To: Mike Zafirovski, Nortel Board of Directors, and Other Officers of the Company

Cc: Ernst & Young Monitor

From: Recently Severed Canadian Nortel Employees

As a follow-up to our memo from January 26^th, we wanted to provide you with some research findings that might help convince you that not only is paying severance the morally right and ethical thing to do, but that it is an essential step to realizing your stated goal of emerging from creditor protection as a strong and healthy entity. 

Armed with the information and research we are sharing with you today, we hope you will step up to show the kind of leadership Nortel’s current employees can respect and rally behind, by recommending to the Courts that signed severance agreements be honored and that some financial provision be made for current employees who are laid off in coming weeks and months. This action would help stabilize Nortel’s business and would prove you truly do understand that employees are the critical asset of a knowledge-based company and are critical for the future success of Nortel.

In an effort to identify potential ways forward for Nortel, our group has investigated cases of other companies in creditor protection and has identified best practices and outcomes that may be useful for Nortel to consider. From this research, it is clear that employees are unlike any other unsecured creditor – a reality increasingly being recognized by progressive companies, governments, and courts – and should be given special consideration when a company enters bankruptcy protection. The evidence also clearly shows that the fair treatment of employees is in the interests of all stakeholders who want to see Nortel emerge from the process as a viable entity.

Among the key points from the group’s paper, called The Value of Treating Employees Fairly During Bankruptcy Protection, which you can access in full here, are the following:

• Lay-offs have been found to not only have negative impacts on ex-employees but also on the “survivors” still employed within the company. How the survivors perform and their perception of the company during the lay-off period and well into recovery are, in large part, determined by how their ex-colleagues were treated when they were let go from the company.
• Many companies that have stopped payments to all creditors during their initial creditor protection filing, have – upon reflection of the impacts on their business – chosen to go back to the courts and argue that employee obligations, including those to dismissed employees, be met. Courts have agreed and supported this move as a way to de-risk the company’s recovery plan.
• Severance today is about much more than just compensating employees who have lost their jobs.  A severance agreement is a contract between the company and the ex-employee that results in many positive benefits, including a reaffirmation of non-compete agreements and the protection of intellectual property. It also helps protect the reputation of the company as an employer, encourages employees to speak positively about the company, and helps ensure that former employees who become customers, suppliers or regulators behave favourably towards their former employer in future business situations.
• Even governments are increasingly recognizing the obsolescence of current employment laws, especially in this era of a competitive knowledge economy, where people – not factories – are a company’s primary competitive assets. In recognition of this reality, progressive governments have been modernizing the laws to protect vulnerable employees, including limiting a company’s ability to unilaterally repudiate employment agreements under CCAA or Chapter 11 and in giving employees “super-priority” in the event of bankruptcy.

The paper makes many other points as well, and includes references and links to our sources of information. We hope that you will find this helpful in addressing the employee aspects of recovery in your plan.

We certainly understand the seriousness of the business challenge before you, particularly in terms of addressing employee morale.  The company has also obviously recognized the current state of crisis in the employee ranks, and has taken some small steps to address this, as reflected by the effort to retain some programs, such as the Excellence@Nortel Reward program.  A program that enables employees to collect small-dollar-amount gift certificates, however, hardly meets the needs of current employees, who are first and foremost concerned about their livelihoods and income particularly given the fact that they know if they are laid off they will receive no financial support whatsoever from Nortel and their benefits will be terminated immediately.

Added to this is employee embarrassment. In national and local media, on YouTube videos, in blogs, and in business and social conversations across the country, people are discussing Nortel’s unfair labour practices and unethical treatment of employees as the company goes about “business as usual” as it continues, in your words, “to benefit from the protection offered by CCAA in Canada.”

How much better it would be if these groups – and Nortel’s own employees and ex-employees – could start to say good things about the company. Until this issue of severance is resolved, however, any good news about customer wins or technology breakthroughs or financial gains will fall on deaf ears and will be masked in a cloud of negativity.

