Losing the Signal: The Spectacular Rise and Fall of BlackBerry (22 page)

Like an NHL referee standing by the penalty box, Leipold read off a list
of alleged misconducts by Balsillie and his advisers. There was the time Balsillie’s lawyer Rodier threatened to file an anti-competition complaint against the NHL if Leipold didn’t close the Predators sale.
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Then in May 2007 Balsillie agreed to terms that included a commitment “to make the franchise work in Nashville,” Leipold said. One month later, Balsillie’s advisers were negotiating an arena lease in Hamilton and selling thousands of reservations for season tickets to Hamilton Predators games. That morning, in Chicago, Leipold looked directly at Balsillie and asked how selling tickets to Hamilton fans could have possibly helped Nashville’s interests. “Mr. Balsillie had the gall to say that by selling tickets for the Predators in Hamilton he had helped me by leading to a resurgence of fan interest for the franchise in Nashville,” the Wisconsin millionaire later said in a court declaration.
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According to Leipold, there was a “palpable feeling of stunned disbelief throughout the room,” after Basillie spoke.
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By the end of the day, the NHL announced it had voted 26–0 to reject Balsillie’s bid, citing an obscure bylaw requiring owners to be of “good character and integrity.” In a memorandum later filed in court, the league said Balsillie failed the character test because of his conduct with the Penguins and the Predators and his “wrongdoing at RIM related to the backdating of options.”

Balsillie, who knew more than a little about NHL history, was stunned by the decision. The NHL’s roster of past officials is loaded with rogues and fraudsters. LA Kings owner Bruce McNall, who later would serve time in jail for defrauding banks, had recruited Bettman to the NHL in 1993. The NHL’s Norris Trophy, handed out annually to the league’s top defender, is named after the father of former Chicago Blackhawks owner James D. Norris, a one-time associate of mobster Frankie Carbo. Former Toronto Maple Leafs owner Harold Ballard was jailed in the 1970s for fraud and tax evasion, but he got to keep the team. Former NHL president Clarence Campbell, the Bettman of his day, was convicted in 1980 for bribing a Canadian senator. More recently, Silicon Valley entrepreneur and San Jose Sharks part-owner Gregory Reyes kept his stake in the team after being sentenced in 2008 to twenty-one months in prison for securities fraud related to one of the same types of offenses for which the NHL had red-circled Balsillie—options backdating.
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Why the hard line on Balsillie? The league defended its unusual decision in a biting personal attack filed weeks later in court:

To many hockey observers, Balsillie had bungled the opportunity to gain an NHL franchise. He had lots of money and celebrity, but he tried to strongarm the league as if he was still outfoxing the likes of Nokia and Palm. He apparently didn’t appreciate that he was seeking membership in an exclusive, tightly held country club where members were expected to play by club rules and show proper deference.

Balsillie attributes the bad blood with the NHL to the league’s initial evasiveness about moving money-losing U.S. teams to Canada. He says the league had surprised him in Pittsburgh with a last-minute restriction on moving the team. The same thing happened in Nashville. “The commissioner played the ‘Let’s get you in and then we’ll see’ card to me many times, but I wanted clarity before closing any deal because I didn’t trust vague future promises,” says Balsillie. None of the friction, however, justified the personal attacks, he says. “I learned these guys play dirty. This is a dirty game. I learned this wasn’t a place to go.”

RIM’s chief had solid legal grounds for thinking the NHL couldn’t thwart him in an Arizona bankruptcy court. What he underestimated, however, was how much he’d angered the league. Balsillie pushed the boundaries in business because that was the way the game was played. No matter how many times he provoked customers such as BellSouth or pulled a fast one on BlackBerry Connect partners such as Nokia, customers were always clamoring for BlackBerrys. NHL owners had to be seduced, not conquered. Flattered, not flattened. “He went down this path exactly the wrong way,” says a senior executive with an NHL owner at the time of Balsillie’s NHL pursuits. “The governors have all the cards. You have to appeal to them and make it their idea.” The devotee of
The Art of War
had failed to follow one of Sun Tzu’s most famous commandments: “The supreme art of war is to subdue the enemy without fighting.”

