Abstract
The given case study discusses the rise and fall of Nortel Networks Corporation, which was one of the world’s largest telecommunication corporation. Nortel was a Canadian global organization that was at its peak in the early 2000s and apparently, it botched due to inefficient echelon management, inflated earnings and costs, dysfunctional directors’ board, as well as, illusion of constancy and stability. Although there were numerous possibilities that could have been adopted to prevent the fall and demise of the company; however, those roads were unfortunately not traveled. Nortel’s downfall began when it fails to live up to its investors’ expectations. Its financial results did not reconcile with the statements that were presented by the CEO and management in their annual reports. Consequently, this caused the stock price to experience a nose dive, which led investors to lose heavy investments. Accordingly, they divested their investment leaving Nortel at the devastating edge of bankruptcy. One school of thought reasoned that the intervention of government could have prevented the whitewater and backlash effect of Nortel’s liquidation and bankruptcy. However, due to corporate shared ties between the Securities and Exchange Commission and government; different CEOs of Nortel continued to dodge their stakeholders and government auditors. Although the company somehow managed to exit through debt financing, it finally got liquidated in 2009 as it failed to recover from the heavy losses and damage that has been done to it. In order to carry out the analysis of this case study and to answer these questions; topics such as ethical decision making, corporate governance, codes of ethics, code of conduct, and unethical behavior in business organizations and human nature have been used as these would help to explain the ethical manners with which a business should operate within its stakeholders community while displaying their business dealings ethically.
The rise of Nortel was equally rapid and dramatic as was its downfall. Although Nortel exited a long time ago; however, it experienced its crowned position during the era when John Roth became the CEO. As soon as the Roth hold the harness, fortune has brought Nortel numerous dramatic changes. While considering the ethical perspective, it is observable that there were several factors involved that resulted in the prompt decline of the company and its hasty collapse. The first and the foremost factor that caused Nortel’s rise was rapid business expansion and growth. As CEO, Roth shortly undertakes strategic actions in sequence for expanding Nortel into emerging internet market. Doing so, it started acquiring internet and networking companies across U.S and Canada, and by 2000, it successfully acquired 17 business corporations (Moore & Bazerman, 2012).
Another factor that resulted in Nortel’s rise was the misuse of media and press. Roth significantly utilizes the power of press and media to spread out the exaggerating and falsified financial reports, as well as, profit projections of the company. This increasingly attracted investments and therefore, caused Nortel’s growth to be greatly paced up while leading the company to a dramatic rise. The third factor that contributed first to the rise of Nortel and later to its fall was the ethical hypocrisy of Roth and his team (Wahl, 2009). As soon as Nortel attracted increased investment and funding, Roth and his management decided to make certain that the existing investors did not sell their shareholdings in quest of higher margin elsewhere and keep sticking to Nortel. This act of management was completely free from ethical sensitivity and fails to demonstrate altruistic behavior. The two moral imperatives of “do unto others as you want done to you” and “do not lie” were also not held and attributed by several board members. This unethical intention of management not only caused shareholder holding their stocks but also allured them investing more (Sali, 2014). This intentional misleading facilitated Nortel to progress by leaps and bound, and become one of the most powerful business entities in Canada with one of the largest shareholding base that was expanding across the globe (Anson et.al, 2010).
Another major ethical factor that resulted in the decline of Nortel was the entitlement of extremely high compensations and bonuses of the executive directors including John Roth (above the industry average) that they received even when the firm was going through severe financial debt crunches and the stock prices were abating. Furthermore, the management decided to exhibit its financial performance through ‘pro-forma’ earning per share, which was intended to make investors grow with the false hope of getting higher share margin and investment returns. Ethically, Nortel’s management should have followed GAAP and OECD principles to showcase their earning/share instead of Pro-forma earnings. The intentional avoidance of such code of ethics reflects their unethical and unfair intentions of embezzlement, which eventually dragged Nortel to the grave (Wahl, 2009).
There are several mechanisms thatshould be imposed to well-align managers with shareholders’ interest. One of the most significant of such mechanism is the effective implementation of the code of ethics within the organization that oversee all the business dealings and serve as a reference in case of any ethical dilemma. This tends to improve the business functionality and reputation of the business. As suggested by the business experts and authors, that application of ethical norms and practices among organizational management enables it to deliver a strong sense of accountability and responsibility towards its shareholders. This shows that Nortel was lagging behind somewhere in effective implementation of ethical practices and ethical leadership. Else, the management would never have behaved this way (Moore & Bazerman, 2012).
Managers are vulnerable to human nature and may put their personal financial interests ahead without considering the node of utilitarianism and without concerning the interest of shareholders. To fix this issue, a mechanism that can be implemented is to define limits of executives earning that also matched the norms of the relative industry while also crafting share options and schemes that do not require the indulgence of higher management. Therefore, it will not restrain them from the account and finance manipulation. Another mechanism should be the preparation and treatment of financial record as per the GAAP principles. This will help to maintain an accurate financial record and to provide improved transparency; which will also facilitate better reporting options. As implementing this mechanism would allow managers to have low margins and will restrict their ability to manipulate financial accounts while also setting standards. The appropriate placement of these mechanisms would certainly offer better alignment of managers with the shareholders’ interest (McFarland, 2014).
