the fuddy-duddy telephone company into a new-age fiber-optics powerhouse that would do business from London to Tokyo. The corporate slogan, "Ride the Light," promised space-age marvels and financial riches for those with the guts to get on board.
The message to US West employees was blunt: Change or leave.
A few months after the merger, Nacchio announced the company would lay off more than 10,000 people, and he made it clear that almost all the job cuts would come from the US West side of the company.
"Because you wear a clown suit doesn't mean you work for the circus," Nacchio told the financial Web site TheStreet.com. "We'll take off the suits and get down to work, then we'll send out the clowns."
Prior to this dazzling display, Aiello transferred to a US West service facility in Fort Collins in 1998. There she found a close-knit group of people, many of whom had spent decades with the phone company; the whole staff was an extended family of sorts.
"These were people who'd lived together, married and had children together," she says. "Everybody knew everything about everybody else."
Suddenly, when Qwest took over, there was an immediate transformation in management attitudes.
"Qwest was a young company without roots in the community or with their employees," Aiello says. "It was a nouveau corporate type of management. They were in it to make money and to spend money. They were using US West as a cash cow in trying to further Qwest."
After the dot-com bubble of the late 1990s burst, telecom companies like Qwest found themselves in big trouble, with huge amounts of fiber-optic space that no one wanted to buy. With stock prices plunging and the company posting record losses, last year Qwest began new rounds of layoffs involving thousands of employees.
Aiello was one of them. Last December, when the company closed its Fort Collins facility, she chose to retire rather than transfer. Not only were the warm feelings long gone, she says, but Qwest destroyed morale among its employees.
"The respect is not there," says Aiello. "What kind of respect can you give them when they call you a clown and say you're not the sharpest knife in the drawer?"
Most of US West's top executives followed the example of Trujillo and left the company, cashing out their stock options at a time when Qwest stock sold for just under $50 a share. The handful of corporate elite did well for themselves in the merger, garnering tens of millions of dollars each from the deal ("Caller Rewards Program," August 12, 1999.)
Qwest's employees and shareholders weren't so lucky. Most of the employees also owned stock, which they had been encouraged to buy through the company's 401(k) plan. They were in for a gut-wrenching ride over the next two years, as Qwest's self-proclaimed whiz kids presided over a financial meltdown that saw the value of the stock plunge to just over $5.
All of this has been startling to Qwest employees, phone company retirees and average shareholders, who remember the days when telecom stocks were regarded as one of the safest investments. Since Qwest is by far the most prominent Colorado-based company -- as well as the state's largest private-sector employer -- the nose-diving share price has set off alarms from Grand Junction to 17th Street. The same question is being asked by linemen stringing cables and investment managers supervising billion-dollar pension funds: Do these people have any idea what they're doing?
The messages posted recently on the Yahoo message board for Qwest are emphatic. Referring to Nacchio, someone identified as "Qwest peon" says that "a chimp could run the company better." Another speculates that if Nacchio's private plane ever gets near restricted airspace, it would be shot down, because "some of the air guard guys own Qwest stock." Noting the eerie blue neon Qwest signs that loom over downtown Denver, one writer compares it to Kmart's Blue Light Special. "Like Kmart, the Q blue light will symbolize another bankrupt company (morally now, financially soon) and another very large group of employees and shareholders swindled out of their cash and careers. Meanwhile the management, all lined up in a row behind Joe Notch-it-to-O, prances away with more loot than anyone could spend in 20 lifetimes. Very blue. Very special."
Stripped of innuendo, the facts that are causing the blues speak for themselves. The company, with an annual revenue of more than $19 billion, lost $698 million in the first quarter of this year, almost all of it the result of failed investments of the pre-merger Qwest. To reduce its overwhelming $25 billion debt, the company has even put its QwestDex directory division up for sale. Qwest expects to garner as much as $10 billion for the highly profitable Yellow Pages.
The fusty old telephone business upon which Nacchio had heaped so much scorn wound up being the only thing that saved Qwest from the same fate as that of similar companies, such as Global Crossing, that collapsed into bankruptcy. The revenue from 25 million customers paying monthly bills for old-fashioned telephone service also helped fund Nacchio's $101.9 million pay last year, ranking him as the eighth-highest-paid chief executive among the 501 largest U.S. corporations, according to Forbes magazine.
That the CEO of a company in serious trouble could be paid such an exorbitant amount is a reflection of something deeply wrong with corporate America, say many people who own Qwest shares.
"A lot of executive compensation in this country is so out of line," says Nelson Phelps, director of the Denver-based Association of US West Retirees. "It's driven by greed."
