With the acquittal of all three defendants in the Nortel fraud case, the final chapter on the company’s sad failing has come to an inevitable if unsatisfactory end. While the outcome of this trial was pretty much in my mind a foregone conclusion, many of my former colleagues who toiled with me in what was once a truly great enterprise have been vocal on social media, feeling they have been deprived of some sort of justice.
We have to remember however who, or more correctly, what was on trial here. The premise of the case from my scant readings is that the Crown felt the creation and release of accounting reserves was far too convenient when it came to initiating executive bonuses. It was alleged that the three defendants manipulated these in order to trigger their own highly profitable ‘Return to Profitability’ bonuses. However, in my experience, the creation of reserves was not something done lightly, and the release of them was done with much consideration. As the trial judge remarked, this was a generally accepted accounting practice that Nortel had been making use of for some twenty years. For example, the field support team of a particular line of business may have discovered a defect that affected a certain piece of hardware; while the investigation might be still on-going, at the end of the quarter, it was prudent to create a reserve for the cost to replace the hardware in upcoming quarters. At this point, we might not know how many versions of that piece of hardware were impacted, so the reserve was a conservative view of the financial impact of the hardware retrofit, including material costs, shipping, coordinating downtime with customers and other expenses. The actual cost could turn out quite a bit different than the original reserve, as more was learned about which hardware vintages needed to be replaced and in which countries customers with those vintages were located.
Over time, the reserve would be reviewed, adjusted, and when the retrofit was complete, several quarters later in most cases, finally released. Throughout this process, many people would be consulted, including the engineers who understood the technical problem, the manufacturing team who knew where which vintages of hardware had been shipped as well as the material and shipping costs involved, and numerous members of the finance team who were involved in the creation and tracking of the reserve. If there was a conspiracy to impact such a reserve, it would certainly need to involve tens of people in various different functions. And in any case, any one reserve was rarely material to the quarter’s results for that business unit one way or another.
What is clear about the case around alleged bonus manipulation was as much as my colleagues would like it to be so, it was never the cause of Nortel’s downfall; it was merely the closest thing to something dodgy the hapless Integrated Market Enforcement Teams (IMET) could uncover. My colleagues obviously were longing for a case that assigned blame, that unquestioningly identified who was responsible for the end of what we knew was once great.
The Nortel we knew was a huge organization that on the whole for over the better part of a couple of decades, harboured the best of the best — innovation, creativity, productivity, people. In that ivory tower that started life as Bell-Northern Research and then was more simply known as the R&D arm of Nortel Networks, magic happened. Things that others said weren’t technically feasible. We learned that when we put together the diverse talents of that elite crew and rowed in the same direction, there was little we couldn’t do.
Not that our time at Nortel wasn’t without its downside. The organization wasn’t above many of the petty dramas that occur in any large business, between turf wars, politics and the endless competition for resources. And our moments of self-doubt were costly and embarrassing; numerous quality thrusts over the years added bureaucratic fat with little benefit.
And in the late nineties at the height of the dot.com boom, it began to feel like an endless Bacchanalia. Every Friday a massive feast of hot and cold snacks that would feed three times the number of attendees was put on in cafeterias across each campus. Free alcohol poured from endless fountains. The excess was such that some folks would go down, fill to overflowing a ‘to go’ styrofoam clamshell of goodies and have enough to feed the wife and kids handily that night. (Don’t ever let it be said that our generous salaries made the naturally thrifty forget their instincts.) Worse than the weekly food fest was the real estate boom – new campuses were acquired and old ones refitted, with no expense spared. Architects and decorators chose paint, flooring and fixtures; no plain-Jane carpet for the Nortel team here; no, ours was a custom pattern with no straight edges cut from several colours, the most expensive possible, with each elevator foyer a unique design. And still worse were the dollars thrown at employees — bonuses for joining, bonuses for recommending a new hire, bonuses for staying 6 months, for staying another six months, and the final insult, bonuses for threatening (but not actually making good on the threat) to leave to go to the competition. And stock options for all of the above as well. It was the end of the Roman empire and few of us realized it.
So when friends and former colleagues look for a neck to choke in the unfortunate demise of Northern Telecom, they do so with an honest heritage. It was of course, one of the leadership tenets we learned – ‘make accountability clear in any project’. The problem is, in this case, we were all co-dependents in its downfall, with few wanting to get off the merry-go-round even as we suspected the music would soon stop.