Telecom shareholders need a Reformation

The disastrous drop in telecom share prices and controversy surrounding massive stock option payouts to industry kingpins, including Nortel Networks Corp. CEO John Roth, point to the need for an industry-wide Reformation.

Until the day of that Enlightenment, however, current feudalistic practices endemic throughout the sector will continue to relegate outside shareholders to serfdom.

Emperor Roth revealed how out of touch he has become when he lambasted the media last month for criticizing the company in the wake of its share price meltdown.

“In Canada, you’d think we created a recession,” said Mr. Roth, decrying what he perceives as a widespread “trashing of Nortel by the Canadian press,” which, he added, “is not doing Canada any good.”

Canada’s King of Networking seems to imply that disloyal subjects are to blame for Nortel’s disastrous stock performance over the past seven months. Loyal subjects, in his view, are supposed to remain fawning believers while taking a drubbing on the back of the head. Shareholders and employees who are truly loyal to Nortel are supposed to turn a blind eye to lost fortunes and layoffs, as well as ignore the litany of confusing and surprising disclosures from the company. And woe to those who dare mention the payout of hundreds of millions of dollars in stock options to top management.

At a time when outside investors have seen the value of their holdings evaporate and more than 15,000 employees have been laid off, Mr. Roth cashed out $135.2-million worth of stock options, on top of his ample salary and hefty cash bonuses. Now we know why he pursued his very public campaign in Ottawa last year to lobby for a new income tax deduction for high-tech stock option plans.

The options exercised by Mr. Roth alone in 2000 were worth more than one-half of the current value of the stake that Nortel’s largest shareholder holds in the company today. The Ontario Teachers’ Pension Plan Board has seen the value of its 15.3 million shares plunge to less than $220-million from more than $1-billion a year ago. Nortel’s share price has nosedived dramatically since October: the stock recently fell to another new 52-week low of $21.48 on the TSE – more than 80 per cent below its 52-week high of $124.50.

Those practices run counter to the widely-held perception that telecom is at the leading edge of change as it ushers in the Digital Age. Instead, Mr. Roth is not the sole Lord of the industry, nor is he alone in his treatment of vassal shareholders.

Telefonaktiebolaget LM Ericsson of Sweden has also been assailed by angry shareholders – not only for its first-quarter profit warning last month, but because its truly feudal share structure gives two minority shareholders control of one of Sweden’s most important corporations. The Wallenberg family and the Handelsbanken-led holding company control more than three-quarters of Ericsson’s voting rights, even though they own less than 10 per cent of Ericsson’s total stock because their Class A shares have 1,000 more votes than the widely held Class B shares.

Or consider the directors of U.S. long-distance company Sprint Corp. Until recently, a controversial provision in its stock option entitled its directors to cash in their options once Sprint shareholders approved a merger with another company – even if that merger never transpired. Which is what happened in the wake of Sprint’s aborted 1998 merger with U.S. long-distance giant WorldCom Inc. Although the deal was scrapped last year, some Sprint executives – including CEO William Esrey – were allowed to cash out their stock options.

Germany has yet to separate its church of telecom from the State. Despite the outcry over Ron Sommer’s leadership of phone Deutsche Telekom AG, the embattled CEO will keep his job because of support from German Chancellor Gerhard Schroder.

“How far can a senior manager actually go before he becomes intolerable?” asked business columnist Jurgen Dunsch in the Frankfurter Allgemeine newspaper early last month – a question that shareholders are asking of many other industry executives.

Telecom’s feudal Lords would do well to emulate legendary businessman and investor Warren Buffett – and ask themselves, what does he know that they don’t? The head of Berkshire Hathaway Inc. refuses to either accept or hand out stock options.