Phelps says that Nacchio isn't being treated with the same standards he advocates for his own employees. "Nacchio said to US West employees, 'We're going to pay you for performance, not for just being there.' What about him? What has his performance been?"
Despite this assertion, anger at Nacchio and his salary appears so widespread that it's hard to believe that a little over two years ago, the Rocky Mountain News named him its businessperson of the year, gushing about the "brilliant and brash" executive and quoting a colleague who compared him to both General George Patton and Mahatma Gandhi.
"I'm very much into my legacy being to build a great company that will be good for my shareholders," Nacchio told the News. "You do good for customers, good for employees and good for share owners, you ought to be happy."
And if they're unhappy, you get out of town. That may explain Qwest's decision to hold its annual meeting on June 4 in Dublin, Ohio, hundreds of miles outside its fourteen-state service territory, which stretches from Iowa to Oregon, and far from the legions of angry customers, employees and share owners in Denver.
"I don't think he wants the shareholder meeting here because he fears bodily harm," says Aiello.
Even though he doesn't want to face shareholders in Denver, Nacchio was willing to make a public appearance last week at a White House-sponsored forum on Internet security held at the University of Denver.
The frustration directed at Qwest is, in part, spurred by the Enron debacle, in which insiders made millions by selling their own shares of stock before the company disintegrated and average stockholders (and employees) were left with nothing. Most observers don't believe that Qwest is in danger of going bankrupt. But there are enough parallels between Qwest and what happened at Enron to alarm investors and lead many of them to dump the stock.
In many ways, Enron is primarily an accounting scandal; with the aid of its auditing firm, Arthur Andersen, the company hid its losses and greatly exaggerated its profits, all in an effort to keep the stock price high. Now Qwest is under investigation by the U.S. Securities and Exchange Commission for allegedly pumping up its own revenue with funny money transactions.
The SEC probe was prompted by the bankruptcy of Global Crossing, when allegations arose that Global had engaged in "network swapping" with companies such as Qwest. In those deals, Qwest bought capacity from other carriers to use on its network and sold capacity to the same carriers. Since both companies were able to count the "swaps" as sales, critics charged it was a way for the telecoms to inflate their revenue. The SEC subsequently expanded its investigation to look at allegations that Qwest also manipulated sales of telecom equipment and the publishing schedule of its Dex directory in order to mislead investors, using artful accounting to boost quarterly revenue. (Ironically, Qwest's outside auditor was Arthur Andersen.)
Qwest has strongly denied doing anything to manipulate its revenue reports, insisting that it followed standard accounting rules.
"In various press releases and filings with the Securities & Exchange Commission, Qwest made appropriate disclosure of the existence of [transactions with Global Crossing] and the way Qwest accounted for them," said Afshin Mohebbi, chief operating officer of Qwest, during testimony before a congressional committee in March.
However, if the SEC determines that the company's accounting was fraudulent, the consequences for Qwest could be severe. The agency probably would order Qwest to restate its earnings -- basically, to admit it misled investors -- which would open up the company to lawsuits from shareholders.
Already, several lawsuits against the company have been filed in federal court on behalf of share owners. All allege that the company engaged in "accounting chicanery" to deceive the investing public, claiming that while Nacchio was boasting of the company's record earnings and predicting annual growth in revenues of 15 to 20 percent, he was busy dumping his own stock. Between April 2000 and May 2001, Nacchio sold over four million shares of stock and collected $192 million. During that period, the stock price fluctuated from $35 to $48.
Ultimately, should the SEC require the company to restate its past earnings, the plaintiffs might be able to convince a court that Qwest executives intentionally deceived investors, boosting the stock price at the same time that they were selling their own shares. However, Denver telecom analyst Tom Friedberg of Brean Murray & Co. says the odds are still against shareholders in any litigation.
"They'd have to prove deliberate fraudulent intent," he says. "It would be a difficult thing to prove."
That's not the only legal tangle for the would-be telecom titan. Qwest is also linked to several other investigations now under way involving allegations of wrongdoing on Wall Street. New York Attorney General Eliot Spitzer announced in April that a ten-month investigation of the Merrill Lynch & Co. securities firm found compelling evidence that Merrill Lynch had misled small investors with wildly optimistic earnings projections for companies it was also drawing large fees from. Spitzer charged that while Merrill Lynch analysts were touting certain stocks, the investment-banking arm of the company was earning millions doing business with the same companies the analysts were hyping. This week, Spitzer's office announced a settlement with Merrill Lynch under which the firm will pay $100 million in penalties and will separate its research analysts from the investment-banking side of the company.
