So now we know, its been confirmed by Nokia, that outgoing CEO Stephen Elop, who came from Microsoft, had a contract from 2010, which would pay him a peculiar bonus of 25 million dollars, if this deal we now heard of three weeks ago - Nokia selling its handset unit to Microsoft - were to occur. The details have been dug very deeply by for example Finland's largest newspaper, Helsingin Sanomat and the best English reporting on Nokia has been by Tero Kuittinen who writes at Forbes. Tero's article earlier this week for example explains the specific contract conditions that allowed Elop to be paid this 25.5 million dollar (18 million Euro) bonus, after Elop deliberately wrecked Nokia the corporation.
There was yes, this bizarre series of conditions in Elop's contract. If the Nokia share price kept falling; and Elop was able to sell Nokia's handset unit to Microsoft; and after that sale, Nokia's share price would recover - only under those very specific conditions, Elop would be paid a massive bonus of 25 million US dollars, significantly more than he could earn under any reasonable conditions under his contract otherwise. Yes. This was in Elop's contract as reported by Forbes for example. So we now know, that Elop was hired as CEO, he could have worked diligently for years, reforming Nokia to get it to grow and increase profits, and earn a 'typical' Fortune 500 sized bonus, a couple of million per year. Or he could destroy Nokia, sell the handset unit for a desperation-price to Microsoft, and if after that sale Nokia share price recovered somewhat to modest growth, then Elop was judged to have performed excellently as Nokia CEO, and this specific action would result in Elop getting a 10 times bigger bonus. No wonder Elop took the second option. I explained earlier this week how that was accomplished in my big Elop performance analysis blog. That is the extent of 'new facts' in this blog. If you wanted more 'facts' then you can stop reading. Because the rest of this blog is my speculation. How could Nokia's Board give Elop this mad contract clause? I have been thinking about it and I think I know why. Please note, I was nowhere near those negotiations. I have no 'mole' into those negotiations either. I have never even met Elop or any of the current Board members (I left Nokia in 2001 and I was a very junior executive running Nokia's global consulting department, at Nokia Headquarters at the time).
However, I do think I know what happened. This blog article is totally speculation on my part, but I think it makes sense. I think the Nokia Board in 2010 made an honest mistake, in agreeing to the new terms for Elop, that were not part of the standard Nokia contract it had offered for example to previous CEO Kallasvuo (and would not have been discussed with for example Anssi Vanjoki, Elop's rival). What Nokia Board did, was address very honest and real concerns Elop had, about taking over as Nokia CEO. The special clause in the contract seemed reasonable at the time and the outcome was not obviously likely. It was very unlikely and seemed at the time like a reasonable precaution, to get Elop to sign. The problem is not that this text was written in Elop's contract. The problem is, that once Elop started to destroy Nokia, Elop was clearly acting against Nokia's best interest (and should have been fired 'for cause'). So while we now see, Elop had an 'incentive' to destroy Nokia, nonetheless, that action was destructive, it is clearly 'against Nokia's best interest' and Elop should have been instructed by Nokia's Board immediately to stop damaging Nokia, and then that contract clause should have been ammended. So lets see first, how could this bizarre contract clause was invented.
THE SITUATION IN 2010
During the late spring of 2010, Nokia was secretly preparing to fire its CEO, Olli-Pekka Kallasvuo, and was secretly interviewing candidates to replace him. We have heard that the finalists were Anssi Vanjoki, a Finn, from inside Nokia who had run the smartphones unit very profitably even through Nokia's troubled times. And an outsider from North America, the Canadian Stephen Elop, a Vice President at Microsoft who had been working with Nokia in the past, in Microsoft's enterprise Office suite integration to Nokia's E-Series smartphones for enterprises.
So to be very clear, when Nokia hired Elop in 2010, was ranked the 120th largest Global company according to Fortune 500 and making profits and growing strongly. But it had reported one quarter of a loss in 2010, the first quarterly loss of the corporation since it had become the world's largest handset maker in 1998. While Nokia had a massive cash reserve and was known for very conservative fiscal management, Nokia had lost its AAA rating by the big ratings agencies, and the Nokia share price had fallen 55% during the tenure of the failed CEO Olli-Pekka Kallasvuo during the past 4 years. Nokia was plagued with delivery and execution (and marketing) problems. Its then-current flagship smartphone, the N97, was one of the worst phones Nokia had ever released, and Nokia's Anssi Vanjoki personally apologized for it and promised Nokia would learn from those lessons and not release such bad phones in the future. The 'answer' to fixing the problems like those of the N97 led Nokia from one problem (releasing incomplete phones) to another symptomatic of big bureaucratic companies - severe delays. The replacement flagship smarpthone, the N8, was at that point delayed - it would end up one year delayed when launched later in 2010.
Elop came into Nokia CEO negotiations with the following understanding of the global handset market - this is Spring of 2010. Apple had only entered the smartphone market three years before and had rocketed to 16% market share. Blackberry was the leading rival to Nokia and was the first rival to breach 20% market share. HTC was leading an Android charge in the US market. Palm had just been bought by HP and was expected to help HP grab a lot of share. Nokia's US market share in smartphones was tiny, in single digits, while in dumbphones Nokia was the third biggest. So Elop could easily argue, the touch-screen revolution was coming from America, powered by Apple and Google. The smartphone wars were overall being 'won' by North American players from Motorola to RIM to HP/Palm. While Nokia had 39% market share in smartphones, Nokia's share was declining and Nokia was 'only strong in less modern markets' like those of the Emerging World which had not yet experienced fully the iPhone and Android based touch-screen revolution. Nokia's own touch-screen flagship, the N97, was by wide consensus seen as a failure.
