They're sorry and they vowed to not let it happen again, but Nortel Networks Corp.'s directors also say the accounting scandal that virtually paralyzed the company for nine months was not their fault.
Now the focus is on addressing new revenue and cost-cutting opportunities, and improving the finance organization, Nortel's board of directors and management said yesterday at the annual shareholders meeting. The event lasted nearly seven hours and they were on the hot seat for much of it, defending their actions on everything from the accounting fallout to bonuses and pensions and the stock price of the communications equipment maker.
“To say that we're taking steps to ensure the situation of the past few years doesn't occur is understating it substantially,” said Nortel's new chief financial officer, Peter Currie, who joined in February.
The event was the first chance in two years for shareholders to criticize the company, and they took the opportunity to vent their frustration. Last year's meeting was postponed as Nortel scrubbed its books. Many investors acquired the stock when Nortel was a market darling during the technology bubble, but their dreams of big returns went bust. In 2001, demand for telecommunications gear plummeted, and the stock fell with it. When the industry started to bounce back in 2003, major accounting problems began to emerge.
“Whatever has happened in the past cannot be brought back,” said one of about 600 people who attended the meeting. “But my question is this, when can we see that bubble again? Not maybe $120, but at least $20 a share will make me happy.” Nortel shares yesterday fell 2 cents to $3.30. Its all-time high was $124.50 in 2000.
In 2003, the company, based in Brampton, Ont., restated financial results from prior years. In response, the board's audit committee started an independent review that revealed in March, 2004, the need for another restatement. That marked the start of one of the most turbulent times in Nortel's history.
In April, 2004, Nortel fired chief executive officer Frank Dunn, chief financial officer Douglas Beatty, and controller Michael Gollogly, installing board member and retired U.S. admiral Bill Owens as the new CEO. Criminal and regulatory probes were opened into Nortel's bookkeeping, and shareholder lawsuits against the firm were launched on both sides of the border.
Outgoing chairman Lynton (Red) Wilson, who stepped down with four other directors yesterday, suggested no board could have uncovered the accounting problems.
“Every board has as its cornerstone trust in the senior management of the company, and transparency in its financial reporting and disclosure,” Mr. Wilson said. “As part of its due diligence, the audit committee of this board holds private sessions with the external auditors, the internal auditors, chief executive officer, chief financial officer and controller to provide a confidential forum in which each could raise concerns or issues,” Mr. Wilson said. “None was identified.”
Nortel was distracted last year by the bookkeeping woes, and it spent the first part of 2005 finishing up its financial restatement and catching up on its reporting. Mr. Owens is now executing a strategy, announced last August, that focuses on partnerships in fast-growing areas and cost-cutting efforts.
At the meeting, Mr. Owens repeated that the industry is changing and Nortel must stay competitive with rivals, including low-cost firms in China.
“We've got to get our costs down,” Mr. Owens said. “We're working very hard on that.” Expenses will come down further over the next years, from 40 per cent of revenue in 2004 to 35 per cent by the end of this year, and 30 per cent by the end of 2006, according to Mr. Owens. Among the measures it could take is sharing space at its headquarters, which Mr. Owens said were too large for Nortel alone.
At the meeting, shareholders elected the board of directors, including nominees Jalynn Bennett, James Hunt, Ronald Walter Osborne and John Alan MacNaughton. Nortel yesterday announced that Harry Pearce would become the company's new chairman. Mr. Pearce, 62, has been a Nortel director since January, 2005.
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