Nortel’s meltdown was attributed to numerous factors including unethical decision making of higher management, lack of ethical sensitivity, and inappropriate action undertaken by the executives. Nortel’s meltdown was a result of both people factors and capital market process. Although, the blame of Nortel’s demise is exceedingly associated with the unethical and irresponsible actions that were taken by the people who were controlling the management and operations of the business. However, people factor was not the only one to be blamed as the capital market processes also played their part silently by appealing management towards faulty administration of the company. When Nortel started to expand and acquired higher investments, they broke the Caux Principles for Responsible Business by not being truthful to their investors and shareholders while completely ignoring the sense of organizational justice. Additionally, the decentralization and splitting of Nortel into different individual divisions make Nortel a bloating company that was found bullying and competing with each other (Collins, 2012).
The staggering impacts that hinted at the breakdown, as well as, filing of liquidation and bankruptcy by Nortel was fair because of few of the previous CEOs, yet the capital market also did not support their cause. Mike Zafirovski - Nortel’s CEO in 2005, could have turned everything around; however, aggressive industry settings including the development of extraordinary new low-cost telecom hardware makers like Huawei from China and glitches in Nortel’s portfolio of innovation and technology made the rebound a much more extreme challenge than it was initially anticipated. The global recession and financial crisis also intensified Nortel’s financial difficulties and specifically affected its capacity to finish its organizational change. The ruthlessness and immorality in the financial administration get irreversible strengths under way as borrowing from future incomes requires even more significant financial assistance in consequent periods. The result was an aggregate devastation of Nortel’s core business value and competitive advantage (McFarland, 2014).
What happened to Nortel and other corporation like Enron, Lehman Brothers, Citigroup and WorldCom in the early 2000s, as well as, numerous other banks during the financial crisis of 2008, and why the mistakes been consistently repeated by business people can be simply defined by a word i.e. ‘Greed'. Another term that can be related to most of the CEOs of these companies is the depiction of social dominance orientation. It was the fact that they presumed that they were superior to their associates and maybe even exempted from the rules and laws that everyone else follows.
According to our textbook, there are 6 major ethical theories that settle up the moral basic leadership structure and ethical decision making i.e. social group relativism, egoism, cultural relativism, virtue ethics, utilitarianism, and deontology. On the off chance that each one of the CEOs of the aforementioned companies inquired as to whether they were submitting to those six speculations, the explicit answer would be ‘No’. As indicated by the Economist (2002), there are three areas where change needs to happen i.e. auditor’s regulation, the end of irreconcilable circumstances in bookkeeping firms, as well as, advancement of American bookkeeping models, accounting standards, and the dismissal of conflicts of interests within the accounting firms (The Economist, 2002). Enron was the principal corporate collapse that brought on the most harm to the profession of accounting in the history of United States. Both media and Congress questioned the honesty of independent audit and review process, which argues that the same firms that were inspecting/auditing were likewise on the organization’s finance and payroll as consultants and lobbyists. Auditor autonomy is a foundation for capital markets (McFarland, 2014).
Auditors ought to have the capacity to impartially evaluate whether publicly traded organizations are coming up with transparent information related to funds without trepidation of retaliation (Thomas, 2002). This autonomy is debilitated by comfortable, long haul associations that create amongst corporations and auditors. Apparently, with the approval of Sarbanes-Oxley Act of 2002, which was developed for fixing the reviewing and auditing procedure; congress had trusted that would settle this issue (Moore & Bazerman, 2012). As conscripted, the act included rotation of the audit firm; however, because of substantial campaigning by accounting corporations, it was diluted to require just the rotation of the supervisor/auditor from the review firm regulating audit. As one could envision, this made a gap that CEOs could move and still keep working together as before. As long as there are people that will go for taking such financial risk, there will always be CEOs like the CEOs of Enron, Lehman Brothers, AIG, WorldCom and Citigroup (Anson et.al, 2010).
While keeping in mind the end goal to stop the reoccurrence of such financial demises, I would prioritize/organize in the following way. The effective regulation of financial and accounting markets, controlling and regulating incentives and bonuses, and propagation of business instruction and regulating business punishment. As per the Economist (2002), Enron brought about a Code of Values and Ethics that they utilized as their Fortune 100 Code of Ethics which reflects respect, communication, excellence and integrity (The Economist, 2002). This was an unmistakable representation of moral false reverence or in other words, ethical hypocrisy.
The whole enchilada to which their value depended on was actually an illustration of smoke and mirrors. I would not be shocked to discover that other businesses that either needed to have government help or caved in had a portion of the same ethics or values (Sali, 2014). Organization’s code of ethics and conduct should be the foundation of what they endure for; however, on account of Nortel and other companies that were not the situation (Moore & Bazerman, 2012). This is the place that requires more prominent control of financial and accounting markets as they are possibly the most important factor (Thomas, 2002).
Shareholders have an authoritative trust that the company will submit to the guiding principles and do what is to the greatest advantage of all stakeholders included. The government needs to have a bigger impact on the auditing procedure to guarantee that organizations are not exploiting their partners and stakeholders. The second primacy would be with the incentives regulation. As a general rule, it is the official panel or executive committee who benefits the most from the company’s incentive program rather than the employees (McFarland, 2014). The expanded investment opportunities, swelled pay rates, rewards, country club memberships, and excursion packages are all case of motivating incentives that are typically given to elite executive individuals from the organization. There must be some kind of government control with regards to corporate enticements and incentives. Apparently, the business education and punishment would be my last concern because I don’t believe it’s a matter of concern for people not being educated as they are completely mindful of what they are doing, and they should be penalized on the off chance that they are found infringing upon the law (Anson et.al, 2010).
References
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