Merrill Lynch was a key advisor to US West during the merger with Qwest. The financial company was paid approximately $20 million for its analysis of the merger and concluded that it was a good deal for US West shareholders. At the same time, Merrill Lynch analyst Adam Quinton was promoting the merger to investors, saying the synergy between the two companies would increase earnings and help the stock hit $65 per share by the summer of 2001. (Quinton did not return phone calls seeking comment.)
"I'm now more shocked than ever that Merrill Lynch said the merger was fair," says Qwest shareowner Gerald Armstrong, a frequent critic of the company's management who is known for asking pointed questions at annual meetings. "They were paid to write that opinion. If it's fair for us to go broke, they should live by their guarantee and give us our money back."
Spitzer has also been investigating the activity of Salomon Smith Barney analyst Jack Grubman. In the late '90s, Grubman became the best-known telecom analyst on Wall Street, endlessly hyping telecom stocks while he was helping his firm win multimillion-dollar investment-banking fees from those same companies. It was Grubman who arranged for Qwest founder Anschutz to meet the then-47-year-old senior AT&T executive Nacchio in 1996, which led to Nacchio's taking the helm of the young company.
Not that Qwest is alone in these turbulent waters. By one estimate, investors have lost $500 billion in the past few year because of the collapse of the telecom stocks. Onetime Wall Street favorites such as Global Crossing, 360 Networks, ICG and Williams are in bankruptcy, while huge companies like WorldCom are awash in debt and battling insolvency. More than 400,000 telecom employees have lost their jobs since the start of last year.
Seen from this perspective, it's hard to believe it was only in 2000 that the Qwest-US West merger was being hailed as a brilliant financial move that would make Qwest a global-communications powerhouse. But Armstrong, for one, had carefully read Qwest's financial statements and didn't believe all the hype.
"I didn't like the merger; I spoke against it at the US West meeting in New York City," he says. "I thought there were too many unknowns about Qwest's revenue stream. I asked Sol Trujillo what was wrong with just being a telephone company. He said, 'Well, we've chosen to grow.'"
As for Nacchio, Armstrong was immediately put off by him. "The only time I've dealt with him was at the annual meeting, and I was not impressed," he says. "He was very boastful and bragging about their 700 percent stock appreciation. He said, 'That's why my compensation is justified.'"
This year, Armstrong will be joined by new allies in challenging the corporate leadership at Qwest's annual meeting. The California Public Employees' Retirement System (CalPERS), the largest public pension fund in the country, said it was outraged over Nacchio's compensation package and put Qwest on its annual list of the worst-run companies in the United States.
"These decisions demonstrate blatant disregard for shareholders," CalPERS chief investment officer Mark Anson said in a statement. "We have lost complete confidence in Qwest's management and board."
CalPERS owns more than 10 million shares of Qwest (out of a total of 1.67 billion shares). The group said it will propose a number of reforms to Qwest's management structure at the annual meeting, including requiring each member of the board of directors to stand for re-election before the share owners each year and mandating that key committees -- like the compensation committee that approved Nacchio's pay package -- be filled by independent directors who weren't nominated by the CEO.
Phelps says the US West retirees' group will also be pushing for changes in corporate management, including a requirement that shareholders vote on all "golden parachute" compensation packages for company executives. Such proposals have failed in the past, but Phelps is hopeful that the reforms will fare better this year.
"The climate is more receptive this year because of what happened to Enron and Global Crossing," he says.
In a letter to share owners, Nacchio asks them to vote against the retirees' proposal. "It could put us at a competitive disadvantage relative to our peer companies when it comes to recruiting and retaining talented executives," he wrote. "The severance arrangements that we currently have in place with our executives have been approved by a committee of non-employee directors and are smaller than those in place at many companies."
Phelps thinks the real problem at Qwest is with the board of directors, many of whom are close Anschutz associates or came over from the US West board. Qwest's board includes Hank Brown, president of the University of Northern Colorado and a longtime Republican politician; Linda Alvarado, a politically well-connected construction magnate; and Cannon Harvey and Craig Slater, who work for Anschutz.
"They're all cronies. It's a club, and they're handing Nacchio pieces of the company," says Phelps. "Nacchio is a lightning rod, but I think the board of directors has gotten off scot-free. I want the shareholders to turn this board out."
For years, phone-company employees were exhorted to buy company stock. Not only did US West match the shares bought by its employees, but it also touted the dividend it paid on each share as a good source of retirement income. Once, US West share owners were paid 50 cents per share each quarter, but when Qwest bought the company, the dividend was slashed to just five cents.
"A lot of people depended on that dividend," says Aiello. "For a lot of people, that was their retirement."
