NORTEL CASE STUDY

Table of Contents

Thesis Statement3

Introduction3

Discussion3

Factors that Contributed to the Rise and Fall of Nortel4

Executive Compensation5

Ownership5

Financial Analysis6

Mechanisms to align Managerial and Shareholders' Interests6

Failure of People8

Why Same Mistake Again and Again9

Prioritization of Remedies9

Conclusion11

NORTEL CASE STUDY

Thesis Statement

Nortel Corporation, once known for sweeping shares in every segment it served lost all to the unethical practices it carried out.

Introduction

Nortel Networks Corporation which was once considered to be the giant in its respective industry has lost all the glory to the unethical practices it carried. It is clearly its people's mistakes and not much can be attributed to the environment it operated in. We will be reviewing the ethical misdeeds committed. The paper will further focus upon different factors so shaped so as to ensure alignment between managerial layer and owner of any firm.

Discussion

Nortel, once known to be the largest corporation in the world, has now ceased operations and sold-off all its business units. It came as Canadian giant playing in the field of Telecommunication industry and swept the market with remarkable series of success. Initially its primary focus was telecommunications, but in the wake of wireless technology, it shifted its focus. It went on to market networking equipments and developed an expertise in the segment. It gained momentum by using extensive acquisition (Simon, 1995). Year 2000 saw the peak point where Nortel's share value hit $200 mark.

Everyone started to place blind faith in Nortel, CEO John Roth and his decisions regarding all the affairs. But the distorted factor that was supporting the base of their accounting practices could not for long sustain excessive growth rates and earnings. As a result Nortel had to issue few financial restatements and its market value took a nosedive.

Factors that Contributed to the Rise and Fall of Nortel

Overvaluation

From an ethical perspective, it is Overvaluation that set into motion series of irreversible events leading to the doom of Nortel. Overvaluation is when you overstate your share prices to lure people in to invest in your company. It is the discrepancy between actual value of the share and the market value of the share. Nortel raised market value by playing word game to raise peoples' expectations. Market value increased as a result of strong future prospects and profit potential for the company. This view settled in the buying behavior among investors as a result of which market value of the share soared.

But when Nortel failed to deliver on its expectations, it started to create suspicion among its investors with share price declining. As a result of this, managers started to take drastic measures thinking it might stable the situation. Taking drastic measures as a last resort results in increased calamity and panic, and same happened with Nortel.

Board Structure

An independent board of directors elected by shareholders is required to ensure alignment of the managerial decisions with owner's visions. Research suggests that board consisting of nine non-executive members is the most effective; with not so much members to deviate from the course. At the same time, members are not so less ...