In order to stabilize Nortel’s business, which you have identified as your top priority, you need to stabilize the workforce – ASAP!  Although meeting current commitments to severed employees will cost some money, it is perhaps the best, most expedient and most valuable investment you can make in the short term. Fair treatment of recently severed employees – and good-faith negotiations with any potential future employees who are laid-off – will go a long way to stabilizing the workforce and maximizing the probability of Nortel emerging from creditor protection as a viable entity.

In your January 30^th e-mail to current employees, you indicated that the company’s decision to not pay severance was made because “our financial advisors, hired by the company and Board to guide us through this process, made it very clear: the creditors would never accept it and the company could not afford it.”   

We have two questions related to that statement:

1. How can you be so confident about the Courts not accepting to honour severance agreements when the Company hasn’t even made the effort to put forward a compelling argument about why it would be in the interests of all stakeholders?  As we’ve pointed out in the paper mentioned above, other progressive companies have asked the Courts and been granted permission to honour severance obligations during creditor protection. We urge you to seek the same. 
2. With respect to the statement “the company could not afford it,” our question is: how can you not afford to send a strong signal of moral and ethical integrity to reassure existing and future employees that Nortel respects its employees and their contributions and honors pre-existing agreements that were negotiated in good faith?  Moreover, the latest Monitor’s report shows that your cash reserves were stronger than expected in the first three weeks of January. Instead of a projected $80-million deficit in January, the company is $184 million in the black. That would cover many times over the severance promised to Canadian employees who were recently severed.

Nortel’s historical strength has been the loyalty of its employees. Without the goodwill of employees and ex-employees, there will be no Nortel. We ask you – again – to do what is right to protect this valuable asset by extending fair treatment of your current and ex-employees.

Yours sincerely,

The Steering Committee of the Recently Severed Canadian Nortel Employees

Cc:  Ernst & Young Monitor

From:  The Steering Committee of Recently Severed Canadian Nortel Employees

On behalf of all recently severed Canadian Nortel employees, we urge you to overturn your recent decision to deny the payment of promised severances and, in so doing, uphold your stated commitment to the highest standards of business conduct and integrity, as well as provide emotional and financial relief to ourselves and our families in this difficult time.  Severance and other employment-related laws were put in place in Canada to reflect what society feels is fair, honest, and respectful treatment of people in this country. We urge you to respect the spirit of those laws and not hide behind the creditor protection laws that give you a choice of whether to recognize severance or not.

We all want Nortel to be successful, so this request is not only for the benefit of those recently severed from Nortel, but for the benefit of all Nortel stakeholders. People are the heart and soul of any successful company, and this is particularly true in Nortel where knowledge and innovation are what differentiate the company from competitors. If your intent – as you say – is to keep Nortel alive in some way, shape, or form, a dedicated and motivated workforce is crucial. The decision you have taken to stay severances is weakening the company’s ability to survive. Today’s employees, as well as tomorrow’s, need to trust that you value their contributions and that you will treat them fairly and with respect. Keeping your word, paying severances, and respecting the rights of employees are all part of keeping Nortel alive. 

Nortel has a long history of treating its severed employees (through many rounds of layoffs) fairly, honestly, and respectfully in the face of challenging business conditions. As a result, severed employees who have moved into positions of influence in other companies (including customers and suppliers) have endorsed Nortel, its technology and its people – as many of us will have the opportunity to do when we ultimately find employment. Likewise, in the past, valued employees whose positions have been eliminated have been happy to return to the company when asked back, in part because they had respect for the way they were treated when they left. Nortel’s uncharacteristic “about face” on the matter of severances is having an extremely negative impact on the company’s reputation, as well as on your own reputations. If not reversed, your actions will be remembered – far beyond any restructuring period – as a prime example of failed corporate governance that placed undue emotional stress and financial hardship on employees at a time when they most needed your support.

Equally concerning is that you placed us in a disadvantaged situation because you led us to believe that Nortel would be able “to sustain adequate levels of liquidity” for at least the next year and that bankruptcy protection filings were not imminent.  Of note:

On October 16, in a video message to all Nortel employees discussing the upcoming announcements around restructuring, Mike Zafirovski said: “There are no current plans to change our guidelines around severance packages. …I do understand that the last few weeks have been extremely difficult for all of you. I can only assure you that these actions will be unfolded with the utmost respect for Nortel’s people.”

