NORTEL-CASE STUDY

NORTEL-CASESTUDY

Nortel-casestudy

Abstract

Bycritically reviewing operations of businesses, this paper reveals adetailed analysis of a large multinational Canada-headquarteredtelecommunications company. It shows the operations of the 21stcentury top officials in some companies: a CEO whose compensation isfar from his peers, a board of directors that is dysfunctional, ashow of financial irregularities that later leads to downfall. Therise and fall of Nortel shows a company that was operated by lack ofbusiness ethics within system of corporate governance.

NortelNetworks Corporation popularly known as Nortel was a multinationaltelecommunications, and data networking equipment manufacturer. Itwas founded by in Montreal, Quebec in 1895, its headquarters were inMississauga, Ontario, Canada. It was a company that rose in itsfirst years of operation but fell in late 21stcentury (Fogarty,Magnan, Markarian, &amp Bohdjalian, 2009).This paper assesses Nortel’s rise, as well as its decline early onits 21stcentury. Particularly, we investigate the ethical factors that ledto rise and fall of the company, mechanisms that can be used bymangers, description of meltdown of Nortel, mistakes done bybusinessmen and how to prioritize different remedies in business.

Factorscontributed to rise of Nortel

Marketvalue

Nortelwas one of the largest firms in the world. It was a giant corporationthat had risen to its height. For instance, its market capitalizationhad an excess of $350 billion Canadian dollars. In terms of shares,statistics show that Nortel had more than 37% of the Toronto StockExchange Composite Index value. More so, its shares tripled in fouryears and it had reached to the top in the mid 2000. Statistics showit had reached on the peak with more than $200 Canadian dollars forevery share (Fogarty,Magnan, Markarian, &amp Bohdjalian, 2009).

Diversification

Thisis one of the factors that had made Nortel to rise. It was muchdiversified although it focused mainly on the telecom market. Itfocused on broadband and wireless technologies a factor that madeNortel to rise in the North America’s market. In addition, thecompany took all opportunities that came its way, an aspect that alsocontributed to its rise.

Fallof Nortel

Equityovervaluation

Thisis the existence of large deviation in the company’s share priceand its underlying value in the environment (Baker &amp Powell).This suggests that Nortel had high chances of not meeting itsstakeholders’ expectations. This was attributed to the poorfinancial management this is because it exaggerated pricing of thecompany’s share for $2000, which created the biggest deviationcompared to its underlying value. This made the business to be arisky business order to cover up the incoming disaster.

Dishonestaccounting practices

Thedecisions made by company’s management were disastrous. Forexample, a highly priced acquisition of firms like Qtera at $3billion cost, this decision was not adequately justified since thecompany had no sales that could explain this investment. Simply, themanagement could not monitor and account for its revenue. This led tofinancial irregularities that rendered the company bankrupt.

Executivecompensation

Thesemanagers, board of directors and other officials compensatedthemselves highly. They reaped more than they sowed in the sense thatthey put more cash in their pockets than they were receiving from thebusiness. With all these, the result was a total destruction ofNortel core competencies, the company finally liquidated and stoppedto exist in January 2009 (Gomez-Mejia,Berrone, &amp Franco-Santos, 2010).

Mechanismsto put in place to better align managers with the interest ofshareholders

Shareholdersplay a significant role in companies. Therefore, it is necessary formanagers to be always in good terms with the shareholders. This willbe achieved only if the manager is sincere enough with thestakeholders. This will involve updating shareholders in everyoperation of the business. To avoid financial irregularities, thereshould be a committee that would be working independently from themanagement (Bake,&amp Powell, 2009).In this committee, there should be at least two members from thestakeholders and the committee will be regularly reviewing theaccount practices. Instead of using pro forma financial statements,they should be using real financial data since pro forma is prone tomanipulation.

Descriptionof the meltdown of Nortel

Arguingfrom the history part of Nortel, it will be more sensible to say thatmeltdown was because of people’s failure rather than capital marketprocess. From the analysis done, management contributed greatly tothe meltdown of the company. Their irresponsible actions andincentives had to be blamed for the company’s meltdown. Thisargument is also supported by the dysfunctional board of directors,which lacked strong internal control mechanisms. The board had 12members, and according to Bakeand Powell (2009), it isquite a large board. With this, disagreements often raised thatresulted to ineffective finances control of the company.

