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Nortel’s New CEO Tests His Limits (Ingles)

TORONTO — Mike Zafirovski, Nortel Networks Corp.’s new chief executive, got a rude shock when he met with his finance chief early last March. He learned that Nortel would have to restate financial results for the third time since 2003.

For the three nights before he had to break the bad news to Wall Street analysts, Mr. Zafirovski lay in bed awake. The company had said it cleaned up its accounting mess more than a year earlier. Now, “we were going to have to say again, ‘We goofed,'” he recalls. Mr. Zafirovski worried about calming jittery customers, preserving critical credit lines and defending Nortel’s stock-exchange listings. He knew his window of opportunity was limited, his credibility fragile.

Mr. Zafirovski had arrived at Nortel in November 2005 with ambitious plans to revive the beleaguered vendor of telecommunications equipment. He brought strong credentials — 25 years climbing the management ladder at General Electric Co., followed by five years at Motorola Inc., where he rose to second in command. When Motorola chose an outsider as CEO in late 2003, Mr. Zafirovski set out to run his own show elsewhere.

But being a CEO has proved a far bigger challenge than he ever expected. Unanticipated problems pop up regularly: additional accounting irregularities, lawsuits that threaten to bankrupt the company, skeptical investors, reluctant recruits, unhappy employees. Mr. Zafirovski must confront them without GE’s gold-plated resources. Nortel is struggling with creaky internal systems, a bloated corporate bureaucracy and a junk-bond credit rating.

That’s left him working 100-hour weeks, punctuated by four hours of sleep many nights. Tall and thin, with piercing blue eyes and a rapid-fire manner of speaking, the 53-year-old Mr. Zafirovski is an intense competitor who has completed the grueling Ironman triathlon and eight marathons. A fan of a GE boss’s mantra of “forceful optimism,” he is doggedly upbeat. Still, the incessant demands and exhausting schedule of a rookie CEO take their toll. “I have been stretched beyond what I thought I was capable of,” he observes.

Since joining Nortel, Mr. Zafirovski has largely been a commuter CEO, living in Toronto during the week and flying Friday nights to Lake Forest, Ill., to see his wife and the youngest of their three sons. Before Nortel, Mr. Zafirovski says he attended 95% of that son’s basketball games. Last winter, that number slipped to 70%. And while Mr. Zafirovski plunged ahead with a long-planned family vacation in March, a week after the surprise earnings restatement, he spent half his vacation calling customers and handling email.

He admits to occasional bouts of exhaustion. In early November, jet-lagged after a weeklong business trip to China, Mr. Zafirovski took his 16-year-old son to see the film “Borat.” “The silly comedy kept me awake,” he recalls.

On Nov. 16, a year and a day after starting his job, Mr. Zafirovski reflected on his tenure so far. “It’s difficult to have an appreciation for all these pressures and expectations unless you’ve experienced them before,” he admitted, in a rare departure from his usual upbeat pronouncements.

Mr. Zafirovski knows the clock is ticking. Chief executives are on a shorter leash than ever, facing revived boards and restless shareholders. More CEOs are being forced out; a record 35% of the departing chiefs of big North American companies left involuntarily in 2005, according to consulting firm Booz Allen Hamilton.

In 2006, several high-profile CEOs were pushed aside after serving less than 14 months. The list included Viacom Inc.’s Tom Freston, Nike Inc.’s William D. Perez and RadioShack Corp.’s David Edmondson.

Nortel directors promised Mr. Zafirovski extraordinary leeway, given the company’s problems. But the risks are high. Mr. Zafirovski is Nortel’s fourth leader in four years. Once corporate Canada’s crown jewel, the company has yet to fully recover from 2004, when it was discovered using a financial sleight-of-hand to transform losses into profits, thus triggering millions in bonuses for senior executives. That accounting scandal resulted in the firing of its then CEO and nine other top Nortel executives, the exit of five board members, a stock price meltdown, and pending criminal and regulatory probes in two countries.