ELOP THE DEAL-MAKER
Nokia had four major business units at the time. The featurephones (dumbphones) business which was profitable but the future of handsets was smartphones. The smartphones unit was also profitable but seeing a shift in the consumer expectations and Nokia was facing unprecedented number of rivals, and Nokia's current product offering was not competitive. Nokia had a new version of its software coming, Symbian's version S^3, a new flagship to be released later that year the N8, other 'superphones' like the E7 in the pipeline, and a totally new software and operating system, MeeGo, that was supposed to replace Symbian. Elop correctly argued that if Nokia had not yet committed the company to MeeGo but was going to end Symbian - then this time - Elop's hiring - was the right 'last moment' to consider any alternatives. Nokia was at its core a hardware company, a phone maker, and that was software. Elop was a software dude. He could evaluate with fresh, outsider eyes, the Nokia software processes and consider as CEO if the internal process was competitive. Most importantly, Elop convinced the Board, that he be allowed to solicit - secretly - bids from the other OS platforms to replace the Symbian/MeeGo option of Nokia.
That process led to Microsoft being announced on February 11, 2011. But we have heard that Microsoft and Google have been in serious negotiations and produced offers to Nokia. Those negotiations were going on in late 2010. We also heard from RIM that they had been contacted by Elop but RIM had said no, they were not interested in licencing the Blackberry OS to Nokia. So we know for a fact, Elop was engaged in serious negotiations with at least Google and Microsoft, and got serious bids from both, to become Nokia's smartphone OS provider. And these negotiations started only weeks after Elop took over as Nokia's new CEO. So we know that Elop had gotten this permission from the Nokia Board, when finalizing his negotiations.
We also know, from contemporary reporting in 2011, that Elop had tried to sell the NokiaSiemens Networking unit. This was the big draw on Nokia profits from 2010, and the big reason why Nokia reported that one quarter of corporate loss in 2010. So Elop had almost immediately started to try to sell the NSN unit. That attempt failed, no acceptable bids were received (remembering NSN was a 50/50 partnership with Siemens, so any bid would need to be approved both at Nokia and at Siemens). Eventually Elop bought Siemens out of the partnership and this unit now forms the basis of what is 'left' of Nokia, after the handset unit is sold to Microsoft. But yes, the original negotiations with Elop included clearly permission to seek bids from other smartphone OS vendors, and included permission to try to sell the NSN unit. Eventually Elop would resort to selling smaller pieces and other Nokia assets from factories to patents. But the first step - and the one definitely discussed in Elop final negotiations and approved by the Board, was to try to sell NSN.
Very clearly Nokia Board saw that Nokia needed a giant shake-up. NSN accounted for nearly half of Nokia's employees, and generated a third of its revenues. There is arguably a 'synergy' between providing handsets and networking gear, as the carriers/operators in many markets were the buyers of both. But modern telecoms thinking said that the trend was away from this - like networking equipment maker Ericsson joining Sony in the SonyEricsson partnership for its handsets and Ericsson concentrating only on networks, and Motorola selling its networking unit (to Nokia) to concentrate only on handsets. If NSN often made losses, and the handsets unit was Nokia's profit engine in 2010, obviously the Board saw, if they had to sell one - lets sell the poorly performing NSN unit, not the profit cow, handsets.
WHAT WAS DECIDED AND WHAT NOT
Several things are now clear from contemporary reporting and what has recently emerged. First that the Symbian 'end' was not part of the Elop negotiations. Nokia had already months earlier announced in public, that it would gradually shift from Symbian to the new MeeGo operating system for its smartphones. The first MeeGo devices were expected to be shown in late 2010 and sold in early 2011 (Elop would interrupt those plans and postpone them dramatically - these caused lots of resignations in protest). So the 'lets end Symbian' discusssion was already done and decided, before Elop stepped into his first job interview at Nokia. End of Symbian was already accepted fact at Nokia, and Elop never even considered that option. Symbian was good for the 2000s decade, it was obsolete for this new 2010s decade. When Elop came in, he knew, Nokia's smartphones under Elop would go through a shift to a new platform. The questions was, which platform.
Elop was clearly given permission to seek bids from rival OS makers. We know he contacted at least RIM, Google and Microsoft and got bids at least from Google and Microsoft. Thus its pretty certain, he also contacted Apple and HP, and was given a clear 'no' from both. Nokia's Board did not decide in the summer of 2010, when hiring Elop, that MeeGo would be ended. MeeGo would be evaluated alongside the outside options, for costs to Nokia and competitive benefits. That decision would be made 'later' likely on a 'within the next six months' schedule - consdidering that Microsoft was announced almost exactly 6 months from when Elop joined Nokia as an employee (he was in the company a few weeks before he started as CEO, to get to know the company a bit while Kallasvuo finished his tenure).
