The Nortel Case Abstract

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TheNortel Case


NortelCorporation contributed a key role in the boom of telecommunicationgrowth during the 1990s in Canada and beyond. Although it boasts tohave been among the leading makers of telecom equipment within NorthAmerica, the company is presently trying to liquidate its assetsbecause of its rise and downfall during the 21stcentury. The rise and downfall of Nortel Networks Corporation arecharacterized by significant challenges, variations, and atrocitiesthat resulted in the increase of discrepancies. Nortel experiencedperfect progress in trading operations since the industry was veryresponsive and all investors aimed at realizing the organization`sgoals and objectives. From a diverse viewpoint, the tumble of Nortelis due to the ethical operations undertaken by executive management,which includes excess executive compensation, poor governance, lackof commitment from the owners, and recurrent financial variations.

Keywords:Telecommunication, Rise, Downfall, Company, Boom, Investors

NortelNetworks Corporation was an international firm of Canadian origin,which at its peak during the early 2000’s had covered a third ofthe overall valuation of the corporations on TSX (Toronto StockExchange). Nortel was established in 1895 in Montreal, with itsproduction headquarters presently situated in Mississauga. Theorganization manufactured equipment of data networking alongsideproviding telecommunication services. It hired more than 94,500workers globally. The problems of Nortel started during the 1990’sunder the leadership of John Roth, the Chief Executive Officer(MacDonald, 2014). Roth utilized the media in altering the perceptionof the public of the corporation. The sale of fiber networkingequipment by the firm from then onward was overestimated by thespeculators within the marketplace, raising the company`s shareprice, although it failed to generate the total annual profitsbecause of the saturation of the market, which soon resulted.

Nevertheless,due to the awareness created by Roth backed by the acquisitions ofweb-technology firms like Bay Networks, analysts judged the company`sstock price to increase exponentially, and something less wouldnegatively impact the stock price. The organization`s downfallstarted when Nortel failed to live up to the expectations of theinvestors. The financial outcomes did not compliment the statementsissued by the CEO and its management. As a result, the firm`s stockprice assumed a nosedive, leading to the investors losing vast sumsof cash (Fogartyet al., 2011).Several investors divested their finances from Nortel thus, it wasleft on a bankruptcy verge. The corporation continued thriving withdebt funding although the harm was already done and in 2009, Norteleventually went into liquidation. This analysis paper will use sometopics like “Human Nature and Unethical Conducts in Corporations”to explain how ethics is crucial and the way human nature ofexecutives acts while performing their business.

Factorsthat Led to Nortel’s Rise and fall

Nortel’srise was as rapid and quick as its downfall. Even though the firm wasexistent was before Roth became its CEO, his era at the company’stopmost position brought dramatic alterations to the organization’sfortunes. From an ethical viewpoint, it is evident that there werenumerous reasons as to why the firm spiraled down and shot up. Theforemost task, which Roth took after assuming the CEO position, wasto develop the business through enlarging it into an internetbusiness-line.The company started the acquisition of Internet and networkingcompanies across the United States and Canada, and as of 2000, it hadacquired seventeen different firms. Throughout this time, John Rothgreatly utilized the influence of media and press to his benefits,mostly immorally (Fogartyet al., 2011).Although Nortel was still developing at a sluggish pace, Roth usedthe media channel to spread exaggerated and falsified financialreports and forecasts. This attracted considerable investment inNortel hence, the company`s growth paced up and resulted in itsrapid rise.

Afterthe company has started to attract investors and increased finances,Roth together with his team resolved to ensure these investors didnot sell their shares in quest of better returns elsewhere anddecided to hold Nortel`s stock. This way, the actions of themanagement were unethical, and they started reporting over-optimisticfinancial performance, which showed increased earningsper share(EPS). The company`s investors fell for the bait, and they continuedto hold their current stocks. Also, they even acquired more holdings.This can be interpreted as deliberate misleading by the topmanagement although it helped Nortel progress to become among themost dominant establishments within Canada, with its shareholdingcapacity spreading to several other nations as well.

Theother problem arising from an ethical point of view associated withthe company’s fall was the compensations, which Nortel’sexecutive directors were entitled to even after there was a decreasein the share price and a funding issue was starting to grow. Morally,it would be necessitated by an entity’s directors to avoidaccepting high incentives and several other bonuses when theorganization was losing its marketplace viability, the business’operational side was experiencing debt crunches, and the share pricewas declining (Fogartyet al., 2011).This was never the case at Nortel. For instance, John Roth himselfearned huge bonuses that were way higher than the norm of theindustry. The top management continued carrying on its immoralbehaviors thus, this was among the crucial aspects for theorganization`s downfall.

Nortel`smanagement had chosen to showcase the company`s performance using the&quotpro forma&quot EPS in order that its investors could have theexpectations of getting significant returns. Ethically, themanagement needed to have pursued the principles of GAAP in statingthe EPS, instead of misleading the stakeholders and other ownersusing &quotstreet earnings&quot or &quotpro forma&quot earnings.On ethics and good governance, the firm`s management should havetrailed the GAAPprinciples inpresenting and preparing the financial reports and statements(MacDonald, 2014). However, the administration worked to benefititself through unethical and unfair means that ultimately resulted inthe fall of Nortel.

