Alcatel-Lucent: Which model for corporate governance?


Nine tricky questions to ask a struggling company, from board oversight to CEO succession

I finally had the opportunity to catch up on the news by debating with a friend, also a professor in a business school, the recent reorganization of the telecom equipment manufacturer Alcatel-Lucent (ALU). Unsurprisingly, he had a lot to say about it (so much, in fact, that he prefers to remain anonymous…). An excellent case study for his students.

He even embellished my proposal: ‘It would be a great final exam subject,’ he said. ‘Of course, we are not aware of all the facts (when dealing with a case study), but it is instructive to imagine ourselves as executives and members of an administration in some context , to ask ourselves what obvious mistakes we seem to have made, what the mitigating circumstances may have been, and whether or not we really should be forgiven for making those mistakes, even taking into account these fictional  incidents .’

We agreed that, although we know of the said situation only what was told to us about it, this is apparently enough to provide us with a treasure trove of questions such as ‘would you have taken the same decision?’

For those whose situation we are discussing means nothing, here is a brief summary: Lucent was a major American telecom equipment manufacturer headed by Patricia Russo, formerly CEO of Eastman Kodak (EK, a company offering services in the fields of photography and cinema), when the company had failed to jump right into the new technology (digital photography) that everyone knew was destined to liquidate Kodak’s old business (the chemical development of photographs).

Lucent subsequently sold itself to the Alcatel Company, an even larger French OEM, whose product lines were mostly dissimilar to those of the Lucent Company…but for Lucent’s products like those of Alcatel, the implied technology was also different. The partner company was run by Russo, even if she could not speak French (and yet the headquarters are in Paris). Former Alcatel CEO Serge Tchuruk chaired the company. The administration was divided into two; on the one hand were the   former directors of Alcatel, and on the other, those of Lucent (among whom was   Russo’s predecessor, Henry Schacht).


From the outset, investors and analysts alike abhorred this prospect. Press releases claim that the two companies never merged and that the Lucent company continued to bet  on the two technologies (the  DSL technology -Digital Subscriber Line, or in French the digital line of subscribers- in the networks of fixed circuits and CDMA (Code Division Multiple Access, a method of cordless telephones using a wide spectrum of frequencies for mobile telephony) technology, both of which are losing ground in the market. Analysts and investors now hate the   merger of the two companies even more, because the group  who came out of it has lost money every quarter since they got together (six quarters in a row). As a result, the share value of this merger is down 60% from when the two companies joined. At the end of July, the Alcatel-Lucent company announced that it had lost 1.7 billion dollars (or approximately 1.16 billion euros), of which 800 million dollars (or approximately 544 million euros) were liquidated because of a single client (in this case, a client of the company Lucent) which had slowed down its investment of capital with the company.

Both Russo and Tchuruk resigned, but the board asked each to stay with the company until successors were found. The company also announced that its board was being restructured, reducing the number of its members (Schacht being the first to go).

So my friend and I came up with a list of questions that this background might well raise. Here they are :

1) If you’re on the board of a tech company whose industry is going through some technology transitions and you’re considering allowing your company’s takeover executive to become your CEO, how would you feel about ‘a presidential candidate whose first job with your company, many would say, was cut, and whose experience in the meantime  helped lead a company that had failed an inescapable transition? And if you hired this person, would you establish close oversight of the board  to ensure that your company has bet on the right technology of the day?

2) Suppose you thought there was enough synergy within your company to justify the merger of a French company and another American company formerly operating in different subdivisions and using dissimilar technologies: to what extent would you insist you on the fact that the integration of the two companies must be prepared before proceeding with this merger? Would you require special control of the board?

3) How long would it be  reasonable to accept an unbroken succession of losses before the board updates its plans for a possible succession (in case things do not work out)? Three quarters in a row? Four? Five? What circumstances would justify the choice to change nothing for six quarters or more?

4) Under what circumstances can it be said that a correct answer would be: ‘We would have to wait six quarters, without being disturbed by the fact that the CEO leaves the company without leaving him a successor?’

5) Under what circumstances can it be said that the solution with regard to the succession of the CEO would be to ‘fire the current president, but leave him/her in his job for another five months?’ Can an outgoing CEO be an effective executive during this time?

6) Does your answer to the previous question change if you already have an outgoing president, whom you also ask to stay for a few months in the company?

7) Having got rid of the management of the company, both that of the president and the CEO, under what circumstances should you immediately announce that you are going to restructure the board and fire a confidential number of its members (without  disclosing the head of this operation or the extent of the said restructuring)? Do you expect  a lot of harmony within the board in the next two months? During this time, are you relying on board members to fill the leadership gap or ease the concerns of the rest of the management team following the firing of the CEO and board chairman?

8) Having already gone through the above steps, what first step do you take to look for a new CEO at this point? Which Board Members Should Be on the Corporate Committee? Besides, which members of the council should elect those who will be part of the Committee?

9) On the contrary, would you find it pleasant, as a board member, to wait for  the intrigue suffered by all its members to unravel before starting   to search for a new CEO? If so, how would you feel about announcing in December that the outgoing CEO will in fact remain active for another five months while the search for a successor continues?

As you consider your answers, please remember that Wall Street will not rely on this review to estimate the value of stocks on the stock market.

And here’s a bonus question: if you were the candidate winning the position of CEO, and you admitted that you would inherit a company apparently subject to a veritable shambles – in terms of its strategy, the operations implemented by its members, and its leadership – what conditions would you impose before accepting this position?

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