THE BOARD WAS THINKING
Looking at the handset business from Nokia's Board and its point-of-view, from early 2010. Apple had appeared a few years before, and had rocketed at unprecedented growth rate up to 16% market share. Nokia had laughed at the early iPhones and dismissed Apple's attempts very openly in public. Blackberry kept growing and had fierce loyalty in the enterprise - and alarmingly - youth sectors. Then there was Google, who had started to make serious success on the Android platform, especially in the USA, which was the thorn in Nokia's side. Nokia never made a Razr clone to respond to Motorola's surge in the middle of the 2000s decade. But the Blackberry rise was so dramatic and dangerous - the future of handsets was smartphones - Nokia had produced Blackberry-clone Nokia E-Series models, mimicking the iconic Blackberry style QWERTY keypad. Now, in 2010, Nokia was releasing its first true iPhone-clone, the E8, Nokia's first flagship that had no keypad at all, just pure touch-screen interface. All this meant that the software costs at Nokia were out of control.
Nokia had been developing Linux based software to become the new OS for future smartphones. The then-current product was Maemo, which powered the Nokia N900, a smartphone and OS that has the distinction at the time of being the most used smartphone OS on a whole continent - Antarctica (yes, its true, Linux was highly loved by engineers on the uninhabited planet, so the N900 was an excellent cheap but very reliable 'computer' to power various testing and measurement instrumentation on the continent).
Maemo had had several competing Linux based operating systems for smartphones, including Android by Google. Intel had its own, called Moblin. So Nokia didn't want to become 'slave' to Google with Android and Google didn't want to partner with Nokia on Android. But Intel was very happy to join with Nokia so both companies took the costly step to integrate their OS projects, as both were Linux based. Moblin and Maemo became MeeGo. The new OS by both Nokia and Intel, that had a huge array of giant tech companies already aligned to it by 2010, including Panasonic, Huawei, Fujitsu, China Mobile etc. All this integration caused severe delays between the 'current' N900 model running Maemo, and the new partnershpi project MeeGo that would eventually release new superphones we'd see as the N9 and N950.
The Nokia Board in 2010 saw MeeGo/Maemo/Linux as an endless pit of R&D, that produced geeky gadgets occasionally, like the N900, but nothing the mass market would love like the iPhone. Because of the Intel project integration, costs of Maemo/MeeGo had gone out of whack and the delivery schedules delayed by more than a year already. Nokia had already faced huge costs with Symbian to ever diminishing ability to compete and differentiate. The N97, attempting to bring touch-screen utility to Symbian was a clear fiasco. So the Board was very dubious about committing Nokia to another decade of MeeGo with associated accelerating software costs, that seemed to always just get more complex and costly. It was a very legitimate concern by Nokia, should it be in the software business. Maybe Nokia could be more profitable since it had the massive global scale advantage in production, sourcing and distribution - to just concentrate on making the world's best hardware and have someone else take the headaches of producing the software. This was a very legitimate concern in 2010.
If Nokia Board was willing to consider the end of software development (which eventually resulted in the Symbian development employees being sold to Accenture) and the sale of Nokia's telecoms roots, the networking unit - the two parts Nokia Board clearly believed in, and never considered selling were its current cash cow - handsets - where 95% of Nokia profits were made, and the future investment of Navteq ie the navigation and mapping unit. Nokia Board saw the need to change Nokia Corporation drastically under Elop's leadership - and it blessed pursuit of two avenues - selling the networks unit, and considering if the software side of smartphones was sensible to do in-house at Nokia or if Nokia abandons that path and selects one of the established players as the OS provider. Nokia's Board did not see a plausible future of selling its handsets (or maps) units. Remember, even during the troubled times of the world recession - when all of Nokia's rival full-portfolio handset makers like Motorola, LG, Samsung and SonyEricsson - had reported losses in their handsets unit, the Nokia handset unit was a clear beacon of profits - easily double-digit profit margins regularly. Even after the costly software development expenses, the smartphone unit was very profitable too, so it was not only the cheap phones business.
Elop looks at Nokia and considers the job of CEO. He discusses the current contract being offered to him, which is the same contract as Nokia had for example with outgoing CEO Kallasvuo, on its terms, but of course Elop is getting updated salary and bonus numbers. But the main clauses are about the same. The boss is paid for performance and most of his incentives come in the form of stock options, so as Nokia owners get richer - when Nokia's share price grows - the CEO gets also rewarded. If the company share price falls, this primary incentive method, stock options, become worthless. And it generally is a widely used and well accepted executive incentive system.
Elop looks at the contract and Nokia's situation. It is clear, that Nokia's share price is currently falling when these negotiations are ongoing. Nokia's share price has been falling for three years. Now Elop is to step in, the outsider, against a 'Finnish' company. Elop is supposed to make drastic cuts and changes - firing staff because Nokia was bloated. Eliminate units that are not producing profits. Selling massive parts of Nokia, including half of its employees at the networks unit. There would be riots. There would be internal resistance. Even after his best efforst, its very possible that Nokia is not able to be saved. The share price was declining when Elop was hired, and had been declining for three years. And during those past 3 years, Nokia had suddenly seen now, very powerful rivals entering its industry - from Apple and Google on - so it was very possible the 'good years' would never come back.
