Nortel Networks shakeup raises more questions The Northern goes south

The firing of three senior executives at Nortel Networks at the end of April shows just how far large telecommunications companies have strayed from their history.

For the company once called Northern Electric — and simply “the Northern” by its employees and the people that lived next to its factories — the new ways were exciting and seductive. They fit the new world of telecommunications equipment, all buttons and displays and forty-page manuals. The old Northern culture was a part of the past, like pulse dials and Bakelite.

With the new Nortel, unfortunately, came some new habits that proved to be bad ones, all enabled by a business culture that had come to see moving the stock price as an end in itself. Honest and conservative recording of financial results was supplanted by a practice that gave life to the old joke about the accountant who, asked to sum two numbers, replied, “what did you have in mind?”

One nagging problem remained: the old ways of accounting, rather like the old Bakelite phones, worked. People who needed to understand them understood them; however, much the whiz kids found them “limiting.” Like the old phones, they were durable.

Nortel wasn’t part of the culture’s weird fringe — the topsy-turvy world of Enron, for example — but its own accounting practices from those days have forced it to make significant restatements to its earnings from 2000 to 2003.

Along with the restatement have come investigations by the Ontario Securities Commission and the U.S. Securities & Exchange Commission, and a cloud of suspicion that the company’s chief executive, Frank Dunn, its chief financial officer, Douglas Beatty, and its controller, Michael Gollogly, had manipulated earnings results to show a profit in 2003, and so collect on a US$14-million bonus fund.

That is certainly the implication of the company’s announcement, at the end of April, that the three had been “terminated for cause.” Yet there was an unusual comment from Lynton Wilson, Nortel’s non-executive chairman, who said, “the decision to terminate Frank Dunn was particularly difficult, but it is the right decision for the company.”

We had the impression that the decision to fire someone for cause was never difficult: if the cause came up, the guilty party got half an hour to clean out his desk, and upper management, while it might be shocked by the cause, had no qualms about removing the offender. So where does Wilson’s inner turmoil come from?

If indeed the company’s two senior financial executives were misstating financial results — through either outright dishonesty or mere lack of accounting rigour — there need have been no difficulty about the decision to fire them; the board would have had no choice. If, in turn, Nortel’s chief executive acquiesced or failed to supervise, his own job should reasonably have been on the line.

But if this is a case of posterior-protection by a board shy of having securities commissions asking for answers, we can see why the decision might have been “particularly difficult.” Bonus pools for top executives would have to have been approved by the directors; how easy could it be to admit that a mechanism supposed to provide an incentive to turn a company around instead got the company into regulatory trouble?

Shareholders and boards are constantly looking for ways to give management an “incentive.” Why do they so often find the wrong ones?