Wall Street remains dubious. “There are a lot of things he wants to do. It will be very difficult to do them all, given his [weak] balance sheet and cash position,” says Nikos Theodosopoulos, a UBS senior analyst in New York. He adds that Mr. Zafirovski’s goal of double-digit operating margins by 2008 is “just unrealistic.” Nortel shares are down 13% since he arrived, closing Friday at $26.73 on the New York Stock Exchange.

The market for one of Nortel’s cornerstone businesses, a wireless technology called CDMA, is stagnating as developing countries embrace a more popular rival technology. The company’s unit that makes business communications systems is under siege. And Nortel has made little progress breaking into markets for new products generally.

The month Mr. Zafirovski was selected for the Nortel post, big Swedish telecom supplier Telefon AB L.M. Ericsson announced it was buying Marconi Corp.’s telephone network equipment business for $2.1 billion. Since then, many large global telecom equipment companies have joined forces to compete for contracts from fewer customers, as telecom carriers themselves have merged. During most of Mr. Zafirovski’s inaugural year, Nortel has been left out of the merger dance, and now must face much-bigger competitors.

“The industry is at a key inflection point that plays in Nortel’s favor,” retorts Ann Fuller, a Nortel spokeswoman. “In 2006, Nortel completed the heavy lifting on the foundational changes that will re-establish Nortel as a great company.”

A native of Macedonia, Mr. Zafirovski moved to Cleveland because his father fell in love with the country during a visit. His parents, now dead, worked in U.S. factories. Mr. Zafirovski, who didn’t know a word of English when he arrived at 16, won a scholarship to Edinboro University of Pennsylvania, where he majored in math and captained the soccer and swimming teams.

After graduation, he joined GE. He embraced the conglomerate’s fiercely competitive and hands-on style, moving seven times in one 16-year stretch. W. James McNerney, one of his GE bosses and now CEO of Boeing Co., credits Mr. Zafirovski with reviving GE’s troubled European lighting unit. “He works everybody hard, including himself,” adds Mr. McNerney, one of Mr. Zafirovski’s several CEO advisers.

In 2000, Motorola recruited Mr. Zafirovski to fix its important handset division. He restored profitability by cutting costs and launching popular flip-top models. He was named president in July 2002, and made no secret of his desire to run Motorola after the board pushed out Chief Executive Christopher Galvin in fall 2003.

That December, Motorola directors chose an outsider as CEO. Mr. Zafirovski quit the Motorola presidency in January 2005. He unsuccessfully vied for the highest spot at Hewlett-Packard Co. and 3M Co., people familiar with the two searches say. Mr. Zafirovski declines to comment on those two jobs.

Then Nortel came calling. Harry J. Pearce, the former vice chairman of General Motors Corp. who is chairman of Nortel’s board, heard good things about Mr. Zafirovski from ex-GE Chairman Jack Welch and Motorola directors. He and two other board members flew to Chicago to meet Mr. Zafirovski and two other possible candidates.

In mid-September 2005, the three directors interviewed Mr. Zafirovski for several hours in a windowless conference room at the Ritz-Carlton. Mr. Pearce says he immediately liked the 6-foot-3-inch executive’s intelligence, warmth, directness and energy. Mr. Zafirovski’s extensive business background was impressive as well. “Knowing Mike [now], he probably was nervous. But he wasn’t showing it,” Mr. Pearce says.

At the interview, Mr. Zafirovski expressed his optimism about Nortel’s prospects, pointing to its global reach and intellectual-property portfolio. “I don’t care if you’re a miracle worker,” Mr. Pearce cautioned at one point. A turnaround would take “two to three years.”

Nortel’s board selected Mr. Zafirovski in October 2005. His initial pay package included $1.2 million annual salary, a potential annual bonus ranging from $1.8 million to $3.6 million, five million stock options and restricted stock units valued at $7.5 million. He started work a month later, confident he could re-create a great company. “I’ve never left anything in worse shape than I found it,” he says.

