Every stakeholder has a distinct need and contribution towards the advancement of the economy. In case of business scandals, firms are unable to meet the demands of their stakeholders. The shareholders were largely affected due to the fall of the share prices, which effectively reduced their worthiness. Business ethics commit organizations to adhere to the established code of conduct that meet the demands of the business environment. In this paper, we will examine the ethical dilemma that contributed to the downfall of Nortel Company. The information gathered will inform other firms on the approaches to avoid such occurrences that hurt not only the shareholders but also the economy. We will use secondary sources of information such as books, company information, and news articles to help in gathering information. The findings indicate that the managers have an important obligation to ensure that best practices and standards are followed. Devoid of compliance, scandals and unethical practices emerge and affect the performance and financial standing of an organization (Fernando, 2010).
Historical Ethical Dilemma
Aligning the managerial and shareholders’ interests is crucial to enhance business sustainability and realization of long-term goals. According to the agency theory, the agents are supposed to represent, meet, and realize the goals of the principals. In this case, the principals are the shareholders while the agents are the employees and executives. The managers should put mechanisms to ensure that the firm has control mechanisms that will produce positive results. The mechanisms should be devoid of inconsistencies and irregularities. On accounting, for instance, the managers regularly need provide valid statements that reflect the financial and business standing of an organization. Compliance to accounting standards is one way to ensure an appropriate code of conduct in the organization. Nortel was a global leader in the telecommunications industry, having experienced tremendous prosperity since its inception. However, the firm was wound up in 2009 after it failed to emerge from bankruptcy due to ethical dilemmas. The fall of Nortel is attributable to ethical ramifications of poor governance policies (Fernando, 2010).
By 2000, Nortel commanded a market capitalization of about 350 billion Canadian dollars as well enjoying a significant market share in the telecommunications industry. At its peak in 2000, the firm diversified its products owing to advancement in technology. It was a major player in broadband and wireless communications. The executives attributed to the fall of the company due to unethical practices and poor strategies. One of the poorly crafted strategies was the aggressive acquisition that saw it buy or merge with many firms in the industry. It is true that company recorded impressive gains, with the financial statements showing the firm was in good health. In fact, its share price tripled in the first half of the 2000s. The firm entered into many partnerships with competitors such as Bay Networks and LG Electronics (Fernando, 2010).
Additionally, the firm lacked appropriate code of conduct in bookkeeping that led to irregularities and non-compliance to accounting standards. Irregularities meant that the executives were manipulating the financial results hence portraying an incorrect position to the investors. Besides, the managers’ practices in overvaluation of shares indicated they were short of ethical sensitivity. For example, financial experts agree that the peak season in 2000s was of overvaluation of the shares. In 2001, for instance, the award of 70 million dollars to the top executives accounting restatements in 2004 is a reflection that there were fraud and unethical practices in the firm (Fernando, 2010).
Another major problem was executive compensation. Inflated compensation plans of the senior officials were a form of dishonesty in earning. The governance of the company comprised of an ethical dilemma whereby the board appeared dysfunctional and remained silent at correcting the financial standing of the company. The lack of code of conduct in human resources saw the board hire and fire individuals without proper procedures. Specifically, the board overlooked their economic responsibilities in the company since such practices cost the firm money in compensation and lawsuits (Kurtz & Boone, 2009).
Managers should engage in business activities that are beneficial to the organization. Such activities include merger and acquisitions. Adequately spell out policies on organizational structure, corporate finance, and strategic management are good indicators of ethical sensitivity. Many businesses have sought to enhance their competitiveness and sustainability. The managers play a significant role in enhancing the success of corporate restructuring. As such, the managers need to make the process open and fair devoid self-interests. Accounting standards help in maintaining the codes of conduct and ethics. Although firms require a regular independent audit, it is the responsibility of the internal team and executives to ensure that the best practices are followed (Fernando, 2010).
The meltdown of Nortel can be explained as a failure of “people” than of “capital market processes”. The people, particularly the managers, contributed to the downfall of the firm. The managers overlooked the ethical ramifications of their actions. Specifically, they failed to observe the code of conduct and policies that would enhance the realization of positive outcomes. Ethical dilemmas led to irregularities in the financial statements and created secrets that the managers never wanted to disclose. Besides, the lack of economic responsibilities resulted into decisions with negative implications on the financial standing of the firm (Kurtz & Boone, 2009).
