Peter's principles.

When Peter W. Currie wants to get away from it all, he does. His favorite vacation spot has no laptops, no fax and no phone. In fact, it's located comfortably outside of cellular range - not what you'd expect from the CFO of Canada's leading high-tech telecommunications company, Northern Telecom

But Currie, 45, didn't become CFO of Nortel by staying out of touch. His rapid trip up the corporate ladder includes two stints with his current employer and executive positions with North American Life Assurance Company and Procter & Gamble.

A respected business person who attributes much of his success to working with "superb professionals," Currie is helping to lead the $10.7-billion telecommunications company at a time when deregulation is driving competition. William E. Hewitt, vice president of investments at Sun Life of Canada and a member of Financial Executive's editorial advisory board, catches up with the CFO to get his thoughts on the future of telecommunications, the role of the finance function and Currie's career moves.

HEWITT: In light of all the deregulation that's already occurred in the telecommunications industry, what do you think remains to be done?

CURRIE: I think we're on the right path in terms of more competitive interaction in the marketplace. The priority now is to allow the market to find its own level, to have the regulators step back and let the market forces take over.

Canada's needs are very different from the United States'. The United States is more deregulated today and, with the passage of the Telecommunications Act last January, I think deregulation there has proceeded about as far as you could expect. It's opened up all aspects of local and long-distance carriage to competition and should sort itself out quite efficiently, if not elegantly, over the next five to seven years.

On the other hand, in Canada, the Canadian Radio-Television & Telecommunications Commission isn't helping consumers by trying to be its conscience. Canada needs to determine the real role of the CRTC.

But right now most of my attention is focused on Europe. Full deregulation and eventual privatization of the European PTTs [post, telephone and telegraph authorities] will have a large impact on our company because it will open up markets that were closed to nonindigenous suppliers. When deregulation and privatization of some of Europe's PTTs occur, I think we're going to see a dramatic change in the competitive complexion of Europe after 1998 - more along the lines of what we've seen in the United States and the United Kingdom.

HEWITT: So your most significant regulatory impediment is remaining deregulation in Europe and Southeast Asia?

CURRIE: In Europe, deregulation of existing telephone monopolies is the linchpin. But we're not as directly affected by regulation on a day-to-day basis as is a telephone company like Bell Canada or Nynex. Southeast Asia, however, is a different story. The people there are rapidly turning to alternative carriers.

NAVIGATING FINANCE

HEWITT: What makes your mission statement for the finance function unique?

CURRIE: Mission statements are pretty commonplace. It's their execution that makes any organization unique. At Nortel, our finance function is integral to the success of our individual business units. We're structured on a line-of-business or product basis, with distribution to various market regions around the world. While we have central treasury, tax, investor relations, and accounting and statutory reporting functions, we also have an operational finance organization aligned with each of our business units. That connection has been very important.

HEWITT: Does this disparate structure create any anxieties for you?

CURRIE: Nortel has, perhaps, a different culture from many others. We tend to manage in a less regimented fashion. The fact that we're spread out all over the world and we have different businesses moving at different paces and in different markets means we have to allow our colleagues a lot more freedom than some other organizations would.

This holds true for each of the operational finance units as well. But we have some overarching objectives. For instance, I sit down annually with my senior colleagues in finance and we establish the overall objectives that then get percolated down through the individual organizations. If we come up with a dozen objectives - and I don't think people can cope with many more than that - then each finance council member may have three or four, with some overlapping, of course. Then every month we have a council meeting to ensure we're on track.

CURRIE'S CLIMB

1994-Present    Senior Vice President & CFO, Nortel Ltd.

1992-1994       Executive Vice President & CFO, North
                American Life Assurance Company

1979-1992       Northern Telecom Ltd. and subsidiaries

1991-1992       Vice President and Controller
1990-1991       VP-Finance & Information Systems
                (Canadian operating co.)
1987-1990       VP-Finance (Canadian operating co.)
1985-1987       Group Controller (U.S. operating unit)
1983-1985       General Auditor
1979-1983       Division Controller

1973-1979       Procter & Gamble, Toronto
                Various management positions covering
                internal audit, general and construction
                accounting, financial analysis, taxation
                management

1978            MBA, York University, Toronto
1973            BA, Economics, York University

HEWITT: Would you give an example of an overarching objective?

