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New board 'is an improvement by a mile'

Wednesday, January 12, 2005

Shareholders agree the company needs new leadership to restore reputation

JANET McFARLAND

Shareholders of Nortel Networks Corp. yesterday praised the company's decision to replace five members of its discredited board of directors, saying the company needs new leadership at the top to restore its battered reputation.

Stephen Jarislowsky, chief executive officer of Montreal investment firm Jarislowsky Fraser Ltd. and a founding member of the Canadian Coalition for Good Governance, said the coalition has been urging Nortel to reform its board, and has even proposed names of possible new nominees.

Mr. Jarislowsky said the root of the company's recent problems can be traced to the board, because it approved an executive compensation plan that paid large bonuses in 2003 based on achieving even one quarter of profitability.

"We were totally dissatisfied with a board of directors that leads people into temptation and does totally stupid things, and then is surprised when people succumb to temptation," Mr. Jarislowsky said. "They gave incentives that made no sense."

The new board, he said, "is an improvement by a mile."

Gone are Nortel chairman Lynton "Red" Wilson, and directors James Blanchard, Yves Fortier, Guylaine Saucier and Sherwood Smith, all of whom will not stand for re-election at the company's annual meeting this year.

Three of their replacements were unveiled yesterday, and the company said it is still searching for the final two. The new directors named so far are John MacNaughton, the retiring CEO of the CPP Investment Board in Toronto; Richard McCormick, former CEO of Denver-based telecommunications company U.S. West Inc.; and Harry Pearce, former chairman of Hughes Electronics Corp.

Bob Bertram, executive vice-president of the Ontario Teachers Pension Plan Board, said the new board appointments are a critical change for Nortel.

"I think it's a bit of a watershed for the company," he said. "It's the beginning of them recognizing that this company had serious issues to be dealt with, and they're bringing in a fresh set of eyes at the board of directors level to deal with that. So I think from a going-forward basis, this is probably pretty healthy."

Nonetheless, he said the announcement does not erase the mistakes made at the company. Teachers is lead plaintiff in a class-action lawsuit filed by shareholders against Nortel, and Mr. Bertram said the suit will proceed.

"This doesn't change what's happened in the past, and it doesn't redeem them," he said.

The five departing directors were those who had served longest on the board, all joining prior to 1997. Of the six remaining board members, the longest-serving directors joined the board in 2000.

All of the departing directors refused to talk yesterday about their decision to leave. Mr. Wilson issued a brief statement saying Nortel has successfully come through a "difficult period" and is moving forward with new leadership. "Board renewal needs to be part of that process," he said.

A source close to the company said the board was united, and the five departing directors left voluntarily because they agreed that the board needed a turnover. He said they were also ready to go, after an "arduous" and "gruelling" investigation process.

Several had considered leaving for some time, the source added, but felt it would send the wrong message if they went before the company's problems had been addressed.

"It would have looked like there was a disagreement about how to proceed," he said.

Investors, meanwhile, said yesterday it was especially good news that two of the three new Nortel directors identified so far have experience working within the telecommunications industry. The board has been criticized for lacking sufficient industry expertise.

Bill Mackenzie, president of shareholder advocate Fairvest Corp., said so-called "blue-chip" directors with strong general business knowledge are fine, but Nortel is a case where specific telecom experience is especially important.

He said he also hopes the new directors have sufficient time to devote to understanding Nortel's complex operations and changing industry position.

"To ask the right questions, you have to understand it," he said. "I think having some expertise on the board is good . . . but to understand Nortel requires a lot of time, because they have so many divisions and they've done so many acquisitions over the years. It's a pretty complex company."

Michel Magnan, associate dean of the John Molson School of Business at Concordia University in Montreal, said all of the departing directors were at Nortel through its boom years in the late 1990s, and played a role in the company's rapid expansion and the creation of a series of compensation incentives that have proved disastrous.

"The danger of plans with a simple objective is that they're conducive to manipulation," he said. "And if, at the same time, you have a culture where playing the numbers game is accepted, it's not surprising they would do it."

Prof. Magnan added that the company's revelation yesterday that revenues would be restated from 2000 and earlier should also raise questions about the enormous stock option gains reaped by past executives, including former CEO John Roth. In 2000 alone, Mr. Roth earned a profit of $135-million on his stock options. He stepped down as CEO in late 2001.