Nokia also faced a problem at this time of 'the past glory years'. Nokia had for more than a decade, been a reliable investment, that consistently underpromised and overdelivered. It had at one point been Europe's most valuable company and had been seen as a very good investment. Now, in the post-iPhone Era, that image of 'infallibility' had disappeared. There had been a lot of 'confidence' in Nokia which caused its share price to be inflated. That was disappearing but gradually. It was very possible that Nokia would never return to those days of Jorma Ollilas last years, when Nokia was the tech darling of the investment industry. Elop was, looking at his CEO contract and share options - facing a very honest fear, that there is 'hope' in the Nokia share, that may be unfounded, and if that 'hope' has to be removed, the real market evaluation of Nokia's share is significantly below its current value. This, while the Nokia share price was still declining. So, Elop had a very legitimate fear, that he was being promised worthless share options. Without those inventives, the Nokia CEO contract was not on par with tech company CEO salaries. And Nokia was in deep trouble, it needed strong leadership now.
THE 25 MILLION DOLLAR CARROT
We know for a fact, that the CEO contract was changed from what was offered to Kallasvuo. The significant part of the change was summarised at Forbes as a three-part condition. All three have to occur, for the extraordinary bonus to kick in. This is how Forbes summarized the new special clause in the contract terms:
- Nokia’s share price drops steeply as the company drifts close to cash flow crisis under Elop.
- Elop sells the company’s handset unit to Microsoft under pressure to raise cash
- The share price rebounds sharply, though remains far below where it was when Elop joined the company.
So - Elop is not paid if Nokia share price stays on the same level when he is hired, or if it rises. In that case he gets normal bonuses of his share options becoming valuable. The better the Nokia share price, the more Elop stands to gain. Typically would be valued in the low millions per year.
If the Nokia share price collapses - then Elop has to be able to sell - the Nokia handset unit - to Microsoft. Not selling the Networking unit or the mapping unit or patents or anything else. The clause was explicit it has to be the handset unit and..
Only if the handset unit is sold to Microsoft. Not an open contest to sell the handset unit to the highest bidder. Only if Elop is able to sell the handset unit to Microsoft.
And lastly - this is very important, the Nokia shareprice has to rebound after this sale. So it is not an 'emergency fire sale' of Nokia's best assets - after which the share price would plummet. But if the Nokia share price grows after the sale of the handset unit to Microsoft - in that case Elop would clearly must have built a good business out of the mapping or any Nokia other projects. The share price has to rebound after the Microsoft sale is announced.
We know this all happened, exactly in that sequence. First, lets examine how this weird clause came to being. Again - I remind you, I was not there, I don't know anyone in the meetings, and I have no secret documents etc. This is pure speculation on the emerging facts now, and examining the world of 2010. Why was this bizarre clause added to Elop's contract in 2010. (note, there is news that the contract was ammended now, in 2013, when the Microsoft deal was announced. That ammendment was only to ensure that Elop won't depart Nokia now, take the cash, and not go to Microsoft. Microsoft is paying 70% of the 25 million dollars, and wants Elop to come with the handset unit back home. The material terms of the contract were as Forbes reports, those three bullet points, already in 2010).
So once again, this is my speculation. But I think I know how the negotiations happened. We know what was in the normal Nokia CEO contract and that this clause was added for Elop. So it was not Nokia's wish, it was Elop's wish. Why did he want this, and why did Nokia say ok. I think it was a series of discussions that went something like this.
First, Nokia offers Elop the standard contract. They debate and discuss the actual dollar values and options etc. Then Elop says - this is all good if Nokia is healthy and can be saved. But I am not from the company. It may be more rotten than what you are telling me, and I have no way of knowing. I am signing my life to this, my career to this venture. If I find that Nokia cannot be rescued to the previous levels of share price, my career is doomed, due to no fault of mine. In that case, Nokia would have been 'already destroyed' by Kallasvuo and previous Nokia management, damaged beyond repair. (remember, at the time in late 2010, there was widespread consensus that Kallasvuo had failed as Nokia CEO with many in the press calling for him to be fired).
Elop is a good debater and negotiator and speaker, he'd put it in more flowery language, but the key point is, he had a very legitimate concern, that since Nokia's share price had been falling for 3 years, even if Elop does a magnificent job for the next 3 years, he might not get more than the Nokia share price to stabilize, and worse, it may be that Nokia is truly a dinosaur, the Apples and HTCs and Google Androids will bury the Nokia handset unit, and Elop can never be compensated properly for running the company in this distress. It was a very legitimate concern, that even after Elop's best efforts, it was possible the world of telecoms had changed so much, that the current model for Nokia was not sustainable anymore. The good times of being the world's biggest handset maker were over.
In that scenario - Elop suggested since he is from Microsoft and knows Microsoft - he knows Microsoft wants a handset unit. Microsoft had bought small youth-phone-maker Danger (and was just releasing its Kin phones at this time). Elop promised the Board, that if the Nokia share price fell disasterously, even after the loss-making networking unit was sold - then the future of Nokia was not in handset hardware, it was elsewhere such as location-based services and mapping, Navteq (if you remember Elop early in his tenure was promising how he'd transform Nokia from the Connecting People company to a 'where' company around the mapping competence). If the handset unit failed in that future, Elop could get it to be sold to Microsoft. Not under the current situation, obviously, with the handset unit producing Fortune 100 sized profits - would be far too expensive for Microsoft. But, if Elop's fear proved true, that the handset unit is a dinosaur, and would eventually become an underperformer for Nokia, in that situation only - he could sell the handset unit to Microsoft.