Balsillie’s failed quest to acquire a hockey team cost him more than a battered ego. Employees and investors began questioning his dedication at a time when the company faced its greatest competitive challenge. It’s not unusual for prominent business leaders to acquire sports franchises, but it is rare to see the boss’s personal feuds spattered across front pages for months. Balsillie maintains his hockey quest didn’t distract him from his primary job, and
many of his RIM colleagues agree. He only spent a call or two a week on NHL business because he had a team of advisers managing his private interests, he says. At the same time, he today concedes the high-profile battles with the NHL created the impression his mind was elsewhere. “I do regret that there was a false public perception that I was not fully engaged in my duties as co-CEO of RIM. I think it gave media and various pundits an easy pass to write negative stories about RIM without ever getting to learn our business,” he says.

Both Basillie and Lazaridis had a number of outside distractions by 2009. In addition to hockey, Balsillie was extending himself in government and academic fields. He sponsored and chaired a Toronto-based foreign relations policy institute, the Canadian International Council, which hosts conferences that star political experts from around the world. He endowed a Waterloo think tank, the Centre for International Governance Innovation. By 2009 CIGI had secured C$100 million in federal and provincial funding to research, study, and enhance understanding of global government, economic, and legal issues. The institute also partnered with two Waterloo universities to create the Balsillie School of International Affairs.

While Balsillie pursued the NHL and supported his think tanks, Lazaridis chased his own quixotic dreams. His new ambition was the holy grail of theoretical physics: harnessing microscopic subatomic particles. The engineering student inspired by maverick physicist David Bohm now had the means to promote innovations in quantum mechanics. Silicon Valley owed its origins to Bell Labs, the AT&T ideas factory that led to innovations in transistors, lasers, silicon cells, and communications. Lazaridis envisioned a Canadian equivalent that might one day make Waterloo “Quantum Valley,” home to advances in quantum technology. It was theoretical physics that helped lead innovators to transistors and chips, crucial breakthroughs for computing and mobile communications. “I saw how powerful theoretical physics were in the last century. I saw how important it was to everything we did at RIM,” says Lazaridis. The United States had science foundations to support physics research, and as early as engineering school Lazaridis dreamed of building one in his backyard. “It was one of those things that I told myself in university that if I could afford it I would start one up.” He took his first step in 1999 by donating C$100 million, a contribution he later increased by C$75 million, to found the Perimeter Institute, a center devoted to theoretical physics that today employs over 150 scientists. In 2008, he announced a C$100 million investment
in a more ambitious project, a University of Waterloo center devoted to new applications in quantum computing and nanotechnology.

Balsillie and Lazaridis were dreaming big, pursuing a world beyond RIM, because they could. They had hundreds of millions of dollars to spend and a growing appetite for success outside an increasingly stressed RIM. Apple, one of Silicon Valley’s most successful companies, was starting to outsmart RIM in the mobile world. A patent war defeat and options scandal had cast a cloud on its management. And the personal relationship between Balsillie and Lazaridis was unraveling. RIM was developing a leadership problem at a time it most needed a strong management team. Where was the company’s board of directors? As a confidential report would soon reveal, RIM’s board was not in the habit of questioning management.

RIM’s top officers squirmed under a microscope all through the summer of 2009. As part of its settlement with the Ontario Securities Commission, the company hired the global consulting firm Protiviti to assess its boardroom and management practices. There was no welcome mat for Protiviti’s team when it arrived in Waterloo. Balsillie and Lazaridis had a longstanding aversion to consultants; they cost too much, didn’t understand the business, and wasted valuable time. Protiviti’s consultants quickly understood RIM didn’t want them rummaging around in its affairs.

According to a confidential seventy-two-page draft report shared only with RIM’s board and the OSC, Protiviti said there were “significant challenges to our review process.” RIM officials took months to hand over boardroom minutes, and when documents arrived, substantial passages were redacted. Examiners weren’t allowed to copy most documents. Access to managers was limited. They were able to secure interviews with five RIM executives, but all but one were canceled. When Protiviti asked for new meeting times, “we were advised that further requested interviews would not be scheduled,” the report said. In RIM’s defense, Balsillie says Protiviti reached beyond its mandate, disrupting business and “racking up bills.”

