Abstract
In the world of nowadays the causes of financial crises are carefully studied and analysed by thousands of experts all around the world, yet as well as countries, large business organisations tend to go into crises from time to time. This paper is focused on studying the case of a corporation called Nortel, which was a major Canadian telecommunication company.
In the end of 1990s and the beginning of 2000s it went through impressive success and turned into a business giant and every business maker’s role model. Yet, a couple years later Nortel’s value decreased massively and the company suffered a huge meltdown. The analysis of Nortel’s business processes revealed a series of frauds directed at the disguise of its poor performance.
This phenomenon occurred because the company’s managers who happened to be at risk due to the decreasing stock options of Nortel tried to protect their own welfare and hide the fact of failure from the shareholders. This paper is focused at the examination of the issues of Nortel from the perspective of ethics. First of all, the factors that contributed to the downfall of the company will be listed and described.
Then, the paper will elaborate of what mechanisms are to be there to prevent risks of Nortel. After that, the meltdown of Nortel will be presented as the failure of people, but not of capital market processes and the repetitive nature of this big fail will be explored. Finally, a number of remedies helping to avoid Nortel’s mistakes will be prioritised.
In the contemporary world there is a variety of large and rather rich corporations that widely are viewed as examples of ultimate success business strategy. Huge companies that manage to stimulate the growth of their capitals and revenue within several years and expand their businesses becoming highly influential and recognised as brands are every business maker’s role models.
Their tactics and paths towards success are carefully studied, followed and copied. At the same time, the majority of the large and influential brands regularly go through big downfalls and stop being as important or seize to exist whatsoever every fifteen years. Statistically, the list of most frequently used brands changes completely within a couple of decades; at least forty per cent of the companies that used to be at the Fortune 500 top in 2000s were not there anymore ten years later (SAP, 2013).
This paper is focused on the case study of Nortel, the Canadian telecommunication giant of the end of 1990s and the beginning of 2000s, and its steep rise and fall. It will discuss the factors that contributed to the rise and fall of Nortel from the ethical perspective, mechanisms that align managers with the stakeholders, the nature of this failure and remedies for it.
From an ethical perspective, describe the factors that contributed to the rise and fall of Nortel
Generally, there are four main factors that are viewed as the main contributing influences that may have caused the meltdown of Nortel. The first factor is the company’s board of directors and its composition and size. First of all, the number of board members in Nortel was significantly larger than recommended.
The independent board elected by the stakeholders failed many of its important functions due to the complete lack of knowledge of the company’s operations and revenue acquisition. This occurred because the board of twelve directors at Nortel did not include anyone who could perform high-quality financial expertise. Besides, many board members were too busy with their executive work to properly focus on their duties.
Ethically, the board was unsuitable for the company and elected based on the personal achievements that did not reflect the efficiency of these people as the curators of the company. The second factor is executive compensation. The CEO of Nortel John Roth had an extremely generous compensation package, which was a lot larger than the ones of his executives.
This created an unethical situation, as his leadership was perceived as authoritarian. Besides, the excessive revenues of the company owners always cause rumors about egoism, frauds, theft, or tax avoidance. Executive stock options were the factors that made the people push the company’s performance or its image to keep having stock option profit.
The next factor that contributed to Nortel’s downfall was its ownership structure. The organisation’s stakeholder base included many transient investors that sought the opportunities to profit because of the stock changes. Ethically, the stakeholders were not dedicated to the company’s growth but to their own profit. The final factor is the management of Nortel’s earnings. The company hired multiple analysts to monitor its business, analyse and explain it.
Projecting and predicting of the company’s future profit caused the “benchmark beating game” where the managers were focused on exceeding the projected positive outcomes and disguise the company’s poor performance in order to preserve their own compensation, which was in direct dependence from stock options. Human factor plays key role in this situation, everyone tried to hide the negative sides so hard that it eventually led to the company’s meltdown, when all the disadvantages were revealed.
What mechanisms should be put in place to better align managers with the interests of shareholders?
Nortel’s managers are the subordinate group, whereas the stakeholders of the company are the representatives of the dominant group in relation to stock options dependant revenues and compensations. Alignment of the incentives of these two parties is the key to ethical leadership and the only way to avoid complete lack of transparency of the working process and fraud.
Managers of Nortel, as the employees whose commission directly depended on stock options were at risk of going bankrupt in case of company’s performance became poorer. Nortel’s downfall happened due to the wrong kind of employee empowerment. In Maslow’s hierarchy of needs it is shown that physiological and safety needs are the two most important and basic categories of needs. In the contemporary world money and income represents the main way to address these needs.