Bud Lafferty, who put in 31 years in construction with the company before retiring in 1985, says that starting wages were low but that employees believed that retirement benefits were so good, it was worthwhile to stay for the long haul. The company's pension plan was regarded as one of the best, and Lafferty expected his pension would always keep up with inflation.
"That was pretty much promised to us," says Lafferty. "We were supposed to be guaranteed that, and it hasn't held true at all. As far as I'm concerned, our benefits have not been as promised."
For most of the 45,000 retirees, the last increase in pension benefits was in 1996 and averaged just 2.9 percent. Boosting benefits is the biggest issue for the retirees.
"The cost of living in Denver since 1990 has gone up 43 percent," says Phelps. "A pension increase of 10 percent would cost the pension fund $78 million. Compare that to what Nacchio made last year."
Qwest insists that its pension program is still one of the best.
"We've had a longstanding commitment to our retirees to provide a comprehensive and competitive retirement package," says Qwest spokesman Chris Hardman. "Our retirement package compares favorably with [those of] other large companies."
The company has been meeting with the retirees to discuss pensions, but Hardman notes that Qwest has no legal obligation to raise pension payments. "We have a fiduciary responsibility to do what's best for the company and our shareholders," he says.
Many retired employees are especially troubled by the fact that Qwest can use the money set aside for their pensions to pad its bottom line.
"If they have a surplus [in the pension fund] above obligations, it can be considered for quarterly results," says Phelps. "It's a financial calculation, but that credit is taken to the bottom line. It's counted as revenue. Because Qwest inherited a rich pension fund from US West, they can use that to offset their losses."
That means the company has a financial incentive not to increase pensions, since doing so would cut into the pension-fund surplus. In 2001, for example, the company counted a pension credit of $343 million toward revenue. It also means that Qwest's earnings statements are misleading.
"It's an inaccurate measurement of how the company is doing," says Phelps. "It's a vapor profit."
At the annual meeting, the retirees will be sponsoring a resolution calling for pension-fund credits to be excluded from the earnings figure used to determine executive compensation. Retirees like Phelps are especially galled that the pension surplus could be used to inflate Nacchio's paycheck.
"They calculate Nacchio's compensation on the basis of those earnings," he says.
In his recent letter, Nacchio also asks shareholders to oppose this proposal. "Pension credits do not contribute significantly to the measurements that we use to determine performance-based compensation for our executives," he writes. "In determining cash bonuses, we look to a variety of performance measures to determine the amount for each executive. In 2001 pension credits increased Qwest's (earnings) by just 4.9 percent, and had no effect on the other measures of our performance."
Some Qwest employees also believe that workers are being targeted for layoffs based on how close they are to drawing a pension. Arvada resident Robin Tingley filed suit against the company in April, charging that she was fired after 26 years with the company so that Qwest wouldn't have to pay her full pension benefits. Tingley was a 45-year-old manager with the company and says in the lawsuit that she was never reprimanded and never received an unsatisfactory job rating during her years with the phone company.
Tingley would have been eligible for a full pension if she had stayed with the company for another four years. The lawsuit -- which is seeking class-action status, meaning it would become open to other laid-off Qwest employees -- claims that Qwest has targeted older employees who are close to full pension eligibility in its layoffs.
"Qwest has actively sought ways to cut costs associated with employee benefit-plan payments," reads the suit. "The pattern of terminations show that more persons over the age of 45 and only a few years shy of service pension eligibility have been terminated than would be expected in a random process."
The lawsuit also alleges that the company has a financial incentive to deny employees full pension benefits. "Qwest relies upon the earnings of the pension plan to boost its income statement report given to investors," says the suit. "To the extent Qwest can reduce pension liabilities, there is a better chance the pension plan can contribute more to the company's bottom line."
Denver attorney Curtis Kennedy, who represents Tingley, says, "There are thousands of people out there watching this, because they agree with the allegations."
However, Qwest's Hardman says Ting-ley's lawsuit is completely without merit. "We don't target those employees close to pension eligibility in our downsizing efforts," he insists.
Another lawsuit filed earlier this year in U.S. District Court accuses the company of defrauding employees who were encouraged to buy company stock through the Qwest 401(k) plan. That suit alleges that at the same time thousands of Qwest employees were contributing to the plan and buying Qwest stock, company executives were selling their own shares and reaping profits of over $430 million. The lawsuit, filed on behalf of two Oregon residents who participated in the plan, claims that Qwest's executives knew the company was on shaky ground but concealed that information from employees.
Many Colorado retirees have watched in dismay as the value of the stock has plummeted. Almost all of the phone company's employees owned stock.