CURRIE: One revolves around the need to become more involved in vendor and customer financing. Historically, our company provided hardware and software products to our customers around the world. Now our customers are saying, "That's fine, but we also want you to provide the design, fabrication, installation and financing of our networks until we go cash-flow positive."

In the past, we left the financing to others because it wasn't one of our core capabilities. Since it's now a competitive element in our marketplace, we're embracing it. So one of our objectives is to develop effective customer financing. Whether that's through debt or equity vehicles depends on the individual project. And, by the way, the projects have an average size of about $100 million - not insignificant.

HEWITT: What do you think about the SEC-mandated Management's Discussion & Analysis financial reporting guidelines? Have these added value to public company stakeholders?

CURRIE: Although we're a Canadian company, the SEC's mandate is important to us because we get about half our revenues from the U.S. market and we're listed on the New York Stock Exchange. By and large, the MD&A reporting guidelines have been useful. I may not gain a lot of friends by saying that, but I think corporations have a responsibility to explain to their stakeholders what they're doing and why.

But I'm concerned the guidelines aren't specific enough. We don't have consistent product segment definitions, so you can still end up comparing apples with oranges on an industry-to-industry basis.

I'm also concerned that as more companies become global, their competitors may not be bound by the same disclosure guidelines. Companies that are forced to disclose extensive information about their business - in areas like gross margins, revenues and customer segmentation - can be at a competitive disadvantage. In that respect, there's an obligation to the shareholders and stakeholders not to disclose such information.

THINKING LIKE A CEO

HEWITT: To whom do you report at Nortel, and do you have any dotted line responsibilities to BCE, Nortel's parent company?

CURRIE: Like most CFOs, ultimately I report to the board of directors. But in our management structure, I report directly to the corporate executive vice president. He pulls together all the resource functions - finance, government relations, human resources and information technology. Since we're structured on a global basis, our functions are distributed worldwide and our CEO has a rather broad span of control, encompassing several of the international market regions.

We also have a president's council, chaired by the CEO and composed of the top 24 people in the company, which meets regularly. It's a very open exchange.

The president and CEO of BCE both sit on our board. Although I do have regular dialogues with my associates at BCE, there's no reporting relationship. If we're going to under-take an activity beyond the norm, like an acquisition or refinancing, even penetrating a new market, I'll talk to the folks at BCE to keep them informed. Our CEO does likewise.

HEWITT: It sounds like you're in a good position to talk about the evolving role of the CFO and the shift from managing the financial reporting process to contributing to the strategic direction of the business.

CURRIE: I view my role as having more to do with contributing to the strategic direction of the business. I don't think any one or two people can define the strategic direction of a large enterprise any longer. It takes a collective approach - the CFO, COO, CEO, unit presidents, market presidents and so forth.

But I agree there's a shift for financial executives toward strategic involvement. Now we really need to know our industry and our competitors. For years, we could excel by knowing the technical aspects of the job. We could be super-controllers or accomplished treasurers and do very well. But now the stakes have been hiked up a few notches. CFOs have to think like CEOs - not act like CEOs, but think like them, to do their jobs more effectively.

HEWITT: You've said a successful CFO should be creative. How have you been creative?

CURRIE: One example is all the governance we now have in place for customer and vendor financing. Just 16 months ago, we had nothing. Now we have a credit review process modeled on several Canadian and U.S. banks. We've engaged our board of directors and developed relationships with portions of the capital markets we haven't worked with before.

Also, a few years ago we were one of the leading proponents of activity-based costing and activity-based management - before they became stylish. Now we're in the process of developing a program to make the top 5,000 people in the firm conversant in why shareholder value is important and how they individually can improve shareholder value. I'm sponsoring the project globally.

We've also recently developed a database information system for our global reporting function. And we've consolidated 25 accounts payable sites throughout North America into one site.

We've gone from a paper-based employee expense-reporting system to a completely automated desktop system that allows employees to enter reports at their workstations. It short-cycles the expense-submission routine while maintaining superior internal controls and accountability. It may sound mundane, but with 60,000 employees, expense reporting takes on a life of its own.

HEWITT: What's your opinion of treating the finance or treasury function as a profit center?

