In four of the past six years, from 2001 to and including 2006, Nortel has posted a loss. Over that time, the losses have soared past $30 billion. The years that made a profit accounted for less than $200 million. Out of the four quarters for 2007, Nortel posted losses in three, including a whopping $844 million for Q4, announced today. All told, the Toronto-based maker of telecom equipment lost more than a billion dollars for 2007 on a quarterly basis.
In each year since disaster struck the company to reveal management scandals, accounting irregularities and a woefully myopic board, Nortel, when not announcing restatements in its financial figures (it’s had four) announced more job cuts. Worldwide at Nortel, close to 60,000 people have been laid off, fired or have taken retirement since 2000, according to Information Week. Each time, job losses and layoffs were trumpeted as part of the great strategy for what CEO Mike Zafirovski now calls “our transformation.”
But you have to wonder what’s going to happen when Nortel runs out of jobs to cut. Will they try to lay off workers at other companies in order to look good? Stranger things have happened at Nortel, not the least of which is the infinite patience investors have shown for a company that always promises paradise in the abstract but generally delivers disappointment in the quarter.
CEOs today make an estimated 400 to 500 times the average U. S. worker. When they made just 40 times the average paycheck five decades ago, and apparently had about one-tenth the incentive they have today, it makes you wonder how anything important got done. They just helped to change the world. That’s all.
“It is not a coincidence that the Dow Jones industrial average, which stood at 5,000 in 1996, is now well above 13,000,” the authors write. “While U.S. executive pay practices do not entirely explain this rise, there is little doubt that it would not have occurred without them.” (more…)
Once again, the SEC has done the heavy lifting for Canadian investors by imposing, according to reports, a $100 million penalty on Nortel. Indeed, nothing could more graphically illustrate the contrast in approach toward the protection of the capital markets between the SEC and the OSC than this decision. For exactly the same kind of improprieties, the OSC thought just $1 million toward the costs of its investigation would be sufficient. Like us, the SEC was clearly not impressed with the OSC’s thinking and wanted to levy a penalty commensurate with the offense. We said at the time that the OSC hit Nortel with a wet noodle. The SEC’s action looks more like it threw the whole pot of pasta at them.
Nortel should move more aggressively to recoup these costs from the officers and directors on whose watch the wrongdoing occurred. But as long as the concept of limited liability exits, and companies have the right to sue and be sued as though they were legal persons, they will have to deal with fines and penalties. That’s why who is chosen to sit around the directors’ table and in the executive suite is important and needs to command more attention from shareholders than it often does —even when times seem so good, as they once did at Nortel.
Maybe Canadian investors should think about the added value they are getting with the SEC, which once again has acted true to its motto, “the investors’ advocate.” I’m open to suggestions as to what the OSC’s motto should be. They pay the OSC’s top level officials hundreds of thousands more than their SEC counterparts make. There are approximately 90 employees at the OSC who make as much or more than the head of the SEC. Yet time and again, it is the SEC who fills the void and makes the tough call when Canadian regulators fall short. Sort of makes you wonder what they have in mind for RIM next.
By the way, with this posting we have inaugurated a new category at Finlay ON Governance. Our Outrage of the Week has been published with regularity for a number of months each Friday and has become a popular feature. We think, however, that in the interests of encouraging a positive and balanced perspective, in those weeks where there has been a major breakthrough or step which we feel enhances the interests of transparency, accountability and sound governance, we will run that story. Outrage or Kudos? We don’t know which you will see more of on Fridays as time goes by, but it should be interesting.
Today’s Financial Post has some comments from me on yesterday’s settlement between the Ontario Securities Commission and Nortel Networks. Peter Brieger does a good job setting out the background. Like many things the OSC has done lately, some of which we have commented on before, this one leaves us wondering if anyone is really home at Canada’s so-called premier securities regulator.
Last week, the OSC settled with Biovail founder Eugene Melnyk for $ 1 million —the same amount it is seeking from Nortel. The Melnyk settlement involved an individual. Nortel, on the other hand, is a leading corporate issuer and the offence took place repeatedly over a period of several years. If the settlement with Melnyk was fair and appropriate, it is hard to see the OSC’s deal with Nortel in the same light.
For Nortel only to contribute toward the costs of the investigation opens the door to others seeing it as just a cost of doing business improperly. Unlike the Melnyk situation, where no investors appeared to suffer, Nortel’s actions resulted in investors being systematically deceived and misled over a considerable period.
This decision sends precisely the wrong signal, but it is consistent with the lame image the OSC continues to create in the minds of investors who are looking for more than a cost of investigation outcome. And it raises the question: What exactly is the business of the OSC? It seems to go out of its way to find reasons not to pursue potential wrong doing or to prosecute. Now, the fact that the executives on whose watch this occurred are no longer there seems to be the latest excuse. Nortel is a corporate entity with its own legal rights and obligations. Executives were not acting on their own behalf; they were acting for the company. Shareholders relied upon the company’s actions and statements; they were not relying upon the executives in their personal capacities. But the OSC seems to want to take the easiest route to making it look like it is still on the scene when it is doing little more than an impersonation of a regulator. I predict some investors will be more outraged by the actions of the OSC than by the events that prompted the investigation in the first place, and will again be demanding reform of Canada’s system of securities regulation.
It is hard to regard this outcome as anything but one more indication that the OSC is out of touch with the investors it is supposed to be protecting and lacks the will and the judgment needed to properly regulate an important sector of Canada’s capital markets.
Not to be lost in the recent accusations of accounting fraud involving former top management of Nortel is the fog that company’s financial statements continue to produce.