Thecompany did not have an independent body that could monitor financeoperations of the company. Instead, Nortel relied on the managementfor financial control. Such a big company should have an independentdirector that is skilled and have experience in accounting, auditingand other financial related issues.

Thecompany also lacked proper market monitoring body. A good reason asto why we cannot base Nortel’s fall on capital market condition. Ifthe marketing body were inefficient, then capital market would notoperate efficiently. Finally, the management focused on theshort-term investment instead of focusing on the long-terminvestment. This was influenced by John Roth and his managerialcounterparts. It is therefore evident that meltdown of Nortel isattributed to people’s failure but not the capital market process.

Whybusinesspeople make the same mistake

Whenpeople start business, their aim is always to succeed in it. However,they miss steps along the way, which lead to business failure. Whathappened in Nortel is similar to what happened by companies asWorldCom and companies as Enron and Citigroup. It seemed theyoperated with the obvious mistakes that often lead to failure oftheir businesses such as

Improperleadership

Properleadership is characterized by honesty and commitment, aspects thatlacked in Nortel and other companies. Those at the top are usuallydishonest and they tend to benefit themselves with cash from thecompany. They become greed and eventually lack commitment since theywould have milked the company enough. This definitely leads tofailure of the business.

Ignoranceof the past failures

Nobusiness operates without some failures. However, such mistakes arenever resolved properly, which later affects the business. Manypeople assume these failures leaders are never ready and willing tolearn. To avoid this, they should not be reluctant in listening fromothers about past failures of the business.

Prioritizingremedies to stop such recurrences

Businesseducation

Thisshould be the basis of any business that is willing to succeed. Allmanagers, and other stakeholders of any business should be wellinformed about the operations if the business. Especially where thereis transition of management, the outgoing executives should firsttake through, the incoming executives, about the business operations.Regular workshops should also be held to all stakeholders (Massey,Montoya-Weiss, &amp O`Driscoll, 2002).

Financialaccounting

Thecompany should recruit skilled and experienced accountants and otherprofessionals who will be specializing in financial matters of thebusiness. This team will help the company comply with financialrequirements they will also help in streamlining its financialoperations (Bake,&amp Powell, 2009).

Regulationsof incentives

Themanagement will achieve this. Business incentives should beprioritized since without this, most of the business operations wouldnot operate. They would help in putting strategies that will lead tosuccess of the business. With this, management would establishethical rules that will govern the business. Those would be seen tohave done mistakes either voluntarily or involuntarily will face thewrath of such rules accordingly.

Generally,any business should give priority to the financial management sincethis is the root of all problems.

Conclusion

Businessshould be sensitive to any matter that appears to be a threat. Allbusiness should learn from Nortel, avoid such mistakes and adoptnecessary measures towards achieving their business goals.

References

Fogarty,T., Magnan, M. L., Markarian, G., &amp Bohdjalian, S. (2009). Insideagency: The rise and fall of Nortel. Journalof Business Ethics,84(2),165-187. Accessed on 28thMarch 2015 from http://www.hec.edu/heccontent/download/3655/137682/version/2/file/MAGNAN_Inside _agency_-revised-.pdf

Gomez-Mejia,L. R., Berrone, P., &amp Franco-Santos, M. (2010). Compensationand organizational performance: Theory, research, and practice.ME Sharpe. Accessed on 28thMarch 2015 from www.indiana.edu/…/Managerial_Compensation_Based_pdf

Massey,A. P., Montoya-Weiss, M. M., &amp O`Driscoll, T. M. (2002).Knowledge management in pursuit of performance: Insights from NortelNetworks. MISquarterly,269-289. Accessed on 28thMarch 2015 from onlinelibrary.wiley.com› … › Vol 39 Issue 6

Baker,H. K., &amp Powell, G. (2009). Understandingfinancial management: A practical guide.John Wiley &amp Sons. Accessed on 28thMarch 2015 from www.amazon.com/UnderstandingFinancialManagement