Mr. Zafirovski, who likes to spend half of his time with customers, traveled nonstop for weeks. He talked himself hoarse in meetings not only with Nortel’s customers but also 30,000 of its staffers on four continents. He suggested slashing the company’s bureaucracy, hoping to reduce its 10 management layers to seven and to streamline an order-entry system. Mr. Zafirovski also presented the Nortel board with his broad turnaround strategy, which eventually included chopping administrative expenses and curbing spending on research and development.

Then came an unexpected detour. Two class-action lawsuits seeking at least $9 billion in damages from the accounting scandal threatened to drive Nortel into bankruptcy court. Settlement talks, started before Mr. Zafirovski arrived, were moving more slowly than expected.

So, in an unconventional move, the CEO invited key plaintiffs to meet him and five other senior officials on Feb. 7 in a New York courtroom of a court-appointed mediator. After shaking hands with each plaintiff, Mr. Zafirovski apologized for Nortel’s past mistakes that had destroyed more than $30 billion of market capitalization. “We let you down,” he said. But he urged the shareholders not to “kill the company” because “you would receive absolutely nothing.”

“We were all very impressed by him,” says Max W. Berger, a New York attorney who represents a lead plaintiff, a pension fund for teachers in Ontario. That night, the two sides hammered out an accord, announced the next day. It required Nortel to pay about $2.4 billion in cash and stock.

A month later, the bomb hit. Nortel needed to revise financial results since 2003. The errors involved accounting flubs rather than fraud, but reflected poor internal controls, the company said at the time. Some senior executives favored limiting disclosure until they knew more. Mr. Zafirovski insisted on disclosing everything the company knew right away.

Mr. Pearce says the board was supportive of the CEO. “He repeatedly said, ‘If this company is going to have the integrity we’re talking about, we have to deal with it,'” he says.

The announcement plunged Mr. Zafirovski into crisis mode. He spent much of the following week reassuring about 25 major Nortel customers by phone. He made another round of calls during April to quell rumors, circulated by rivals, that Nortel might not survive.

The restatement also rattled Nortel’s demoralized staff. In early September, 51% of staffers were highly satisfied with their jobs, an internal survey found. By April, that number had fallen to 40%. “I was coming to the realization that the positive momentum we had just put in place would be lost,” Mr. Zafirovski says.

It was a tense month. The restatement forced Nortel to delay filing its 2005 annual report until April 28. In the crush of last-minute details, Nortel wasn’t able to electronically transmit the report until 4:40 p.m., just 20 minutes shy of the deadline. And at first, computer glitches at the Securities and Exchange Commission made it impossible to tell whether the agency had received the document.

Mr. Zafirovski fretted all weekend, checking email about 20 times from his Lake Forest home. Only on Monday did he learn that the report had arrived in time.

Although he had always worked very hard, Mr. Zafirovski was now toiling into the wee hours, often dispatching emails long past midnight and waking before 6 a.m. for his morning run. In bed, he sometimes had trouble sleeping. “Am I making the right decisions?” he asked himself. “Are people telling me what I need to hear? Am I being naively optimistic and ignoring warning signs?”

The restatement crisis had barely faded when Mr. Zafirovski faced another challenge: persuading investors to lend Nortel $2 billion. It needed to repay a line of credit and cover the cash portion of the class-action settlement, among other things.

So Mr. Zafirovski was back on the road in June, hitting seven U.S. cities in a week to sell dubious investors. “I could see the skepticism on their faces,” he recollects. “It was pretty tough.” Investors grilled him about whether Nortel could generate cash for the first time since 1998 and regain profitability.

Nortel ultimately raised the full sum, but at considerable cost. It had to offer interest rates as high as 10.75% — a jolt to an ex-GE man accustomed to an employer with top credit ratings. By contrast, Nortel’s credit rating was just three levels above the lowest possible grade.

In late June, two days before his first annual meeting, Mr. Zafirovski announced the company’s third round of layoffs since 2002. He eliminated 1,100 positions, altered pensions and curbed retiree health coverage. Once topping 95,000, Nortel’s ranks now stand at about 33,000.

