The Board’s CEO Miscues

By Mark Evans | Published: August 12, 2009

You can look long and hard at what Nortel’s board could have done or should have done, particularly over the past three years while it let CEO Mike Zafirovski drive the company into the ground.

(And folks, let’s stop sugar-coating Mike Z.’s performance by citing accounting issues, the economy, fierce competition, the credit crunch, etc.)

Just for fun, here’s a mini-list of how the board dropped the ball since the telecom boom:

1. It promoted Frank Dunn to CEO from CFO after John Roth suddenly resigned (along with a $140-million compensation package). Dunn was a long-time Nortel soldier but he was a bean-counter, not CEO material.

2. When Dunn was fired for allegedly cooking the books to trigger a lucrative bonus scheme, the board hired ex-U.S. Admiral Bill Owens as CEO. Owens oozed with credibility but was a caretaker CEO, who should never been allowed to make decisions such as aggressively move into India.

That said, Owens did well by leaving with a lucrative compensation/pension package – money he still wants despite Nortel’s financial woes.

3. After doing something right by hiring the two Garys – Daichendt and Kunis – as COO and CTO respectively, the board rejected their plans for an aggressive makeover – a move that could have resuscitated Nortel. Instead, the board stuck with Owens, forcing Daichendt and Kunis to resignafter just three months.

4. Finally, the board hired Mike Z. as CEO. Sure, he had good pedigree after spending a few years with Motorola. But Mike Z. wasn’t really a telecom guy; he was a GE Corp.-trained cost cutter. When it came to providing Nortel with a strategic vision, Mike Z. didn’t have what it takes to do the job.

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  • cwlh

    I think that there's a more fundamental set of people who deserve blame. I suspect that, at least to some extent, the board was willing to bring in CEOs with no telecommunications experience (Dunn, Owens, Zafirowski) because it believed that that experience and advice would come from the existing Nortel leaders.

    OK, Z tried to run the company as a manufacturing business (six sigma, etc.) which is ludicrous for a company based on R&D and product development but where were the experienced Nortel executives not only telling him he was wrong but also warning him of the massive shift happening to Nortel's customer base? I believe that executives at Nortel have been busily burying their heads in the sand and misreading the changes in the telecommunications market for at least the last 10 years.

    I have in front of me a copy of “Northern Telecom: The Anatomy of a Transformation”, dated November 1996 and signed by Jean C Monty. In the introduction it says: “The most common personal computer of the next decade is going to be a digital cellular phone. It's going to be as mobile as a watch, as personal as a wallet. It will recognise speech, navigate streets….”.

    This was a wonderful 1996 vision, the adoption of which would have placed Nortel in the forefront of today's telecommunications when voice is no longer a for-profit business and telcos are no longer service providers. But it was more comfortable to believe that the old ways would persist for ever. And they didn't.

    So where does the fault lie? I believe it lies as follows:

    1. Executives at Nortel didn't recognise the massive change in the needs of their customers

    2. The board didn't realise that the executives at Nortel were so out-of-touch and so thought it would be OK to appoint CEOs without direct telecommunications experience

    3. Mike Z didn't have the experience to realise that he was being very misled by the executives who were supposed to know about the telecommunications industry and wouldn't listen to the people trying to tell him

  • bankrupt_bob

    As long as “executives” and “boards of directors” are handsomely rewarded, regardless of their performance, this sort of thing will continue to happen.

  • zeroman

    true. they had Blackberry and iPhone functionality ready in 1999. they dismantled all those future vision groups in 2000. one of my friends showed me a stylus operated point and click PDA phone which was way ahead of its time.

    its all the CEOs who did not execute as well as all the old dinosaurs they managed. well like the dinosaurs they are dead too. some day these fossils will be written about.

  • tiredofitall

    I think I have to agree with that. However, as I understand it, during Mike Zs early days at Nortel he made it quite clear that he only tolerated 'yes' men. And, as you stated, Mike was trained and focused on cost-cutting. Changing the direction of Nortel to adapt to the new reality would have required investment, not cost cutting. If you put all this together it is not a surprise the way it went down.

