Factors That Contributed To The Rise And Fall Of Nortel (Essay Sample)
Last week, in Chapter 9, your textbook asserted "well designed goals hold managers, coworkers, and subordinates accountable to one another." In this week's case analysis we will look at the consequences of unrealized expectation. Review the case study linked below, then answer the following questions:
Fogarty, Timothy, Magnan, Michel L., & Markarian, Garen. Nortel: The Rise and Fall of a Telecommunications Company.
1)Describe the factors that contributed to the rise and fall of Nortel.
2)What mechanisms should be put in place to better align managers with the interests of shareholders?
3)Would you describe the meltdown of Nortel more as a failure of “people” or of “capital market processes”?
4)What happened to Nortel that 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?
5)Why do business people keep making the same mistake?
6)Discuss how to prioritize the following remedies to stop such recurrences: business education, regulation of accounting/financial markets, regulation of incentives, or regulation of punishment.
Your Institution of Affiliation
July 23, 2017
1 Describe the factors that contributed to the rise and fall of Nortel.
According to Fogarty and Magnan (n.d.), the main reason why a technological giant like Nortel, fell in a relatively short amount of time, could be summarized in four points. These points are (1) governance structure at the board level, (2) executive compensation, (3) ownership structure, and (4) earnings management.
The first point – governance structure at the board level – refers to how the composition of company's board of directors. More specifically, the authors said that two of the problems when it comes to the board composition are: (1) contrary to researches done on effective management, the size of Nortel's BoD is too big, which could have led to “less effective monitoring and increased decision making time” and (2) the board did not have a “financial expert” amongst its ranks until 2001, which has caused irreparable damage.
As for the second point – Executive compensation – it was stated that because of the millions of dollars given to CEOs and other board members despite the stock decline, John Roth and other executives decided to manipulate the company's report sheets and issue a lot of restatements, in order to prevent further stock decline while maintaining the amount of wealth that the executives enjoy.
The third point – Ownership structure – states that during its peak, Nortel has gained more and more “Transient Institutional Investors” which mostly play on stock speculations in large quantities. Therefore, when stock prices for Nortel have lowered most of these short-term investors have shorted their shares which then led to a rapid decline in the company's market capitalization.
Lastly, the authors discussed the concept of earnings management, where the company (more specifically, John Roth) was pressured to beat the benchmarks provided by analysts, in order for him to retain the confidence of their investors. However, because of the real performance of the company, Roth was forced to release fraudulent statements about the company's performance and earnings. However, as the lapses between its Pro Forma EPS and GAAP EPS were discovered, countless provisions were released against the company, which ultimately led to more losses than revenues.
2 What mechanisms should be put in place to better align managers with the interests of shareholders?
In order to make sure that the fiduciary duty of the managers is aligned with that of the company's, proper and correct incentive programs must be put into place (Boundless, n.d.). Although this might be the case for almost every company out there, some companies like Nortel does not have a safe and appropriate incentive programs due to it's under- or over-valuation of these incentives. In the case of Nortel, the executives were given too many incentives,
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