Nortel’s annual meeting, held June 29 at the cavernous Toronto Congress Centre, was his next big test. Mr. Zafirovski had an inkling of what was coming — the prior year’s annual meeting had lasted a grueling six-and-a-half hours.

During a portion of the next three hours, unhappy investors pelted Mr. Zafirovski and his colleagues with questions. “Where has my money gone?” asked a man who indicated he had lost $50,000 on Nortel stock.

Mr. Zafirovski, who usually shuns formal business attire, looked nervous at times in his white dress shirt and red tie. His trademark machine-gun patter failed more than once, causing him to stumble over a few words. But he told the investors that he and Nortel’s senior management were “betting their careers on bringing Nortel back.” (See the company’s presentations from the annual meeting.)

Later, Mr. Zafirovski admitted he felt nervous, but said jitters over confronting shareholders paled in comparison to prior moments in his life, such as his early days as an immigrant. “You don’t expect standing ovations” when a company has problems, he said.

Distracted by the unforeseen crises, Mr. Zafirovski didn’t finish assembling his senior management team until June, two months longer than he anticipated. Once he had wooed seven outsiders to his 18-member team, lieutenants’ anonymous reviews of his performance made him realize Nortel veterans resented the amount of attention he paid the newcomers. In reaction, Mr. Zafirovski sought to be more evenhanded while privately worrying about the gulf between the two groups.

Mr. Zafirovski’s travel schedule kept him from quickly forging personal ties with the executives, only three of whom he knew before Nortel. “We’re still pretty much strangers,” he conceded in early September. “Many of us have different [work] habits.”

Heading to Dallas later that month for a meeting of Nortel’s 250 highest-ranked managers, Mr. Zafirovski doubted his lieutenants would appear unified. He was wrong. Lauren Flaherty, the recently hired chief marketing officer, says some attendees told her that the senior executives appeared “to enjoy being together.” Concurs Mr. Zafirovski, “That was a defining moment for us.”

Still, he was downcast when he gave Nortel directors a mixed report card on his tenure during a mid-October breakfast at Washington, D.C.’s Willard Hotel. “We are behind where we want to be,” Mr. Zafirovski said. Among other things, he had forecast an improved operating-profit margin in 2006, but the margin declined during the first nine months, reflecting intensified pricing pressures and stiff competition. He pledged to move “with greater urgency.”

Mr. Zafirovski says he plans more cost cuts and to narrow Nortel’s focus to fewer product areas.

The CEO’s harsh assessment muted directors’ reaction. The board “found it reassuring that Mike was not satisfied with the progress the company had made,” Mr. Pearce observes. Still, the board “would like to see progress sooner than later,” the Nortel chairman continues. “We’re not shy about giving him feedback.”

Nortel’s latest financial results make clear its need for further progress. The company reported a third-quarter loss of $99 million, its seventh loss in the past nine quarters, on a 17% increase in revenue to $2.96 billion.

Mr. Zafirovski, who says he hopes to lead Nortel for at least a decade, has a full slate of challenges to confront as he looks ahead.

For the moment, at least, the board supports Mr. Zafirovski. “He moved more quickly than I thought possible” during his inaugural year, says Mr. Pearce. The new CEO “exceeded my expectations.”

Nearing his first-year anniversary last November, Mr. Zafirovski found his lack of sleep was catching up to him. “I was dragging at the end of the day,” he says, admitting he’s almost dozed off during a few meetings. He began forcing himself to get a nightly minimum of five hours of sleep.

As has been the case for much of his life, Mr. Zafirovski finds much-needed stress relief in intense exercise, wearing out a pair of running shoes every other month. He makes himself bike, run, or row up to 90 minutes every day — and never allows himself to exercise for fewer minutes a day than the number of years he’s been alive. “I always try to add a minute” each birthday, he says. “It’s tougher as I get older.” 

Fuente: The Wall Street Journal