  • bigNerdRanch

    I'm not sure I understand the sudden support for the two Garys. Just because the company did not listen to them and failed does not mean that had it listened to them it would have succeeded. The fact that they were unable to get the company to listen to them is in itself a failure on their part if we are keeping score.

  • smokeemout

    The results of the Enterprise vote:
    462 responses in 19 days:

    Avaya 130 30.4%
    Alcatel 9 2.1%
    IBM 26 6.1%
    HP 19 4.4%
    DELL 3 0.7%
    Microsoft 23 5.4%
    MITEL 37 8.6%
    Seimens Enterprise Networks 163 38.1%
    APPLE 6 1.4%
    CISCO 12 2.8%
    Other 34
    Total 428 462 total, but 34 were ridulous. duplicates added tot he total,i.e. Microsoft was added as an 'other' so it was moved to their total.

    Server/SW IT 77 17.99%
    Network IT 351 82.01%
    It appears that most think traditionally that this will go the networkers who want to survive with greater installed base and market share, versus SW companies expanding outside their traditional space. Thanks for playing.

  • smokeemout

    Okay, We've seen much blame thrown around, you can pick multiple answers, but who was to blame for the downfall of Nortel?

    Vote yourself…
    http://www.learnmyself.com/poll15532xac4Ff79e

  • NortelSouth

    Although I agree with you the two Garys might fail at the end, however they have something Zman never had, never will:

    1- They have a strategic plan
    2.- They have experience of delivering this kind of strategic moves at Cisco
    3.- They have a clue

  • Got_Out

    This is indeed the right approach to looking at what happened. Ultimately, you can hold Roth, Chandran, Dunn, Owens and Mike accountable for their actions (and lack thereof). However all of them were put into place and supported by the BoD of the day. If the wrong tool is used (even if the time for a new tool is right), the outcome is predictable. The BoD picks the tool (the CEO)

    All of them bear accountablility. In the case of Mike, he chose to apply and accept the job knowing the conditions. He openly and often told the Exec Leadership Team that he would lead the “greatest turnaround in business history” and that “all would share the rich rewards”. He brought in a new cabinet (for the most part) with promises of riches and fame as well. The board seems to have backed everything he did (and didnt do). As pointed out by many, his specialty (along with key advisors like Dennis C and Joel H) is cutting costs. Cant argue that he didnt make gains on that front. Problem is there was no real, driving, viable strategy and no critical decision making. No problem making cost cutting decisions. Strategic ones were either not made or defered (same thing). While I dont believe he was the right man for the job, he could have made a MUCH bigger impact early on if decisions had been made and directions taken. They werent and the company he led is where it is.

    Mike hammered at everyone that accountability was non-negotiable. He should be held accountable. Given that he has taken a lot of money out of the company (may see more yet) leaving in disgrace with a damaged reputation/ego is probably the only accountability we'll see him hold.

    Disasters like this always lead to “who's fault” questions. Most often it is not that easy or simple. I truly believe that there were MANY oppty's to fix the company or at least prevent what is now happening. Unfortunately, none of them were taken. Different CEO's, CFO's, CTO's, CMO's, CSO's, etc but dont forget – the BoD is where the buck stops

  • felixmk

    Many execs told Mike he was on the wrong track. He did not pay attention since his yes-men told him he was right. These execs then left Nortel: Slattery, Pusey, Wolff, Jioanou, Stoddard, Whitton, etc. The sycophants like MacKinnon, Lowe, Morin, Hackney, Donovan, Riedel stuck around and are still there.

  • xnt

    John Cleghorn took down Frank Dunn, but then abdicated on taking the reins.

    If you kill the “king”, you have to replace the “king”.

    I think Cleghorn was still around with the Board turfed the Gary's also.

    He then convenientlly disappeared so the leadership vacuum he left behind wouldn't tarnish his reputation.