On December 10, in a Wall Street Journal article reporting that Nortel was exploring bankruptcy protection and had started discussions with legal firms as early as September – a Nortel spokesperson stated that “no bankruptcy filing is imminent.” The spokesperson also referenced the fact that Standard and Poor’s had reaffirmed Nortel’s ratings in November, saying the company “should be able to sustain adequate levels of liquidity in the next 12-18 months” despite difficult market conditions.

As well on December 10, Nortel employees were invited to access a URL link to a “Liquidity Fact Sheet”. The Fact Sheet stated, among other reassurances of liquidity, that Nortel had successfully completed debt refinancing in May 2008; that no material debt maturities were due until 2011; that we expected to improve full-year Management Operating Margin by 125 bps over 2007; and that Standards and Poor’s had removed us from the “Creditwatch with negative implications” and had reaffirmed that “Nortel should be able to sustain adequate levels of liquidity in the next 12-18 months.”

On December 12, Nortel employees received another e-mail specifically encouraging them to read an article from the National Post that “better reflect(ed) Nortel’s messaging”. Entitled “Nortel Bankruptcy Fears Considered Premature,” the article stated:

“… While he is cautious about Nortel’s ability to implement a successful turnaround in today’s challenging telecom environment, National Bank Financial analyst Kris Thompson said Companies’ Creditors Arrangement Act (CCAA) protection is premature at this point. The company’s earliest bond maturity comes due in July 2011. And even with Mr. Thompson’s pessimistic free cash flow burn rate of $901-million in 2009, he forecasts that Nortel will end 2009 with $1.4-billion in cash.

With no short-term debt obligations and the possibility that Nortel can successfully restructure, we would not expect CCAA as a near-term consideration by the company,” he said in a research note.”

You repeatedly assured us that there was nothing to worry about in the short term, and so you can imagine our shock and disbelief when we learned, on January 14:

• that Nortel was filing for creditor protection;

• that Section 73 in the Monitor’s report claimed that “The proposed Monitor is advised by Nortel that without protection from its creditors the remaining available cash resources within Canada could be fully exhausted as early as the second quarter of 2009 and the Canadian companies will not be able to operate”;

• that the company had made the conscious decision to allow the Monitor to “stay severances” and had relegated employees to “unsecured creditors”; and

• that we were all suddenly and unexpectedly without any source of income effective that very day.

 As you consider our request to overturn your decision, we urge you to remember two of Nortel’s Core Values – “People are our Strength” and “Integrity Underpins Everything.” We also ask that you uphold Nortel’s Code of Business Conduct and take to heart Mike Zafirovski’s introductory words to the Code (which every employee is required to sign as a condition of employment): 

“…As you know, we have set the bar high for all of our activities in remaking Nortel into a great company. One of our key areas of focus is ethics and integrity, and my expectations are that every officer and employee will commit to the highest standards of business conduct and corporate governance and will act with the utmost integrity. You can be assured that every member of the Board, including myself, has made the same commitment. …

By signing up to the Code, we agree to abide by its guidelines, including all applicable laws and regulations. …In doing so, we commit to report any violation of the Code and to challenge any action that may undermine the principles in this Code and Nortel’s reputation for integrity and honesty.”

We couldn’t agree more. Your decision to stay severances previously promised to departing employees reflects extremely poorly on Nortel and, if not corrected, will severely damage Nortel’s value, reputation, and viability going forward.

We ask that you step up and show responsibility for your employees in their time of need by reversing your decision, as other large companies have done in similar situations in the past. We request that you restore our severance agreements and that you champion employee rights with the same commitment and passion that we have demonstrated as we have relentlessly fought – by your side – in the battle to recreate Nortel into the great company it once was. We urge you to do this for the benefit of all stakeholders and for the company’s ability to survive and successfully do business in the future. 

Sincerely,

The Steering Committee of the Recently Severed Canadian Nortel Employees