Measuresfor Aligning Managers

Thefirst mechanism would be the organization’s decision to stress onethical procedures in every transaction of Nortel. Keeping ethics ormorals a crucial guideline in the management of a business may proveto direct the company to sustainability and growth. Several theoristshave proposed that applying ethical processes among a business`management creates a robust sense of accountability towards theshareholders. If good practices were present within Nortel from thestart, the executive might not have behaved in the way they did, andNortel could have remained healthy to date. The other mechanism,which can be employed is setting the executivecompensations`limit to be equal to the marketplace norms, and giving the managersbetter schemes of stockoptions.As such, this would not need management to engage in manipulating theoperations and accounts to earn huge from their shares (Fogartyet al., 2011).Nortel`s accounts, as well as its financial records, can be treatedand prepared using GAAPprinciplesin order to allow the creation of proper fiscal records and moretransparency.

DescribingNortel’s Meltdown

Thefirm`s meltdown has been associated with multiple reasons. Many ofthe grounds fall within the broad group of inappropriate actions andmismanagement by the executives of Nortel in managing it. Partially,the fault of Nortel`s fall lies wholly with the management`s actions.Nevertheless, the &quotpeople&quot aspect cannot be the only reasonfor the company`s fall. The existing processes of the capital marketplayed their roles silently, mainly helping the top managementtowards the poor running of the business. In order to comprehend howthe “people”factorfailure can be considered a primary basis for Nortel’s meltdown, anall-inclusive discourse that highlights and elaborates the manymismanagementinstances must be made. Among the first aspects that related to thefailure of management to act suitably was because the managers wereentitled a particular shareholding upon assuming a specific positionto uphold the success of the agencytheory.This made top management a large stakeholder since they hadincentives of earning more by ascertaining a rise in share price inorder that they could present a considerably high sales return oftheir shares (MacDonald, 2014). Therefore, the human nature andconscience of the company directors weakened their judgment hence,they acted against ethics.

WhyBusinesspeople Make Similar Mistakes

Criticallyevaluating the failures by various companies will prove that theymake similar mistakes for many years for example, Nortel`s case is aprecise replica of what occurred in organizations like Enron andWorldCom during the early 2000`s. While starting a business, theinvestors usually have plans to beat future corporate hardships.However, most of these schemes never last until the first defy of theorganization. Like Nortel, very few investors are dedicated to theirplans hence, they are easily influenced to similar tracks that otherfailed corporations took (Fogartyet al., 2011).Roth`s wish to succeed drove him past knowledge and understanding.While most companies had messed up in their attempts to visit newmarketplaces, he adamantly considered internettechnologythe only means of the organization developing. He overlooked all bitsof advice, including those of press, media, employees, and even theWall Street.

Somebusinesspersons never even contemplate what they are undergoing andwhat they have to do distinctly. Therefore, they become lessproactiveand more reactive.Most firms` ill-preparedness for the crises make executives adoptquick-fix ways, which have been in use for several years. The issueof over-assessment that was evident in Nortel Networks Corporationexerted pressure, which would be anticipated in such a circumstance.However, Nortel management`s reaction caused the damage. Theirscrounging from the future incomes of the company to realize theunscrupulous earnings of management was just a duplication of whattook place in the previously failed businesses like WorldCom andEnron.


Inorder to evade duplication of the tactics of Nortel in several otherfirms, individual priorities have to prevail in regulating financialaccounting.The botch of Nortel Networks Corporation is primarily attributed tocertain accounting errors, in which the executives were unethicallymanipulating fiscal statements to their personal gain withoutconsidering the GAAP principles. The problems of accountingillustrated call for suitable accounting regulations to prevent therepetition of such cases. To success to maintain the marketplaceshare of the company and win the trust of shareholders needs Nortelto obey the GAAP standards since the regulations would help the firmin complying with the fiscal statements and in unifying its corporatepractices. Optimizing the company`s capital and human resources aswell as proper expenditure management is a useful attribute of theGAAPfinancial practices.Secondly, business training has to be the organizational culture atNortel and any other corporation seeking to succeed. Severalunethical conducts at Nortel can be allied to the poor knowledge inbusiness (Fogartyet al., 2011).Every stakeholder must be experienced the company`s critical businessoperations. Shamefully, the directors of Nortel were unable to verifythe accountingstatementsof the firm. As such, innovation, research, and technology must bethe norm of a company in order to realize success.


Withinthe corporate environment, all businesses are created primarily byrecognizing the aims and goals. Thus, stakeholders and investors mustexecute the appropriate measures that are accountable to identify thegoals, mission, vision, and objectives. According to the case studyinformation, one of the main reasons explaining Nortel`s rise andfall was greed of top management and how they acted swiftly toembezzle company funds (Fogartyet al., 2011).In actuality, such blunders resulting in the company`s fall areusually made by several other companies these mistakes causedisparities in the end.


Fogarty,T., Magnan, M. L., Markarian, G., &amp Bohdjalian, S. (January 01,2011). Inside Agency: The Rise and Fall of Nortel.&nbspJournalof Business Ethics,&nbsp84,&nbsp2,165-187.

MacDonald,L. (2014). NortelNetworks: How innovation and vision created a network giant.Toronto: J. Wiley &amp Sons Canada.

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