  • whatnext4nt

    I agree, Gary K is particularly impressive, and all Z really needed was a reasonable plan and to execute it fairly well. Even Z's brain dead “plan” to copy Jack Welch and GE would have saved NT from Ch 11 and made it profitable and on solid financial footings although it would not be the best for NT obviously. Z did not even execute well on his stupid copy and paste “plan”. Even due diligence of the CFO and some basic decisions to raise cash when it was possible probably could have avoided Ch11 for a few quarters while restructuring continued.

  • Another_Nortel_Watcher

    I'm glad that there is at least one other person who understands how much damage Cleghorn did to Nortel.

  • scalppeeler

    Is he foghorn leghorns brother?

  • felixmk

    Cleghorn made sure the board got a pass from the SEC and made sure Frank et al took the total rap. Frank deserved what he got but the report commissioned by the board was pathetic. Every third sentence was “…and he did not tell the board…”

  • ex_roadtrash

    I do not understand the comments about MikeZ , “Sure, he had good pedigree after spending a few years with Motorola. ” .He milked the Razor for all it was worth, but he left that division with nothing new. What has Motorola Cell phone division done after that. The Blackberry and then the IPOD, left the Razor looking old and worn out. There was nothing new from Motorola R&D after the Razor, that is one of the big reason Motorola is where it is now. He did the same at Nortel. Name new one product at Nortel, that MikeZ and cronies are responsible for at Nortel?

  • NortelTragedy

    Right, he's an Ops guy … cost cutting, lean manufacturing, cutting, slicing and managing costs, a guy put in place in a mature cash-cow technology (e.g., CDMA) to eke out cost reductions from the line, where he can't screw much up and only drive increased profit margins. But Z should be nowhere near R&D or PLM. He was never CEO material and the BOD should have known that.

    Z is no visionary, no leader, no forward-thinker — and please don't think I'm suggesting a John Roese type is. Think more Steve Jobs, John Chambers — did you see the Cisco Telepresence in the recent GI Joe movie? — cool!

  • protosphere

    5. Following the hiring of Mike Z. came even more revisions

    After settling the largest fraud lawsuit in Canada by ultimatum and refusing to negotiate pay practices, one analyst claimed that if they ever had to restate yet again they would be “toast”. Well guess what, they restated yet again.

    This cause already antsy creditors to have kittens. They increase their required cash collateral from $1B to $1.5B, and note they had under $2B cash in the bank during Q206.

    Even after restating a restated restatement and extending the repair of accounting out to years from Owens' months, they some how printed a whopping $4B in Nortel paper. Rewarding themselves for financial innovation too.

    They went on to claim mark-to-market profits on the tanked settlement shares due to these revisions that wiped out even Q205's triple profits for following fraud periods while deferring revenues since. They claimed exchange rate profits, posted tax loss as largest assets on books they sought to clean, unrepentantly hyped 3 to 5 year fixes and $20 buying opportunities, played musical chairs with product groups, posted their financials like a sales flyer on their web site, grossly misleading forecasts, increasingly losing credibility to their downplaying insolvency too… it is so endless

    I can go on forever but if this wasn't obvious enough, they ironically traded cash for options yet again that was the source of their downfall, even got bonuses approved after folding, with the ultimate punch line being Manley's law firm is defending the Frank Dunn, with who the past dream team before green team board somehow formed relationships.

    Anyways, these revisions were worse every time counted by the very week, they doubled estimates, with no further mention of fraud year 2003, and Mike Z. downplayed further inquiry or penalty claiming the work was already done, neglecting following periods were new. The SEC finally monitored their repair years later before they folded and I doubt they are even fixed today.

    I guess this what happens when we let a company do whatever it wants as Manley pushes for less regulation. The profoundly astounding events are so endless we can fill many pages…endless I tell ya…. endless… and only too damn obvious if you ask me as fraud trials still loom on both sides of the border =)

  • protosphere

    The timely resigned board with who Frank Dung formed close relationships denied the obvious red flags for these nontraditional cash bonuses they approved and received. Holding so many evangelical no flies on us bored meetings only to reassure themselves that no one could have seen this coming as they roll over on the fall guy while plea bargaining the defrauded hostages …. Interesting they refused to chase past officers, spent a mill defending a handful, and one of the following board member's law firm defends Frank Dung today.