CURRIE: I absolutely don't think it should be viewed as a profit center. That's counter to our stewardship function. However, I think it should be a profit enabler. Like all other units, we should try to build business.

For example, within treasury, I view the mergers-and-acquisitions area as there to facilitate the growth of our business globally. Therefore, I see the M&A team as a resource for yielding significant income in the long and short terms.

Likewise, we charge our operational finance organizations primarily with forecasting and reporting. But I also expect the group to work with the field and line organizations to develop new ideas.

Some of our most creative pricing methodologies have come from finance people working with marketing and sales. They've resulted in new revenue and income streams, but that doesn't come from my saying to the finance people, "I want you to generate $100 million." It comes from their trying to facilitate the success of their colleagues.

HEWITT: How about foreign-currency exposure, given your growing multicurrency contract business and the requests for financing packages? That must bring some interesting treasury management problems into the mix.

CURRIE: It does. However, because most of our activities outside North America are conducted in U.S. dollars, the bulk of our contracts are in U.S. dollars. But where we have local operations, for example, in China, Malaysia, France, the U.K. and Germany, we generate foreign-currency positions and tend to map off those cost streams. Where we can't, we take defensive derivative positions. But we watch these carefully. In fact, in the last 18 months, we've designed and installed a global cash management system that will monitor this closely, so we can manage it on a more real-time basis.

HEWITT: Would you explain more about the derivatives products that Nortel uses?

CURRIE: Primarily, we use interest-rate swaps and currency swaps. But we stay away from commodities-based derivatives, at least in the normal course of business. We review and update credit criteria quarterly and review the criteria annually with our audit committee.

HEWITT: In terms of controllership, what's your biggest financial reporting headache?

CURRIE: Undoubtedly, the multi-jurisdictional aspects of the company due to inconsistent international accounting standards. We're driving our disclosure and reporting timetables and content around North American standards, although we're dealing with other parts of the world. For example, parts of Western Europe and parts of Asia are on completely different plateaux. It's a real challenge to assure integrity and timeliness in the financial accounts.

A WALK DOWN WALL STREET

HEWITT: Nortel has delivered significant value to its shareholders in the last few years. How do you deal with the Bay Street and Wall Street expectations for more?

CURRIE: Very carefully. We're careful to point out that we're managing for long-term growth in shareholder value. That's not just a dodge. When I talk to financial analysts, I emphasize you can't manage a company like this quarter to quarter. You manage it for the medium term, like five or seven years, because a momentum builds. You can't manage element by element. That's a bit dichotomous to financial analysts, who want to manage by the elements within their financial models.

HEWITT: What percentage of your time do you spend on investor relations each year?

CURRIE: About 15 percent to 20 percent. It's rare that I don't have at least one or two teleconferences each week with a shareowner representative or an analyst.

HEWITT: How do you respond when asked about your capital structure or the way you craft your debt-to-equity ratio?

CURRIE: I'm very forthright, but there are a few things I won't tell them. I won't predict performance, because I'm bound to be wrong and I can't think of an effective way of doing it without putting other shareholders at a disadvantage.

In terms of leverage and debt-to-equity or debt-to-capital ratios, we've been very open. We say our target is around 35 percent debt to capital, which we think is an efficient structure for a company of our size and the momentum we're trying to engender globally. I also point out that only two-and-a-half years ago we were in the mid-40s in debt to cap. We've gone from that to just below 30 percent through our financial restructuring program. Now it's up a bit as we expand our assets, primarily through customer financing, and grow our business, to some extent reflected in current receivables.

We don't think that's bad, given our corporate governance, which safeguards the shareholders' position. My experience has been that analysts react quite favorably to that.

HEWITT: Would you describe Nortel's capital allocation determination and approval process?

CURRIE: Our dividend policy is based on our philosophy that we're not a dividend stock; we're a growth stock. So our dividends are fairly meager in the absolute dollar sense but more an indication of confidence in the future. In terms of capital expenditures, we tie our program exactly to our long-term strategic plan, gear it around hurdle rates and modify it for expected returns. These are all aligned with management performance measures.

HEWITT: What thresholds do you use for hurdle rates?

