Inside Business

September 28, 2011 7:26 pm

Boardroom dangers of Silicon Valley’s insularity

HP upheaval puts boardroom culture under the spotlight again, writes Richard Waters

After the spectacular leadership bust-up at Yahoo, co-founder Jerry Yang and Carol Bartz, the just-dumped chief executive, probably don’t make for the closest of boardroom allies. Ms Bartz, you will recall, denounced her former colleagues on the Yahoo board as “doofuses” and attacked chairman Roy Bostock for a lack of class in firing her over the phone.

Five miles east of Yahoo’s Silicon Valley HQ, though, Ms Bartz and Mr Yang still have to make nice. That’s the home base of another troubled tech titan, Cisco Systems, where both are on the board.

Perhaps, as lead independent director at Cisco, the trash-talking Ms Bartz will one day get the chance to show the classy way to do these things: it would fall to her to deliver the bad news to chairman and chief executive John Chambers, should Cisco’s board ever decide he is the not the person to dig it out of its problems.

This would seem to be a classic illustration of the perils that have long afflicted Silicon Valley boards. The geographic isolation and wilful insularity of the Valley’s tech industry have been both a strength and a weakness, fostering a highly tuned competitive culture as well as a certain blindness to the accepted rules of good corporate governance.

The latest upheaval at Hewlett-Packard has put boardroom culture in the Valley under the spotlight once again.

While it is easy in hindsight to spot the mistakes, though, there are no simple formulas for good governance in tech. Given the rapid shifts in technology markets, it is not apparent that a classic big-company board – one made up of outsiders versed in a range of disciplines unrelated to the core business of the company – would always do a better job.

It is certainly the case that the tech world’s insularity, along with the overweening power of its founder-CEOs, has produced its problems.

Boards whose members share a common worldview may not be well-adapted to the external forces faced by big concerns, particularly if they have grown so fast that they still carry many of the trappings of start-ups. And groups of directors who have never seen anything but huge success can also be blind to the external forces that eventually topple them.

Exhibit A in this regard is the former Sun Microsystems, which wilfully refused to acknowledge that the world had changed after the tech bust a decade ago. Convinced that IT spending would snap back quickly, Sun clung to its high cost base and a technology strategy that worked well in the 1990s, but proved ill-suited to the cost-conscious, open-source world of the past decade.

Sun eventually got the message and changed course. A boardroom overhaul was part of the response: by 2009, a majority of its 12 directors had been on the board for less than three years. But it was too late by then to make a difference: the company was sunk by the recession that followed the credit crisis and was swallowed by Oracle.

Hewlett-Packard, of course, has become the master of futile boardroom overhauls. Beginning with an injection of new blood in the 1990s that led to the hiring of outsider Carly Fiorina as CEO, there have since been no fewer than five major reshuffles. Subsequent big changes came with the acquisition of Compaq Computer (which brought five new directors into the HP boardroom), the arrival of Mark Hurd after Ms Fiorina was forced out (four new directors) and the fallout from the boardroom spying scandal of 2006 (four more). This was capped by the spring-cleaning that took place after HP’s board drew more scorn for forcing out Mr Hurd in 2010, after it lost confidence in him in the wake of unsubstantiated sexual harassment claims: seven of its 13 directors have joined since last October.

So what have HP’s shareholders got for all of this? A frequently faction-ridden, dysfunctional boardroom that has warred with itself and failed to supply consistent direction. With so many new faces and little personal credibility invested in earlier initiatives, it was easy for the board to back a sharp change of strategy this year, even in the midst of a fierce business downturn – something that proved too much for Wall Street to swallow and hastened the firing of another CEO, Léo Apotheker.

Remaking a board on the fly in response to the rapid swings in fortune in the tech world clearly doesn’t work.

This leaves two effective boardroom models: companies such as Intel, that enshrined traditional ideas of good corporate governance in strong boardroom cultures without waiting for a crisis; and those such as Apple, that have relied on a small, tight-knit group of directors to support strong-willed founder-CEOs.

With Mr Jobs now gone, not the least of the issues before Apple will be whether this approach will continue to serve it well.

Richard Waters is the FT’s West Coast Managing Editor

richard.waters@ft.com

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