    What's changed… for the better that is.

  • protosphere

    I got a chuckle outta Mr. Stern =)

  • protosphere

    3. (above)

    Daichendt resigned because of different management styles rather than strategic differences they claimed.

    Well what kind of “style” stoops so low as to slander Gary as a religious zealot who told the Nortel board he had a message from God. …what utter horsefeathers was that

    They made an outstandingly ethical and moral man sound like he was mad hatter crazy, as yet another one of their endless appalling actions.

    Gary even had to come public to clear his name and was disappointed no one at Nortel did, dismissing the slander as false and ridiculous.

  • protosphere

    4.
    he defrauded his past employer (who passed him by for CEO job) from day one while joining a company struggling to regain credibility, only to follow with endless contradictions

    promoting his criminally charged pal over a veteran, to the horror of the employees

    even legally tried to manipulate the price of his company's publicly traded stock unrepentantly claiming $20 was a buying opportunity

    downplayed revisions, downplayed folding, got bonuses approved after folding, refused government inquiry until forced, hyped to stakeholders after shareholders, argh…also endless…

  • ntalumnus

    If you want to evaluate Mike Z's performance as CEO, the best place to look is his own words. The following is from a Zmail to employees in March 2006:

    “You’ve heard me say that we must target 20% market share for all new and existing businesses. Ideally, we would be at 20% across all of our business categories. As you know, this is not the case. And our challenge is to focus on the segments where we can lead. The senior team is working closely on a complete portfolio review and is determining the areas that make the most sense for investment, and areas we need to exit. Some decisions have been made, many more are to come. These are not easy decisions as we balance revenue generation with ramp-up time for future opportunities.”

    What's so sad about this is — we never exited anything! There was no bold move to divest major market segments. Nortel under Mike Z continued to try to be all things to all customers, with the predictable result that we dissipated our resources without ever establishing the market leadership that might have resulted in real profitability.

    I don't know why there was no follow-through on this strategy. Maybe the board blocked it; maybe other problems caused it to be put on the back burner. Whatever the case, Mike Z has to accept responsibility for failure to execute the strategy that he called his “favorite.”

  • zeroman

    in 2006 we all knew he was blowing hot air. Morin took this very opportunity to promote himself and his buddies by creating a new organization MEN promising and selling Z a story of carrier ethernet.

  • qcboris

    I think that when Dunn's case comes up, he will drag all the dirt up and try and show that he told the board exactly what was happening, but they were probably too dumb or fast asleep at the time.

    Dunn when CEO was probably doing the right things to save the business. Slash costs etc before the accounting thing exploded and he took the bullett. He wasnt taking it forward but it wasnt going backwards.

    If anyone killed Nortel, it was Owens period of inactivity. It was Ok for a while when they just wanted to put his picture on the front of the bus, but after a few months, he started to think that he could drive the bus and that is where things started to get worse. When the Garys wanted to drive, he kicked them off the bus.

  • less

    Whilst U2 is shilling for RIMs Blackberry on TV.

  • rickyjoe

    The sad part is that the employee surveys repeatedly indicated the direction was wrong, they could see at the ground level that all the process and other BS was not helping to make things better, just more bureaucratic and the work was being impeded. After 2 rounds of poor ratings by the employees, the word was get on or get out. They're a very arrogant bunch and everyone got screwed by their arrogant barking of orders from on high backed by threats of job loss. Bunch of A-holes and the stockholders and the employees all got screwed out of tons of money as a result. These guys should be locked up for their actions with Madoff and company.

  • felixmk

    Aah..the Orbitor..Iphone concept produced in early 90's…those were the days.

  • felixmk

    Aah..the Orbitor..Iphone concept produced in early 90's…those were the days.

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