That would require that the Nokia share price was in irretrievable fall for years after the signing of Elop - probably the minimum period for this was set at 2 years (considering the bulk of the Nokia Microsoft deal were negotiated in February 2013 between Microsoft CEO Steve Ballmer and Nokia Chairman Risto Siilasmaa, and thus the preliminary talks setting this up, would have started in late 2012 - two years after Elop started and when the Nokia share price had fallen by 60% from when Elop started.
Obviously the Nokia Board had a different view to the Nokia future, they had seen the market and knew it well and knew Nokia competences. Nokia had feathered the global economic crisis better than any of their traditional rivals. In the new smartphones, Nokia was far bigger than its nearests rivals. In smartphones Nokia had experienced unusual delays both to the next Symbian based smarpthone - the N8, and the first Linux based MeeGo devices, due to the project taking the time to integrate Nokia's Maemo with Intel's Moblin. So the Board knew, the next years would be a new golden period for Nokia, the hot N8 and E7 devices, already shown in early promotional materials, were highly anticipated. If Anssi Vanjoki's processes truly did produce these phones without the bugs and problems of the N97, then just powered by the N8 alone, Nokia should be back to happy investors and strong growth again, like it had with the N95 that massively outsold the first iPhones.
Nokia's Board was not in the least bit worried that the handset unit could become Nokia's sinking anchor, and its highly profitable business was not about to be destroyed. If anything, under Elop, if he cut waste in the software side - that would only improve the handset unit profitability. And honestly, if Elop could make the case that abandoning the in-house software development and going with an outsider like Google's Android or Microsoft's Windows - that would only boost the handset profitability. Nokia Board knew it had the world's best overall handset loyalty - only in smartphones was the loyalty of iPhones better, so even in smarpthones, Nokia's loyalty (currently, led by the notorious N97) was second best. Better than all other rivals. This was a scenario that the Board saw, that Elop had - and the Board understood that Elop's fears were well grounded, but a scenario that the Board thought was not even plausible.
But then someone thought of the clever 'guarantee' that Elop isn't a Microsoft mole and stealing Nokia's crown jewels to Microsoft. This clause needs one special condition - after the announcement of such a sale, the Nokia share price has to climb, not fall. This is how the Board saw, in 2010, that if Elop can build new businesses, more profitable busineses, such as from mapping and navigation, selling software and licences - remember in 2010 Microsoft was the same size as Nokia but Microsoft had 10x bigger profits, made from its licencing royalties. If Elop could create such profitable businesses for Nokia, that the handset business is dragging Nokia down, then yes, by all means, sell the handset unit to Microsoft - but the Nokia price must recover after the deal, to increase in value (while not having to reach the levels it used to have before Elop, obviously).
Fair deal. They also specified 'Microsoft' as the only possible buyer of the handset unit, because if Elop sold the networking unit, and then started to ask for bids for the handset unit, the Board could sense a revolt brewing. The handset unit would only be allowed to be sold in the deepest secrecy, thus the only bidder would be Microsoft. And currently, the price of Nokia shares was far too high for Microsoft to even consider purchasing Nokia's core business. This whole scenario would not emerge unless the Nokia share price fell to perhaps half it was then, in 2010.
I can see, that Elop honestly, without any malice or 'Microsoft mole' intentions, wanted assurances, that he is still paid a bonus incentive, if the main business of Nokia, its handset business, is so much a dead business, he can't save it. But in that case, he has to achieve a sale of it - to Microsoft which Elop knew wanted the handset business. And the last clause, Nokia share price must rebound after the sale, was the guarantee to Nokia's Board, that Elop won't sell the handsets business if its still Nokia's main and most profitable business.
I believe this clause was negotiated in good faith by both sides and there was no malice and no plan to wreck Nokia with this contract. It was a flawed contract. It created an irresistable carrot to Elop, to pursue destructive behavior and damaging Nokia. But I can see how that text was added to the standard Nokia CEO contract, because Kallasvuo was hired when Nokia share price was generally increasing, and Elop was now hired when Nokia price was falling. Elop needed some assurances that if he did his best, and the conditions were hopeless, he still had a way to bring mutually beneficial outcome to Nokia. And in that very unlikely case, his gain would be considerable. 25 million dollars.
THE ROT OF THE CONTRACT SETS IN
Next Elop went to work. Elop definitely wanted to bring in Microsoft as Nokia's operating system provider. This may have been honestly 'the best option' to Elop in the Spring-Summer of 2010 - when Android was still very young and Elop knew Windows Mobile was being terminated and a new touch-screen optimized smarpthone OS, Windows Phone was under development. Windows Phone was supposed to be, to the iPhone iOS, what the Windows PC software was to the Apple Macintosh PC. So Elop had a particularly rosy view of the promises of Windows Phone (which would launch shortly after Elop joined Nokia).
Because we now know that Elop had this escape clause in his contract - the whole 'MeeGo vs Android vs Windows' discussion was tainted and flawed, from the start. If Elop needed his 'safety clause' to be a sale to Microsoft, he needed Nokia to run on Microsoft software, not Nokia's own MeeGo and definitely not Google's Android. Now we know why Elop immediately, in his second act as CEO, cancelled the public revealing of the first MeeGo smartphone. He then postponed the project, cut its funding, and cancelled totally the first device, though produced by Nokia internally, ready to sell, it was cancelled weeks before it was to be shown, finally in early 2011. Yes, the N9 is the second MeeGo device (interally the code was N9-01, Elop killed the first, internally known as N9-00). That is why Elop never supported the MeeGo project or its phones, even as they received unprecedented public support and press reviews and user reviews. Elop was on a mission to kill MeeGo, because he had in his contract a stipulation that was his safety valve, but that was explicit to Microsoft. Elop was smart enough to see, that MeeGo was going to be a great operating system and would be very good for Nokia's handsets. If MeeGo was released before Elop had finished his 'evaluation' of the options, Nokia would never go for the Microsoft option.
