Nortel Networks Corp. fired chief executive officer Frank Dunn, calling it "the right decision" as the technology company struggles to restore public confidence in the face of regulatory probes and financial restatements.
The company made the surprise announcement early Wednesday, saying only that Mr. Dunn was terminated "for cause."
He was one of seven senior executives of the company either fired outright or put on paid leave Wednesday as part of the management shakeup.
"Yesterday was a very long day for the board and its advisers," Nortel chairman Lynton (Red) Wilson told reporters and analysts during a morning conference call. "The decision to terminate Frank Dunn was particularly difficult. But it is the right decision for the company."
Nortel stock fell 27.4 per cent or $2.08 to $5.50 in late afternoon trading in Toronto. More than 90 million shares changed hands.
Mr. Wilson would only say that Mr. Dunn's firing was related to "accountability for financial reporting." He wouldn't give any further details.
"The fundamentals of the industry are improving so I think much of this was to clear the past," said Marc Lalonde, vice president and fund manager at Louisbourg Investments Inc. in Moncton. "The CEO and CFO were in positions of responsibility and starting over with a clean slate is a good thing."
Mr. Lalonde said he has not owned Nortel shares in his funds for four years, but added that the ouster of its senior executives may prompt his firm "to increase [its]interest in the stock."
The move puts Nortel's future in the hands of William Owens, at one time the second highest ranking military officer in the United States as former vice chairman of the U.S. Joint Chiefs of Staff. He is taking over as CEO.
"Financial accountability will become our watchword," Mr. Owen vowed during Wednesday's conference call.
"It is now. We are working very hard on all of the elements that means. Trust and transparency will be watchwords in my term here at Nortel .... We will put this behind us."
Mr. Dunn's firing - a rarity in corporate Canada - was one of a number of management changes announced by Nortel.
The company also said that former chief financial officer Douglas Beatty and former controller Michael Gollogly - both of whom had been on paid leave - have been fired. Four other unnamed senior finance executives were also put on paid leave Wednesday "pending further progress" of the current review.
"These actions are an important step in the process of restoring confidence in the company's leadership and financial reporting," Mr. Wilson said.
Mr. Dunn, 49, a former chief financial officer of the company, took over Nortel's top job in autumn 2001, replacing outgoing CEO John Roth. His career with Nortel has spanned about 28 years. He joined the company in 1976 soon after graduating from McGill University with a Bachelor of Commerce degree.
In addition to his military service, Mr. Owens was former chairman and chief executive officer of satellite communications company Teledesic LLC. He has been a Nortel director since February, 2002.
"I am fully committed to doing all that is necessary to maintain the business momentum and leadership position of this company," Mr. Owens said in a statement.
Nortel said the previous appointments of William Kerr as chief financial officer and MaryAnne Pahapill as controller have been made permanent. Both had been appointed on an interim basis March 15.
The Brampton, Ont.-based network equipment company last year restated 3½ years of results and is in the midst of a second review, which is trying to figure out what went wrong and will likely lead to another restatement.
The situation has prompted formal investigations by both the U.S. Securities and Exchange Commission and the Ontario Securities Commission. The RCMP have also made informal inquiries, although company officials said Wednesday they are unaware of any current police investigation into the situation.
Nortel had been slated to release its first-quarter results on Thursday. That release has now been delayed as it continues its review.
In Wednesday's announcement, the company also cautioned that, pending a review by its independent auditors, it's 2001, 2002 and 2003 results "should not be relied upon."
As a result of its own independent review, Nortel said it now expects to report a net loss for the first half of 2003, compared with previously announced profit for the period.
In 2002, Nortel implemented a return-to-profitability bonus program, but executives on Wednesday's call wouldn't say specifically how bonuses awarded under it would be affected, saying only that the current independent review is ongoing.
Nortel also expects to see no material impact on revenue in prior periods; nor will its cash balance as of Dec. 31, 2003, be affected.
Although the company said it can't yet report its full first-quarter results, it expects on a preliminary unaudited basis that its cash balance as of March 31 was about $3.6-billion (U.S.), down from $4-billion at Dec. 31, 2003.
The reduction, the company said, is mainly because of payments made in the first quarter under its employee incentive compensation plans as well as cash outlays for restructuring and a real estate transaction.
To date, Nortel added, it hasn't received any notices of non-compliance from debt securities holders.
The company said that if an acceleration of its debt securities were to occur, it might be unable to meet the payment obligations. In that case, it said it would seek alternative financing sources to satisfy the obligations.
The company has said previously it has received a waiver from Export Development Canada that will give it continued access to financial support from the agency despite a delay in filing its 2003 financial statements.
Analysts were divided on what lies ahead for the company after Wednesday's surprise firings and the delay in Nortel's first-quarter release.
Goldman Sachs analyst Brantley Thompson said in a note to clients that the brokerage is maintaining its "outperform" rating on Nortel stock, noting revenue and cash likely won't be affected by the restatements and the shift in the upper ranks should bring new stability to the company's leadership.
"The management changes place the uncertainty surrounding the leadership behind us," he said.
Merrill Lynch, however, put its rating on Nortel stock under review, citing "substantial and material uncertainty" over the company's finances as well as "considerable management turmoil."