Rise and Fall of a Telecommunications Company

Nortel's Case Study
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Nortel's Case Study
Introduction
Fogarty and Magnan (n.d.) assert that the main reason Nortel collapsed was over-evaluating the market potential to lure investors into telecommunication and broadband technology. The overvaluation marked the beginning of a series of irreversible events that led to the company's downfall. The meltdown of Nortel can be summarized into four main points.
Describe the factors that contributed to the rise and fall of Nortel.
Governance structure- The size of the Nortel board of management was too big. As a result, this board composition led to less monitoring and increased decision-making time. Secondly, the board of directors did not have a finance expert since 2001 to consult on investment matters.
Ownership structure- Initially, the company leveraged the disparities between the current value of the shares and the market value to spike capital capitalization of the company, thus raising investor's expectations.
Executive compensation- During the height of the financial crisis, the executive management still received a huge lump sum of money in terms of payment. John Roth manipulated the accounts while reinstating future solid prospects to cover up money embezzlement activities
Earnings management- When the meltdown started, John Roth was pressured to meet the company's predictions. However, since the company was not performing well, he released fraudulent reports on performance and earnings to gain investors' confidence.
What mechanisms should be put in place to align managers with the interests of shareholders better?
To reverse the adverse effects of the unsustainable growth rate, there is a need to implement proper and correct incentive programs to avoid under or over-evaluation (Boundless, n.d.). Another critical mechanism to bridge the gap between shareholders and management is partially compensating managers in shares such as capital growth, profits, and dividends. With this, managers become stockholders and develop an interest in the success of the company. Alternatively, shareholders can outline specific goals and provide rigid frameworks for bonuses to achieve the goals.
Would you describe the meltdown of Nortel more as a failure of "people" or of "capital market processes"?
After an in-depth analysis of the case study, it is evident that Nortel's downfall is due to the failure of people. Initially, analysts ignored the downward spiral and massive acquisitions the company was ...