The same, obviously was about the Google Android 'option'. That was doomed from the day Elop called Eric Schmidt. Nokia was never going to select Android, because Elop had 'sale to Microsoft' in his personal incentive clause, and that clause was worth 25 million dollars to Elop.
Because Elop was personally involved in evaluating the software options and in the negotiations with Google and Microsoft, the outcome was pre-destined. This was a mistake by the Nokia Board and this was a clear conflict-of-interest by the new CEO. That Elop didn't insist on a neutral arbitrator for hte decision - like past Nokia President and CEO of Nokia's handset business, Pekka Ala-Pietila who had been Ollila's first choice to replace him as Nokia CEO, we have since learned, but Ala-Pietila had declined (and the second choice became the failed CEO, Kallasvuo). Ala-Pietila could have been hired to evaluate the software options on a one-time consulting gig, to solicit the bids and conduct the negotiations. Knowing Nokia handsets intimately but being an outsider, he could have done the job - and his recommendation would have definitely been MeeGo number 1, and Android number 2, he would not have recommended Windows Phone in February 2011, it was clearly the worst option, even then.
The CEO, especially because he had the Microsoft clause in his contract, should have insisted to be excluded from those discussions and be 'recused'. The Nokia Board, if it had been competent, should have insisted on this. That Elop didn't do so, tells us the process was tainted already in late 2010. Elop had been corrupted by the 25 million bonus.
THE BOND VILLAINESQUE PLOY
One wonders when it hit Elop, that his contract now had a clause, that invited him to do the following - try to ensure that for the next two years Nokia share price falls. Make sure that the handset business suffers. Get Microsoft selected as the new Nokia OS for its smartphones. Kill off MeeGo. Then continue to wreck the Nokia business, especially its phone business, even further - which the CEO could easily do, like causing confusion in marketing with numbering-naming-numbering games, changing Nokia's slogan, changing the Nokia ringtone, etc etc etc - not to mention, delaying obvious tech advances Nokia had, like NFC and dual SIM technology that Nokia had already announced, etc - all just by delays and confusion, to have Nokia handset unit under-performing. This will guarantee Nokia in a highly competitive market will suffer. That in turn will push the share price ever lower.
Then when he has permission - after 2 years of share fall - to approach Microsoft when Nokia's handset unit is unprofitable and can be sold for a song - sell it to Microsoft. Finally, the Machiavellian - nay, Blackadderish - cunning plan - was to push Nokia share price far further down, with just dumb management decisions during late 2012 and early 2013, to ensure that when the Microsoft deal is announced, Nokia share price is artificially low, and will rebound simply as Elop's deliberate mismanagement is then 'fixed'. So, what has Nokia been doing recently really dumb stuff, like the tablets do/dont/do stuff and the 808 Pureview Lumia Pureview 1020 Purevivew etc stuff. And to really help push Nokia's share price low, ask his buddy Steve Ballmer at Microsoft to go and 'Osborne' the first Lumia series running Windows Phone 7.5, that cannot be upgraded to the new Windows Phone 8. Yeah, this is easy.
At some point between when the ink was dry on the contract and February 9, 2011, when Elop wrote his Burnign Platforms memo, clearly Elop had decided, he won't play the game of fixing Nokia for real. He'll take the short-cut, wreck Nokia and sell the handsets to Microsoft, and pocket 25 million dollars.
BOARD IS AT FAULT
Elop wrecked Nokia deliberately from 9 February 2011. Elop already made decisions against Nokia's best interest in 2010, but the real clear steps are visible from February 2011. I have explained the big picture here - if you want the 'short version' of 11,000 words - or if you want the full story - in 33,000 words - I explained last year why Elop has been the most destructive CEO of any Fortune 500 sized global company, ever. And now we know why Elop did it. He was invited to do this, by the CEO contract he was given. And 25 million reasons in it.
Elop has acted against Nokia's interest consistently since February 2011, because he needed the Nokia share price not just to fall, but to keep falling until August 2013 - when the Microsoft deal was announced - and Elop had to push the Nokia price so low, that his departure would create an immediate 'bounce' to the Nokia share price that we saw in August and September of 2013. It doesn't matter what was written in Elop's contract about this particular clause - the other behavior by Elop was clearly - clearly - clearly - actions against Nokia's best interest - and not judgement calls - the Ratner Effect and Osborne Effect are MBA class case studies of management stupidity. As Nokia saw the exact same results of sales collapse as those management theories promise - Elop was acting deliberately to cause damage to Nokia. He has to be fired 'for cause' ie for failing in his job - regardless of that clause in his contract. The CEO cannot be rewarded for destroying his company's most profitable business, deliberately. Same is true of essentially all his actions, but his active in-public demolishing of MeeGo is again, crystal-clear action of 'failing' his fiduciary duty as CEO, and Nokia can - and must - fire Elop for cause, and not pay him a penny of the benefits promised and revoke all payments since those mistakes - and revoke all his stock options too.