This way, the managers were tempted to manipulate the data and information in order to protect their income and welfare. To secure the relationship between managers and stakeholders certain employee code or contract should have been employed.
The regulations preventing managers from information manipulation would definitely align the relationship between subordinate and dominant groups and secure organisational trust (Collins, 2012). Besides, if the company preferred to be based only on dedicated investors that would remove the risk of imbalance between the managers and shareholders.
Would you describe the meltdown of Nortel more as a failure of “people” or of “capital market processes”?
I would describe what happened to Nortel as a failure of people. According to the definition of utilitarianism in normative ethics, it is based on the quality of action. The action, independently of its motives, is considered right in case if it results in the happiness of its agent and everyone affected by the action (West, n. d.). At the same time, if the action is done to please just the agent, it is considered selfish and unethical.
From the perspective of utilitarianism, Nortel’s meltdown became the result of the selfish actions of its managers as well as its shareholders as both of these sides acted egoistically in order to preserve and secure their own profits. The inner relationships in the organisation were dry and only based on business and revenues.
The company was definitely an outstanding business project, yet it did not survive for long because of the company’s little care about the people it was based on, and the people’s little care about the organisation. The clash of egoistic pursuit typical for human nature and sequence of selfish actions seem to be the main causes of the downfall of Nortel. Besides, the risky actions of the organisational leaders based on its prior success were rather emotional instead of being rational and wise.
Lack of organisational trust and regulations restricting information manipulations among the managers along with organisational injustice in reference to John Roth’s huge compensation created the disruption of inner culture within this corporation. In my opinion, ethical leadership in Nortel was not present and this is not an issue of capital market process. I view Nortel’s case as a demonstration of what happens when marketing process is unregulated by policies and leaders, which eventually turns it into total chaos.
What happened to Nortel is similar to what happened to WorldCom and Enron in the early 2000s, and to Lehman Brothers, Citigroup, and many other banks during the 2008 financial crisis. Why do business people keep making the same mistake?
There is a belief that corporations such as WorldCom, Enron and Nortel did not collapse due to a mistake in accounting, and that the actual reason for their downfall was the failure to cover up its financial weakness (Cato Handbook for Congress, 2003).
Risky actions and bold steps are parts of strategic planning for the companies that profit from the stock options. This has always been this way. The loss of some major companies in the beginning of the 2000s as well as during the financial crisis of 2008 affected a variety of state economical and financial aspects in the United States of America and Canada.
As a result, the leading organisations were suggested to take voluntary measures to prevent risk of undergoing the same tragic circumstances. The human factor contributing into the wrong risk assessment had to be reduced, as it was identified to be the main cause of the meltdowns of large corporations.
5. Discuss how to prioritise the following remedies to stop such recurrences: business education, regulation of accounting/financial markets, regulation of incentives, or regulation of punishment. Also, tell me your thought process about your decision about priorities.
Thinking of the listed above remedies I tried to focus on the principle of virtue ethics, which requires one’s choices to be based on virtuous motives and targeted at moral outcomes (Virtue Ethics, 2013). In my opinion, proper business education is one of the main keys to securing the performance of a company.
After all, the best success of Nortel occurred in the years when the corporation hired dozens of analysts to watch over its business. Besides, the lack of properly educated and experienced board members led to the board’s total unawareness of the processes happening within Nortel. The companies need to have clear mission and vision statements so that the employees and the shareholder are motivated by the same purposes.
This would help to establish incentives regulation in the organisation. Regulation of punishment is also a crucial measure, but, to my mind, it has to be limiting only up to the point of excellent fulfillment of motivation for the employees and executives. For example, the regulations are to provide organisational justice and maintain its moral culture, serve as team building factors and correct work-life balance of the employees (Collins, 2012).
Since it became clear that accounting errors are not the key factors that contributed to the failure of large companies such as WorldCom, Enron and Nortel, I put them last in the list of priority issues that need to be addressed to fix the performance of corporations and avoid risks of bankruptcy.
In conclusion, the case of Nortel is not a rare scenario. Unfortunately, many companies followed the same path after taking too much risk while being financially weak. Since risk is a necessary aspect of any successful business complete avoidance of risk is not possible. As a result, some other measures need to be taken in order for the companies of the future not to follow the failed businesses of the past.
Reference List
CATO Handbook for Congress. (2003). Policy Recomendations for the 108th Congress. Washington, DC: CATO Institute.
Collins, D. (2012). Business Ethics. Hoboken, NJ: John Wiley & Sons.
SAP. (2013). 99 Facts on the Future of Business. Web.
Virtue Ethics. (2013). EthicsMorals. Web.
West, H. R. (n. d.). Utilitarianism. Web.