Nortel execs not guilty, but not clean either

The lesson? Executives can do better.

Chris MacDonald 2

Former Nortel CEO Frank Dunn, accompanied by his wife Nancy, leave provincial court in Newmarket in 2008. (Photo: David Cooper/Toronto Star/GetStock)

The verdict is in from the Nortel case, at least from a strictly legal point of view. The three accused—former CEO Frank Dunn, former CFO Douglas Beatty, and former controller Michael Gollogly—were all found ‘not guilty’ of fraud.

Three points need to be made about this case, and about the boundary between ethics and the law.

First, being declared ‘not guilty’ is not quite the same as having your hands declared clean. But with the court case now settled, the Nortel case moves out of the legal limelight and into the realm of the accounting classroom and ethics case studies.

Second, the outcome of the case highlights the ethical and legal significance of the complexity of modern corporate accounting. The fact that this case took so long to try and decide reflects the fact there was nothing like a proverbial ‘smoking gun’. Nor was there likely to be.

In truth, accounting is necessarily a question of judgment, a discipline that aims at providing ‘fair’ representation of an organization’s financial health. And the rules upon which accounting judgment are anchored are enormously complex. That complexity underpins an increasingly complicated world economy. Complex accounting rules, in other words, are what allow our system to work. But they have a downside. It is incredibly hard for outsiders, and probably for many insiders, to know whether the corporate books are being kept honestly. And that means it’s hard for courts, too. When accusations of wrongdoing arise, it takes an enormous amount of prosecutorial will and resources, and ultimately a tremendous amount of a court’s energy, to see the thing through to its ultimate outcome.

But that, of course, is precisely why ethics in business is so important. The Nortel case highlights just why it is that we cannot rely upon the law alone to keep business on the straight and narrow. It is not in anyone’s interest that questions of honesty in corporate accounting get resolved this way. The investing public surely would be much better off if Dunn, Beatty, and Gollogly had not put their toes quite so close to the line between earnings management and fraud. So would the taxpayers who had to foot the bill for legal proceedings that took years to resolve. That’s not to say that the case wasn’t worth prosecuting. It’s just to say that we would all be better off if the executives quite generally saw it as their responsibility to make sure that their accounting practices stayed far from even the whiff of fraud or misrepresentation.

The final point that needs to be made is that while the verdict handed down is a happy one for the accused, corporate Canada should stifle the urge to breathe a collective sigh of relief. The very fact that this case went to trial should serve as a wake-up call, a warning to any executive tempted to stray into grey zones. No one ought to think that courts are the best ways to keep executives honest. But the Nortel case at least reminds those who need reminding that when push comes to shove, guardians of the public interest are in fact willing to intervene to prosecute perceived wrongdoing.

The business world runs in very large part on trust. But when trust proves insufficient, the long arm of the law is the only, though regrettable, alternative.

Chris MacDonald is Director of the Jim Pattison Ethical Leadership Education & Research Program at the Ted Rogers School of Management.

2 comments on “Nortel execs not guilty, but not clean either

  1. THIS IS AN OUTRAGE. That they manipulated results to generate bonuses for themselves (which I assume that they now get to keep) is not even in question, but somehow they got off. Probably the same way OJ Simpson did, hire the best lawyers and out gun the public prosecuter. This is the same management team that cut te benefits of retired disabled employees while awarding themselves bonuses when they had made no real profits. Another chapter in the bad joke that is Canadian securities “law ” and “enforcement”.

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  2. As a former Nortel employee, it is clear to me that Nortel’s problems started a long time before these three got involved. From Paul Stern’s arrival, Nortel’s executives ran the company to maximize their bonuses not the long term health of the company. In one particular incident, I asked someone why Nortel paid a lot of money to buy a company whose product was so shoddy that the company was not worth the price Nortel paid for it. “We could design a better product for 10% of the money that we paid for this company.” I was told that management was aware that the company was not worth what Nortel paid for it but buying the company created buzz that boosted Nortel’s share price. This increased the value of executives’ stock options. In the end, Nortel had to re-design the product. This was perfectly legal, just as the three executives on trial were “not guilty”; far from innocent but legally “not guilty”.

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