The Board witnessed Elop doing his madness. The Board might have seen that this is driven by the crazy contract clause. They probably didn't even understand initially how this clause is driving Elop. That doesn't matter, the Board saw what Elop was doing, and should have warned Elop in February 2011, and fired Elop by June 2011, with the outrageous and anti-Nokia statements the CEO made of the N9 and MeeGo to Helsingin Sanomat.
Elop was a criminal CEO. He must be fired now, and all paid salaries since at least June 2011 must be collected back from him. Nothing is to be paid for terminating Elop, because we can now see, his actions were deliberate, aiming to destroy Nokia share value. I don't have the numbers here, but I'm sure some of my readers can calculate, what is the total share value destroyed by Elop from Nokia market cap February 8, 2011 to September 3 of 2013. That money was stolen from Nokia owners by Elop and actively destroyed - he acted against Nokia interests, in clear breach of his fiduciary duty as CEO. The contract clause explains Elop's motivation - it does not in any way excuse Elop from his responsibility. His own actions damaged Nokia. He admits it himself, such as to the Nokia shareholder meeting in 2012, when Elop admitted his Burning Platforms memo did damage Nokia. It doesn't matter if he has a clause in his contract that rewards Elop for a dropping Nokia share price under some conditions - Elop as Nokia CEO cannot be retained as 'doing his job correctly' if Elop causes Nokia share price to fall.
The only way the CEO of any company may actively take actions to reduce the share price - is with the explicit prior consent of the shareholders. If it was Elop's mission to cause the Nokia share price to fall - its not enough for the Board to bless this - Elop should have come to to the public, told Nokia shareholders in a press release or in a special Shareholder meeting - that this is his intention - and gotten shareholder approval for it. That Elop went to destroy Nokia value deliberately, over two and a half years - wiping out billions - means Elop acted against his CEO duty - that is cause to fire him - without any pay or rewards. And that Nokia Board must do now that we can see the facts. Nokia Board should have done this two years ago.
So, Nokia Board? It is also culpable. It failed Nokia shareholders arguably from February 2011, definitely from June 2011. Nokia's Board should have fired Elop then, for cause. It is now clear that Elop destroyed Nokia. We know now, why he did so. It does not excuse the Nokia board. Because these facts did not appear now in September 2013. We saw the destructive behavior in 2011 and 2012 and 2013. The Board was asked to act. I have not been alone on this blog chronicling the mistakes. As esteemed bodies as the Finnish shareholder association have called for Elop to be fired. Because the Board oversaw Elop and had the numbers - they have seen the truth before the rest of us. If the Board did its job, it would have fired Elop two years ago. And today Nokia would have a healthy handset unit contributing big profits to the company and its shareholders.
The Board must be fired. I have argued, that every Board member who has not listed in the official minutes a personal objection to Elop's mismanagement - from June 2011 on - must be fired too, including obviously Chairman Siilasmaa. All Nokia Board members must be investigated. Have they been in collusion with Elop, seeing that Elop is now causing damage - and knowing - knowing - the share price of Nokia next year will be even worse than now. Have the Nokia Board members known of Elop's devilish plans and have they been shorting Nokia knowingly, well aware, that the worst is not yet here. That Elop has methods to push the Nokia share price towards the bottom all the way to September 3, 2013, when the Microsoft deal would be finalized?
What to do now? Nokia owners - shareholders - should fire the Board and the CEO and reject the Microsoft offer, obviously. The Finnish Stock Market and New York Stock Exchange must announce in public that the behavior of Elop and his clear conflict-of-interest as CEO have to be investigated - such investigation will immediately reveal that Elop has acted grossly against his fiduciary duty and Elop must punished, severely fined, and be banned from holding any position in any publically-traded corporation including obviously Microsoft. Also all Nokia Board members, current and those in office from February 2011, must be investigated and similarly punished, fined and banned. This cannot remain as 'acceptable business practise' by any corporation listed on the New York Stock Exchange to allow the CEO to deliberately damage his own company to drive the share price down by 70% - and be paid a bonus for doing so. Not to mention the obvious conflict-of-interests involved, if Elop was collecting Nokia CEO salary but acting against Nokia's best interest and specifically in Microsoft's best interest. For its role, that Microsoft offers to hire Elop back to Microsoft - after such clear breaches of his duty when Nokia CEO - means Microsoft too must be investigated what role it had. If it was in any kind of collusion with Elop, then Microsoft too must be fined and its offer to take Elop back to Microsoft must be revoked.
The Finnish government and the EU should also examine this deal and the behavior of both Elop and the Nokia Board. The impacts to the Finnish economy have been devastating, in towns like Oulu and Salo in Finland and many parts of Europe etc - from Elop's deliberate destruction of Nokia. The Board is equally at fault. The Finnish government and the EU must also punish Nokia the company and these responsible parties. I think there have been crimes committed here too, but yeah, at this point I want investigations.
So what we know, is that Elop had a contract in 2010, that had a peculiar clause, that was an emergency condition. If Nokia share price decline was not temporary thing that could be fixed by any reasonable CEO, but a systematic problem and Nokia was destined to see decline. If the future of Nokia could be built on some other business, not phones, and Elop under those conditions, could in secret negotiate a deal to sell the handset unit to Microsoft, but only Microsoft - and after that deal, the Nokia share price would rebound, then Elop would be given a bonus of 25 million dollars. This was a strange clause but it was reasonable by viewing the handset industry with American eyes in 2010. The Board was also not concerned with this clause, as it was clearly not a plausible scenario, as the Board was very well knowledgable about the overall global handset industry and how strong Nokia was not just in handset design but in the retail and carrier relationships, etc.