CURRIE: Since we're primarily a manufacturer, for cost-reduction projects a large portion of our capital expenditures goes to plant and equipment expenses to drive down the unit costs of our products. We look for payback in less than two years. In some cases, depending on the product maturity, we want payback in less than one year.

On real-estate projects, it's essentially a lease-vs.-buy or build-vs.-buy analysis. Expenditures have to pay back in five years or less on a net present value basis. In terms of new projects or new product investments, the threshold is around three years.

HEWITT: Do you think investors in technology companies undervalue strategic initiatives, many of which have deferrals associated with their returns? Is there a value investors place on technology?

CURRIE: I think the investment community tends to undervalue telecommunications companies because it thinks of them as extensions of the telephone company, which hasn't been true for the last 25 to 30 years. However, for other technologies, the market has fully valued the investments. Look at the astronomical multiples on Internet product and service providers, and the experience we have observed with Newbridge Networks. It came out as a pure high-tech company and didn't carry the telco baggage. Its valuation has gone sky high.

HEWITT: That's a good example. When Newbridge was five years old, it had a high proportion of the value of Nortel, which has been around for more than 100 years.

CURRIE: That's exactly right. Look at Netscape's IPO. A company that was essentially $100 million jumped to billions literally in the space of a few weeks, all on the basis of one product. The same thing happened when Sun Microsystems came out with JAVA - an Internet access product that skyrocketed the value of the company. You wonder how much reflects real products today and how much is based on "futures."

BACK AT HOME

HEWITT: What do you see as your personal organization design challenges and opportunities?

CURRIE: It's important for me to have an appreciation of the dynamics in each of the environments where Nortel operates. For instance, I need to know about China, Japan, Colombia, the United States, Canada, Germany, France and the United Kingdom.

Communications is a key factor. We manage finance as a globally integrated function and, as a result, I'm involved in all the personnel selection decisions for various positions above the director level. Also, the finance executive team is very involved in the career progression of our people. That's important in a global organization. You've got to maintain the perspective or you become insular and potentially parochial.

HEWITT: As a financial officer in a technology company, you see large appropriations in rather uncertain areas and you listen to scientists present their needs. How do you measure results from research and development?

CURRIE: We insist on a business analysis before we undertake large-scale projects. We spend about $1.7 billion on R&D a year. Of that, relatively little is pure research - that is, developing brand new ideas and concepts. The rest is application.

However, we do carefully manage the interval from idea to commercialization. We have a rigorous gate review process and a series of steps in the development cycle. If the program goes according to plan, we track an idea through product launch and its various life-cycle segments to make sure we get the payback we're anticipating. We measure each project carefully, but without any single, unique measure.

HEWITT: Is there a next logical step as Nortel continues to pursue digital technologies?

CURRIE: I think Nortel will continue to evolve the technologies we have - digital central office switching, photonic transport, wireless communication and data networking - and make our networks really open and intelligent, completely interactive. We're working on increasing bandwidths now, because the telephone networks that were configured to handle voice signals now have to carry multimedia images - graphics, text and data.

HEWITT: Do you have any tips on how financial executives can handle an array of information - from print to telephone to e-mail?

CURRIE: First, I recommend you use every medium available to communicate with your colleagues. Second, I like to handle each piece of information once and only once. Deal with it and move on. Also, I have fairly sophisticated workstations in my offices, but I don't have a printer. So I don't generate paper, and that again forces me to deal with items immediately.

I've come to the conclusion that your first inclination on a topic is probably the right one. Just go with it, and deal with the consequences if you make a mistake. At least you don't end up in intellectual gridlock.

HEWITT: What do you consider the biggest issue surrounding information security?

CURRIE: No question - unauthorized or malicious database access. And in a company like ours, it's extremely serious because most of our intellectual property is on a database. When you're geared around software products, unauthorized access is a big deal, especially if you're penetrating new markets, like China, where intellectual property is often one of the bargaining chips used to break in.

HEWITT: So where do you think Nortel will be in five years? And where will Peter Currie be?

CURRIE: Nortel should be among the top few global telecommunications suppliers in the world. I think we'll have half our revenues outside North America. As for me, there's no place else I'd rather be. Sometimes, if you're lucky, you find an environment in which you can really resonate; it strikes the right chord. For me, telecommunications is it.