August 13, 2010 11:03 pm

Hurd set for pay-out due to contract loophole

A loophole in Mark Hurd’s contract made it hard for Hewlett-Packard to dismiss him outright and added to pressure on the board to give him severance pay that could be worth nearly $40m in spite of his admission of ethical lapses, according to experts in boardroom practice.

The terms of the former HP chief executive’s employment did not lay out any specific circumstances in which the company would fire him “for cause”, which would have enabled it to avoid paying severance.

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This contrasts with the contracts of most chief executives in the US, which usually lay out more detailed conditions on which they can be fired, including for breaches of a company’s ethical code of behaviour, said Nell Minow, a US corporate governance expert.

Mr Hurd resigned under pressure a week ago after admitting that he did not “live up to the standards and principles of trust, respect and integrity that I have espoused at HP”. The company said he had left by agreement with the board over expense violations and a “close personal relationship” with an external contractor that contravened its code of conduct.

Mr Hurd’s severance includes $12m in cash plus stock benefits. The value of the latter cannot yet be calculated, but the total package probably comes to about $40m, according to one person close to the situation. The Hurd pay-out has drawn criticism from governance experts and has already become a focus of the first shareholder lawsuit filed against HP over his departure.

While not commenting on the loophole, Gary Lutin, a US shareholder activist, said: “If it was really about Hurd submitting a misleading expense report, I’m sure they could have found a lawyer somewhere in America who thought that justified firing him without a dime of severance.”

HP’s board could have sought to fire Mr Hurd for cause even without a clear definition of circumstances in his contract, experts said. However, that would have made it far harder to defend any legal action from him later to recover his severance. “The squishier the definition, the harder it is to prove cause,” said Charles Elson, of the University of Delaware.

Even if Mr Hurd’s contract had not contained the loophole, HP would probably still have been unwilling to fire him over the ethical lapses to which he admitted since it might have “led to a slugfest over the expenses”, Mr Elson said.

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