Despite being put through an obstacle course, Protiviti collected enough information to paint a disturbing portrait of boardroom and management practices. Two years after the backdating investigation prompted Balsillie to step down as chairman, he hadn’t been replaced. Nor did the rapidly growing
global business have a chief financial officer, a post left vacant when Kavelman, another OSC backdating target, moved to another job in the company. And despite being excoriated by the OSC for misusing option grants, RIM was still having trouble getting options right. Protiviti found 12 percent of option grants awarded to employees in one quarter exceeded internal company limits. One employee received duplicate option grants within a two-month period in 2009. When Protiviti asked for board minutes relating to the employee’s lucky options score, the relevant passage was redacted.

Protiviti’s employees were more disturbed by evidence of what they called lax executive accountability. Traditional standards for measuring CEO accomplishments didn’t seem to exist at RIM. There were no written job descriptions or performance objectives for Balsillie or Lazaridis—benchmarks used by directors to measure compensation. Also missing was a succession plan. Incredibly, no one was being groomed to grab the reins if something happened to the CEOs. Weak accountability was a problem at other levels. The company set goals for lower-level managers, but Protiviti found employees “were not held accountable for meeting the objectives.”

One important duty of public company directors is to oversee strategic planning, but in Waterloo it seemed like an afterthought. RIM’s board paid “limited attention” to strategic planning according to Protiviti. In 2009, the year Apple started taking big bites out of BlackBerry’s market share and RIM was betting heavily on Storm phones, the board’s Strategic Planning Committee met exactly once, for less than two hours, according to Protiviti. As RIM stepped up acquisitions of technology companies to bolster BlackBerry services, directors had little time to assess some deals. According to Protiviti, directors sometimes learned about deals during the same meeting they were asked for approval. Elsewhere, the board’s audit committee was asked to review financial press releases after publication. RIM’s employee count soared 53 percent to 12,800 in 2009. The surge of new hires was so great that “a number” of new executives were not vetted or approved by the board, Protiviti said. The report attributed the board’s inactivity to a lack by some directors of “sufficient understanding of the company’s business” and excessive deference to Balsillie and Lazaridis. “For these and other reasons, there has been some hesitancy for directors to question or challenge management,” the report concluded.

Protiviti’s report landed like a bomb in RIM’s executive offices the fall of 2009. In media and investment circles, RIM remained a global success story. Revenues were nearly doubling annually and the company was adding new
BlackBerry subscribers at a remarkable rate of 49,000 daily. RIM’s executives believed they deserved accolades, not a scathing report. RIM’s response to the report was aggressively defensive. In a filing to the OSC, the company dismissed Protiviti’s findings as “unnecessarily judgmental,” “inappropriate,” and “objectionable.” What mattered most to investors, its executives believed, was growth and profits, and few could top RIM’s record there. If governance was so bad at RIM, why was the company prosperous?

Balsillie later complained that Protiviti’s report “was very harsh on RIM’s governance even though we were at the time the fastest-growing company in the world and very profitable too.” The consultants’ best insight, he says, was a call for directors with industry experience. “Mike and I were basically on our own, navigating unchartered waters,” he says today. “Mike and I made mistakes, but they were honest mistakes. We were 100 percent dedicated to RIM’s success and would have immediately welcomed any resource that would help us, especially new tech-savvy board members. But these people were in very short supply in Canada, despite the false myth that we sought to ‘control the board.’ “ To other RIM insiders, the weak board was the legacy of two strong-willed founders who favored compliant directors. RIM’s global sales chief, Patrick Spence, says Balsillie and Lazaridis assembled a board of directors that would allow them to run RIM “the way they wanted.” RIM’s co-CEOs, Spence says, would have benefited from more experienced and independent directors when the company struggled with legal and product reversals. “Those two are smart enough to know now that if they picked other people, maybe it would have helped along the way and helped them. That’s the way they should have been looking at it, as opposed to something that maybe rubber-stamps.”