Now the stock price is "so low you can't even sell it," says Dean Noirot, who worked in engineering for the company for 36 years. "We thought the stock would be a gold brick in the closet. The company encouraged employees to buy stock since I went to work for them in 1950. You could buy it at 85 percent of the market value. People were hoping to supplement their retirement with that. They'd buy a couple shares a month."
All of this leaves Phelps shaking his head. A former human-resources director for US West, he feels that Qwest's current leadership has lost its way.
"What is this management team doing to average families in this community?" he asks. "What about the retirees who relied upon this stock to supplement their income? I think we have a lot of crocodile tears over there."
Phelps and several other retirees plan to fly to Ohio for the annual meeting. Qwest's decision to meet in such an obscure location is telling, he adds.
"It says something about conscience and what's in their minds. Any person in a position of authority who hasn't performed should have the guts to stand up and take their medicine."
Those who are still at work at Qwest say they are constantly being asked to do more with less. (After the merger, the company eliminated 13,000 jobs and has announced another 14,000 job cuts since this past September, leaving Qwest with about 53,000 workers to cover its fourteen-state region.) With so many of their colleagues gone, employees say the work environment has become incredibly stressful.
"They're trying to push for more efficiency, getting more work per employee," says one field technician who requested anonymity. "They want you to do more and more work in the same amount of hours. They want you to do five or six jobs a day. Before, you'd just do four jobs a day. Everybody is upset about this."
A technician who recently quit says the pressure to perform has put the whole staff on edge.
"Even the managers are to the point that they're getting ulcers and are ready for heart attacks," she says. "There was an altercation where I worked: A manager grabbed a technician, and the technician called the cops. That was the day I left. The cops were there, and the two of them were going at it, and ten people were lined up to talk to the union steward. I said, 'I'm out of here.' I had to get out of there before I went completely berserk."
Despite the layoffs, the number of complaints Qwest customers report to the Colorado Public Utilities Commission and the state Office of Consumer Counsel has been declining. US West was notorious for its poor service, often making consumers wait months to receive new telephone lines. Qwest promised that service would improve, and consumer advocates say that it has.
"We look at the numbers we receive from the PUC and the number of people who call us," says Ken Reif, director of the consumer counsel office. "Based on that, service has been getting progressively better the last eighteen months."
However, Reif cautions that it usually takes about six months for cutbacks in the service area to show up in customer complaints. That means it's possible that the layoffs now taking place could affect service in the future.
"The numbers we're seeing now reflect the investments made six months ago," says Reif. "If they were to pull the plug, you probably wouldn't see it for six months or so."
A recent consumer survey by the University of Michigan ranked Qwest last among local telephone companies in customer satisfaction. Qwest insists that its bad reputation is a reflection of past failures on the part of US West and predicts that its polling numbers will rise as service improves.
While Qwest's customers seem to have escaped the turmoil affecting the company for now, shareholders haven't been as lucky. Armstrong also plans to attend the annual meeting, and he will cast his votes for the shareholder resolutions that aim to rein in executive compensation and bring more independence to the board of directors.
Armstrong owns stock in several other utilities, including Xcel Energy. Over the years, he's tried to get other shareholders to join him in demanding more control over the companies they own, but those efforts usually fail. He often feels like a voice in the wilderness.
"In the past at US West, I was the co-sponsor of proposals, including one-year terms for the board of directors," he says. "Other shareholders would call me up and say, 'Why don't you ask this question?' I'd ask them why they wouldn't ask the question themselves, and they'd say, 'Oh, I couldn't do that.'"
Armstrong says that every year, when he speaks out at the Xcel Energy meeting, at least one share owner warns him that when he gets home his lights may be turned off. He's had Qwest shareholders tell him they worry that saying something at the meeting will affect their phone service.
"They're very naïve and very intimidated," he says. "Many people don't even read the annual reports. I read one from a major corporation, and part of it was upside down. I called them up and they said, 'No one has complained about it.' I said, 'That's because no one reads it except me.'"
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With a backlash toward Qwest management, Armstrong is hoping there will be more support this year for the proposals to shake up the way the company is run. Institutional investors such as CalPERS have become more outspoken, and the past year has been so disastrous that many share owners may be ready to break with the past.
However, Armstrong won't be able to sponsor any proposal. Under the corporate bylaws, shareholders must own $2,000 worth of stock in order to introduce a resolution. In the past, that wasn't a problem, but because of the plummeting stock price, Armstrong no longer qualifies.
"I no longer have $2,000 worth of stock, but that's not my fault -- it's theirs," he says.