"That's another can of worms," Prof. Magnan said. "The magnitude of the revenues which were overstated from 2000 and the magnitude of the gaming that took place in terms of the provisions, these were large-scale manipulations. It's really scary."

Investors, meanwhile, also yesterday urged Nortel to seek repayment of the large 2003 bonuses that were paid to top executives who have since left the company. The Nortel source said the company will likely end up suing former executives to recover the money.

"I think it should be pursued," Mr. Jarislowsky said. "If they cheated, they got money under false pretenses. Why should they keep it? They probably should be in jail."

Mr. Mackenzie at Fairvest said the executives who were fired from Nortel should follow the example of the 12 executives who have remained at the company and have voluntarily forfeited their profitability bonuses.

How Nortel shuffled its board

Directors leaving the board

James Blanchard

The former governor of Michigan, who now lives in Beverly Hills, Mich., has been a Nortel director since 1997. He was previously a member of the U.S. House of Representatives and a former U.S. ambassador to Canada. Mr. Blanchard, 62, has been a partner in the law firm of DLA Piper Rudnick Gray Cary since 2002, and also serves on the boards of Bennett Environmental Inc., Brascan Corp., Enbridge Inc., LDMI Communications Inc., and Teknion Corp.

Yves Fortier

The prominent Montreal lawyer, who is co-chairman of the firm of Ogilvy Renault, has been a director of the company since 1992. He was Canada's ambassador to the United Nations from 1988 to 1992. Mr. Fortier, 69, is also chairman of Alcan Inc., and sits on the boards of Hudson's Bay Co., Nova chemicals Corp. and Royal Bank of Canada.

Guylaine Saucier

A chartered accountant, Ms. Saucier, 58, joined the Nortel board in 1997. She is a former chairman of the Canadian Broadcasting Corporation, and is also a director of Altran Technologies SA, AXA Assurances Inc., Bank of Montreal, Petro-Canada and Tembec Inc. She also headed a joint committee on corporate governance, which reported in 2001 on proposed reforms for the Toronto Stock Exchange's corporate governance guidelines.

Sherwood Smith

Mr. Smith, who lives in Raleigh, N.C., has been a Nortel director since 1994 and has reached the board's retirement age of 70. He is the former chairman of Carolina Power & Light Co. and later served as chairman emeritus of the company. He is also a trustee of the Northwestern Mutual Life Insurance Co.

Lynton 'Red' Wilson

A Nortel director since 1991, Mr. Wilson, 64, took over as Chairman of the company in 2001. He is the former CEO of BCE Inc., which previously owned a controlling stake in Nortel, and is also chairman of the board of CAE Inc., and a director of DaimlerChrysler AG.

Directors joining the board

John MacNaughton

The 59-year-old chief executive officer of the CPP Investment Board, which manages the investments of the Canada Pension Plan, is retiring the moth and will join the Nortel board at is annual meeting this year. Mr. MacNaughton has headed the CPP Investment Board since its creation in 1999, and was previously a 31-year career executive with brokerage firm Nesbitt Burns, the investment banking arm of Bank of Montreal. He was president of the brokerage firm from 1994 until his retirement in 1999. Mr. MacNaughton has a BA in economics from the University of Western Ontario.

Richard McCormick

The 63-year-old resident of Denver, Colo., is the former CEO of telecommunications company U.S. West Inc. He retired as chairman of the company in 1999 and is now a director of HealthTrio Inc., United Technologies Corp., Wells Fargo & Co., and Unocal Corp. From 1994 to 2003, Mr. McCormick was a director of the parent holding company of United Air Lines Inc., which filed for Chapter 11 bankruptcy protection in 2002.

Harry Pearce

Mr. Pearce, 62, lives in Bloomfield Hills, Mich., and was chairman of the board of Hughes Electronics Corp. - now called the DirecTV Group Inc. - from 2001 to 2004. The company is engaged in an array of telecommunications businesses including digital television entertainment, broadband satellite and network services, and global video and data broadcasting. He was also a director and vice-chairman of General Motors Corp. from 1996 to 2001, and is still a director of Marriott International Inc. and MDU Resources Group Inc.

TEXT: JANET McFARLAND/THE GLOBE AND MAIL