With its fourth restatement announced two weeks ago —the fourth in four years— Nortel landed firmly in the record books. No publicly traded company has ever had as many restatements in this period of time. Nortel changes its financial statements more often than some people change their hair styles. News of the latest re-do may well prompt investors to ask if the company is really in the telecom business or whether it has gone into the accounting restatement business. After all, the newest restatement will restate financial results that have themselves been the subject of previous restatements. Which begs the larger question: Has Nortel reached the point where it is reasonable to conclude that this once world class manufacturer of technology equipment is metaphysically incapable of producing accurate and reliable numbers to guide investors and company stakeholders? Evidence leans in that direction.
In January 2005, William Owens, Nortel’s then CEO, pronounced that with the release of the company’s restated financials for 2001, 2002 and 2003, a task which he claimed had been “monumental,” “we have a solid foundation on which to move forward with our business.” Then, under its new CEO, Mike Zafirovski, there was a further restatement in March of 2006. One would have thought that no stone would have been left unturned during the three previous reviews, and certainly the one conducted last March —the first to be carried out under Mr. Zafirovski’s tenure— to ensure that every possible contingency was fully considered in order to avoid just this kind of embarrassment.
By the way, the same Form 52 certifications under which the SEC is charging Nortel’s former CEO and CFO were signed by the current CEO and CFO on a regular basis. The period to be restated includes quarterly statements for 2006 and the annual results for 2005 to which both Mr. Zafirovski, as Nortel’s CEO, and CFO Peter Currie, attested as to their accuracy under the provisions of Sarbanes-Oxley. I would not want to be the CEO or the CFO who had to explain that one, since the whole purpose of this part of the legislation is to ensure the precision of financial statements and to avoid Enron-type cases where a CEO could claim to be taken by surprise by their inaccuracy.
One of the most underreported facts about Nortel was the astonishing revelation contained in its most recent annual report that the company’s auditors discovered five material deficiencies in its accounting control system. It boasts in its latest statements that it now has only one such deficiency. Nortel’s own auditors define a material deficiency as:
…a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
The auditors go on to note:
In our opinion, management’s assessment that Nortel did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated….
Yikes! It’s hard to know whether fraud or just plain incompetency was the biggest threat to Nortel’s investors.
All of this brings us to corporate governance —not the ivory tower theory of corporate governance or a society columnist’s celebrity view of corporate governance, but the idea that directors will actually direct and protect investors. That kind of corporate governance.
During the time of Nortel’s major losses and irregularities, it had one of the top paid boards in Canada. The company boasted big name trophy directors. Several had financial and accounting backgrounds. Some sat on the boards of major banks. The fact that three Nortel directors sat on a committee reviewing board standards for Canada’s publicly traded companies, including Nortel’s then CEO John Roth and Guylaine Saucier, who chaired the panel, is something to file under the corporate governance category of Ripley’s Believe It or Not. (I raised a number of criticisms about this committee and its membership in my op-ed columns in The Globe and Mail at the time, which was prior to Nortel’s disaster coming to light.) Yet these directors not only presided over a series of embarrassing scandals and financial mishaps, but as Nortel’s auditors have stated, they failed to ensure adequate internal controls were in place. Several continue to serve on the boards of prominent Canadian companies today.
It might seem odd that failure is so well rewarded in the boardroom. But in the culture that too often prevails in the world of the corporate director, underperformance is rarely seen as an unaccommodating vice, and adherence to the rules of the club, of which thou shall not rock the boat heads the list, is typically viewed as a most admired virtue.
Fast forward to the current board. Under its governance, two restatements have already taken place in as many years. Hundreds of other large and complex companies routinely provide accurate financial statements to the investing public. They do not require repeated do-overs. Yet Nortel has become a serial re-stater of financial results. And the board appears to have hit the mute button regarding this latest fiasco, just as its predecessors did for too long. There are no statements of explanation from Nortel’s audit committee. Its well paid non-executive chairman is silent. And the board itself seems unable to issue a reassuring word. It gives the impression that Nortel’s directors see nothing out of the ordinary in this latest announcement –which is, perhaps more than anything, symbolic of the problem.
Instead, Nortel’s current board seems bent on following in the steps of its predecessors, who are remembered for a governance legacy that produced financial scandal and investor mistrust, huge sums being doled out to a former CEO who left the company in tatters, and a compromised system of financial controls whose effects continue to reverberate among investors.
Nortel was once filled with innovators and highly motivated employees. But with its inability to get out from under the cloud that has long followed its missteps and blunders, the time has come for investors to seriously consider whether the assets of the company would be better off in new hands. Here, the emphasis is on a board that is visible, engaged and capable of instilling confidence on the part of all the stakeholders needed for success –not clamping shut when crisis strikes.
Nortel needs a lot more than another accounting restatement. With its history so steeped in scandal and its present still darkened by constant financial backpedaling, it needs to think through whether Nortel can go on being Nortel.
Scandals are real time drainers. Last week, it was the stock options backdating mess at RIM. This week, and it’s only Monday, I’ve spent a lot of time answering press inquiries about the SEC’s charges against Nortel announced this morning. And I’m actually on vacation.
The Centre for Corporate & Public Governance has a statement on its website about the charges —late in coming for thousands of aggrieved shareholders and employees who have lost their jobs, to be sure. But the prospect of a process that will get to the truth about this unfortunate saga and perhaps bring its perpetrators to justice is no less welcome.
I find the OSC’s piggybacking on the SEC’s allegations of accounting fraud to be rather amusing. Canada’s regulators routinely show themselves to be bit players in the North American capital markets. They had a chance to change that with Nortel —a Canadian headquartered and founded company. They left the heavy lifting to their American cousins instead.
I’ll have more to say about this developing story later in the week.