Elop took that clause, and started to systematically destroy Nokia's handset business. He set the 'platforms on fire' with his memo. He Ratnered and Osborned his product lines. He feuded with retail and carriers until Nokia's carrier and retail relations were ruined. He made public statements disparaging Nokia's top new products like the N9 handset and the MeeGo operating system. He used a mad production idea for the first launch of Lumia handsets - while Nokia's own, world's most advanced - factores were idling with collapsing demand, Elop used outside factories to produce the first Lumia handsets, that were plagued with problems. Elop would throw every obstacle he could think of, to damage Nokia marketing and sales and execution.
He got some (unanticipated?) support from Microsoft in damaging Nokia share price, such as the purchase of Skype - to anger carriers - to the Osborning of Nokia-used Windows Phone version, 7.5, that suddenly had no migration path to the new Windows Phone 8, and the sudden launch of Microsoft's own tablet, the Surface that was seen as a dangerous step to compete with Nokia directly. All further steps by Microsoft that served to push Nokia prospects lower and thus push the Nokia share price even further down.
Elop terminated retail contracts, went from all-carrier support to 'exclusive' carrier deals - a strategy so bad, that it killed Palm and Apple, the last company to deploy that strategy only at its launch, ran away from it as fast as it could. Elop terminated long-standing advertising and marketing agency deals. Elop terminated promising Nokia projects like highly successful Nokia Money and sold Nokia assets like Vertu luxury handsets, and Nokia patents etc. Even when Nokia's own managers argued on behalf of Nokia customer demand and known - customer-surveyed consumer needs - like that 40% of Nokia smartphones traditionally were sold with QWERTY keyboards, Elop overruled such ideas and refused to let any QWERTY based phones be sold on his new Lumia line, etc.
When we examine Elop's tenure, in particular his actions from February 9, 2011, they all can be seen as 100% consistent with achieving the three goals of his contract clause:
- Nokia’s share price drops steeply as the company drifts close to cash flow crisis under Elop.
- Elop sells the company’s handset unit to Microsoft under pressure to raise cash
- The share price rebounds sharply, though remains far below where it was when Elop joined the company.
Almost all of Elop's actions have been criticized by some in the tech space, several of his most glaring mistakes are almost universally seen as mistakes, such as telling the world, no matter how well the N9 on MeeGo will sell, Elop will not authorize more sales of MeeGo devices in the future. Most of Elop's actions can be seen as acting against Nokia's best interests. Some are obviously against Nokia's best interest like the above statement. And all of Elop's actions - every single one of them - served to promote his chance of winning the 25 million dollar jackpot in his sweetheart contract as CEO. Ensure that the Nokia share price keeps falling - make the dumbest statements possible and mistakes but make sure that the handset division suffers. Then ensure that Elop himself is seen as such a toxic boss, that when he is gone, the Nokia share price instantly recovers. That means, that Elop wins. Nokia was destroyed in the process, but Elop got his bonus.
Elop had a sweetheart contract clause yes. But to achieve it his way, Elop clearly stepped over the line - he jumped over the line - he flew over that line into another country, that far he went over the line. He clearly acted against his duty as Nokia CEO to improve Nokia shareholder wealth. Instead, Elop demolished Nokia shareholder value. He failed as CEO and because his failure were deliberate actions against Nokia interests - he was at fault. He must be fired 'for cause' which means, Elop gets NONE of the gains a CEO would normally get, including his salary, bonuses and this bizarre contract clause. This clause - after all - only applies if Elop has done his job as CEO. He cannot be compensated for destroying the company himself, and then saying - look, the share price went down and I sold the handsets unit to Microsoft. Because he was Nokia CEO - if he acted deliberately against Nokia's interest that is contract breach 'by cause' ie Elop is at fault. Nokia (and Microsoft) cannot pay him anything, definitely not the 25 million dollars. Nokia should sue to get back every penny paid since June 2011 at the least.
And Nokia's Board made a mistake with the wording of that clause in Elop's contract in 2010. Fine, those things happen. They should have noticed the damage it causes in February 2011 - or latest June 2011 - and when it was obvious the contract is driving Elop to damage Nokia, they should have ammended that contract. By June 2011, the damage to Nokia was so severe, Elop really should have been fired by then. Nonetheless, the Board has been incompetent ever since June 2011 and must also be fired - and investigated, especially for any share dealings - shorting Nokia stock etc.
Thats what I think happened. I was not there, this is all speculation but attempting to make sense of the actions. I think I can fully understand why this clause was added on Elop's request to the Nokia CEO contract. It was well-intentioned. Elop abused his power as CEO driven by that contract clause, it is clear. Elop should have been stopped. The Board should have seen that Elop was not acting in Nokia's best interest, that was obvious. If the contract clause was causing it - the Board should have insisted on ammending the contract - threatening to fire Elop unless he accepted it along the Spring of 2011 - and by June 2011, even that was not enough, Elop should have been fired, regardless. Because the Board clearly saw this all as it happened but did nothing, the Board is also responsible and must be fired and investigated.