The management applied coercive power in the determination of compensation packages. Salaries were awarded without proper vetting and consequently, it cost the firm millions of dollars. The financial decisions were questionable as they benefited the executives at the cost of the company. Intensive acquisitions illustrated a void of economic responsibilities among the management. For example, the firm acquired 17 companies in a span of 30 months. Acquisitions changes the competitive landscape and impacts the lives of the employees of the firm. When it involves publicly traded companies, shareholder rights must be protected. The managers failed to protect the shareholders’ rights appropriately. The size of the board was large hence making it difficult to coordinate decisions (Fogarty, Magnan, & Markarian, n.d.).
Over the last decade, other firms such as Lehman Brothers, Citigroup, and WorldCom have been involved in ethical dilemmas similar to Nortel. The trend appears that businesspeople continue making mistakes but never learn from previous experiences. It seems that some businesspeople do not want to install appropriate code of conduct in business. Specifically, they avoid the right procedures in the name earning quick money. The lack of economic responsibilities leads to falsification by manipulating the stock prices. Overvaluation, the businesspeople think, would help in increasing their market share and shareholder wealth in a short period. Businesspeople support business dilemmas by failure to engage the services of competent board or consultants. Their thinking is that they might lose important information about their business directions (Amann, 2013).
Others choose not to stick to the legal and regulatory aspects through which they were established. Governance requires firms to adhere to standard guidelines that are sometimes bureaucratic. It is also evident that acquisitions do not necessarily lead to success. Financial and economic implications emerge since the firms involved have to consider the amount of money to offer. Some companies have debts and non-strategic assets that must be considered. As such, businesspeople enter into deals hoping to wipe out the competition. Still, some businesspeople indicate lack of ethical sensitivity through tax evasion and manipulation of financial statements.. Some of the ethical dilemmas in organizations include the collusion among the independent auditors and the clients to misrepresent the financial statements. In most cases, the companies give statements that will be advantageous to them. Tax evasion and distortion of financial figures, for instance, are some of the vices related to collusion (Amann, 2013).
Prioritizing remedies such as business education, regulation of accounting/financial markets, regulation of incentives, and regulation of punishment can help in reducing the recurrence of the aforementioned debacles. The appropriate codes of conduct in accounting include maintenance of an elaborate system of accounts that has effective internal control methods. The management is required to be economically responsible by safeguarding the assets of the company. According to the provided procedures, the team has a direct responsibility in ensuring that all transactions are reflected in the financial statements since they have direct control of the operations with the firm. Business education helps create awareness among the businesspeople and public on the best practices (Collins, 2012).
Incentives and compensation should be guided by factors such as performance, market rates, and experience as opposed to coercive power. Firms should engage appropriate human resource practices when creating policies on compensation (Fogarty, Magnan, & Markarian, n.d.). Punishments within a firm should be done in an ethical manner to reduce incidences of lawsuits. The strategic process is necessary to help in addressing the needs of the stakeholders. Forecasting in areas such as sales and service delivery is necessary during the acquisition process. As a result, this will detail how to help a company figure out what, how and why to get things done the right way to manage future ethical ramifications (Kurtz & Boone, 2009).
The levels of national debt had been on the rise in both the United States and other countries. There is need for a mechanism to deal with this debt, bail out and better regulation will help in recovery. The government bails out companies that cannot raise money to pay for their debts. The bailout package are detested by the majority of the citizens who see it as an assistance for the perpetrator while the common citizens are left to clear their loans. Further, the national economy loses when the investors lose confidence in firms. Every firm has great contribution to the economy through paying taxes and employment. Nortel, for instance, used job-cuts as a restructuring strategy that did not work. Such employees become a burden to the nation (Kurtz & Boone, 2009).
In addition to using coercive power , the executives applied poorly-crafted policies that did not help in reviving Nortel. It was unethical for them to take money when the firm was performing poorly. In most cases, executives and employees are not awarded bonuses or incentives when the firm is underperforming (Amann, 2013).
Failure to comply with codes of conduct is hazardous to a company. It is the responsibility of the executives to ensure proper internal and external measures are in place. When there are weaknesses in the systems, the members of staff exploit such channels for own gains. With effective internal control, it is possible to avoid fraud that emanate from unrecorded transactions or forgeries. Moreover, strategic direction of an organization should be in tandem with the short and long-term goals. Executives have economic responsibilities to create policies that will not jeopardize the financial and business standing of a company (Amann, 2013).