The Hindu Business Line : When HP lost its Way

Large public companies receive public funds. Shareholders assume that the company is doing its best to use the money profitably and operates legally. The publicity surrounding the HP pretexting investigation should send signals to company directors on what is expected of them.

Computer giant Hewlett-Packard is known in business schools for its `HP way.' This was a statement of the principles on which the company was run. It was laid down by the founders, and guided the company for many years. In the 2000 Annual Report, then Chairperson and CEO, Ms Carly Fiorina, explained that the HP Way had got `clouded' over the years, thus necessitating a new `the rules of the garage' (in honour of the garage where the founders started the company) to guide HP in the 21st century. These rules include respect for the individual, contribution to customers and the community, integrity, teamwork and innovation.

If you have been following the news in the papers lately, it would have become obvious that something was lost in the translation of the principles to suit modern times. Let's quickly review the gist of the story.

We have a situation in HP where one director was leaking board discussions to the press. Some of it seemed like confidential information about company strategy. The board recognised that it had a problem and made it clear to all that the leaks should stop. It did not. Chairperson Patricia Dunn (who replaced Ms Fiorina) instituted an investigation into the matter and identified one member, Mr George Keyworth, as the person responsible. He resigned.

Illegal tactics

All seems fair and square. The problem was that in an effort to plug the leak of information, the investigation efforts, allegedly with the knowledge of Ms Dunn and senior executives, seemed to be using illegal tactics to identify the leaker. The company appointed an outside agency that used a practice called `pretexting' which involved pretending to be the person whose records of phone calls made were sought from the phone companies, and so a sting operation was initiated in trying to trace the leak. Company directors and nine journalists were investigated.

Due to violation of laws regarding privacy of information and the illegal practice of pretexting, HP is now under investigation by law enforcement agencies under US state and federal statutes with regard to the illegal tactics. The Chairperson and two board members, other senior officials, including the General Counsel, have resigned. The Chairperson now faces criminal charges.

Work culture and ethics

It would be instructive to reflect on the culture, ethics and work practices of the board given that it worked in such a dysfunctional manner. If an appeal to keep matters confidential does not work and the company has to resort to investigative techniques, that does not suggest that individuals in charge of the future of the company deserve that job. If some members of the board and top management were aware of the illegal tactics used and approved or did nothing about it, what standards do they expect from their over 80,000 employees?

The board of directors is expected to be a tightly-knit group that deliberates the future of the company and is ultimately responsible for all the actions of the company. Confidential information has to be discussed openly with the trust that a collective decision will be taken in the long-term interest of the company. If such discussions are made known to the public, it would result in directors not being open about their views, and that would reduce the effectiveness of the board, apart from harming the company's strategic intent. Such leaks could adversely stock prices and harm the company's standing. After all, the board is not a political party where members make public statements to score points against each other.

But that has been happening at HP for some time now. HP's board has a history of being dysfunctional. You may recall that a few years ago Mr Walter Hewlett, son of the co-founder of the company and a director, initially agreed to the proposed acquisition by HP of Compaq and then changed his mind.Unable to convince his colleagues on the board, he took to making public statements about his opposition. He finally had to resign and HP went on to acquire Compaq.

The board was unhappy with the way Ms Fiorina was functioning, and in February 2005 decided to terminate her services as Chairperson and CEO. That was the board's prerogative and it took great courage on its part to come to that crucial decision. But reports about board deliberations began appearing in the press. The board rightly decided that unofficial leaks of board matters must stop and the new Chairman, Ms Dunn, raised the issue with the directors. When the leaks continued, she began the investigation.

Mr George Keyworth, a director who has since been named as the person who leaked information, is a long-standing member of HP's board; he is the Chairman of the Progress and Freedom Foundation, a think tank that studies the digital revolution, and a former presidential adviser. One would have expected better conduct from him. If he disagreed with the board's decisions, he should have attempted to convince his colleagues, or stepped down. But this is where the issue gets murky.

Issue gets murky

Did he or did he not make `leak'? The company at one time released a statement that Mr Keyworth has met with reporters on the company's behalf. So the board liked him as a spokesperson, but did not like some of the things he was speaking about? Mr Keyworth issued a statement wanting Ms Dunn to quit because of the leak investigation. Another board member, Mr Perkins, who has also since resigned, issued statements supporting Mr Keyworth. Was the board and the company being held hostage to personality clashes between its members?

The board rightly tried to fix its ethical problem of leaks, but led the company down a slippery slope in the methods used and now the entire company is distracted by these events.

The CEO, Mr Mark Hurd, is fighting fire about illegal behaviour at a time when his efforts at turning company around were actually going well. HP does not need this kind of distraction. Company share prices have fallen amid confusion. A board that should be leading the company forward is instead causing great harm.

The Investigation

The US House (that is, the lower house of Parliament) Energy and Commerce Sub-Committee on Oversight and Investigations has been investigating this matter by calling relevant personnel for testimony. (Kudos to the US political system; the elected representatives have moved fast to investigate this matter.)

Watching the hearing, I was amazed to see Mr Adler, Global Security Manager, Ms Dunn, and their lead outside counsel, Mr Larry Sonsini, duck questions, re-interpret their e-mail messages, and obfuscate in their replies. Ironically, Ms Dunn admitted that her role on the board was as a corporate governance expert.

Large public companies are the recipients of public funds. Many hard working people buy the stock of such a company and assume that it is doing its best to use the money profitably and operates legally.

The directors have the fiduciary responsibility to oversee that process. That was not happening at HP. The HP board has been in a mess for some time now and institutional shareholders who have significant voting stock have to share the blame in not keeping a watch on how the shareholder's representatives are doing their job.

Hopefully, Congress will not pass further laws about how privacy needs to be protected, or the methods that can be used to gather information.

There are sufficient laws in the books that make pretexting illegal. At this stage, the incidents at HP are just an aberration and the publicity surrounding it should send signals to other directors about what is expected of them.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

More Stories on : Corporate Governance | American Periscope

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