Abillionaire sporting a high-society ex-wife who writes racy bestsellers along with a $100m yacht named “The Maltese Falcon”. A former White House science adviser who talks too much. And private detectives playing dirty tricks to secretly monitor the telephone calls of independent directors.
Are these the salacious ingredients of an undiscovered Ian Fleming spy novel? No, they portray the boardroom shenanigans at Hewlett-Packard, one of America’s most iconic innovators. While the company’s stock has behaved well in the past year, the company’s board has not. Its directors have seriously mismanaged issues of internal trust and external transparency. California’s attorney-general and the Securities and Exchange Commission have reportedly begun investigations.
Under Mark Hurd, its new chief executive, HP has been a case study of a high-tech turnround – balancing cost-cuts, a big software acquisition and market share capture from industry leader Dell Computer. By humiliating contrast, the company’s corporate governance culture – once seen as a paragon of ethical rectitude – appears to have regressed into a spiral of disrespect, deception and dysfunction. HP’s boardroom behaviour, however, may be less an aberration than a harbinger of corporate conflicts to come.
What happened? Carly Fiorina, Mr Hurd’s high-profile predecessor, had engineered a controversial $25bn acquisition of Compaq Computer in 2001 that provoked a boardroom fight; polarised HP’s executives with her management style; and had failed to move the stock. HP’s independent directors began to pressure their chairman and CEO. They brought back retired director Tom Perkins. Mr Perkins, once married to romance novelist Danielle Steel with a taste for big boats, reportedly had private conversations about board concerns with Ms Fiorina’s tenure even before his return. Another board member, former White House science adviser George Keyworth, pushed Ms Fiorina to put a technology specialist into a top job. She said selecting management was her role, not the board’s.
The intensifying board pressure did not take place in a vacuum. Press leaks infuriated media-savvy Ms Fiorina. She felt publicly betrayed. The breach proved irreconcilable. The independent directors voted to dismiss her in February 2005. NCR’s Mr Hurd succeeded her as CEO, but not chairman, that April. HP’s new non-executive chairman – Barclays Global Investors’ Patricia Dunn – sought to find the leakers. Private investigators were retained. Phone records procured by the investigators in an ethically and perhaps legally questionable fashion fingered Mr Keyworth as the leaker. His behaviour was declared a violation of the company’s standards by Ms Dunn and HP counsel.
A boardroom confrontation ensued in May. Mr Perkins, finding both the process and Mr Keyworth’s treatment disgraceful, resigned. Mr Keyworth was asked to resign; he declined but will not stand for re-election. While US law requires boards to disclose if directors leave over fundamental disagreements, HP’s board concluded that Mr Perkins had issues with Ms Dunn but not the company, so there was no legal requirement to disclose. The SEC may come to a different conclusion.
The precedents here are awful. Does the fiduciary duty of a chairman oblige her to surreptitiously procure the phone records of suspect board members? If one declines to turn over their phone and e-mail records to investigate an unauthorised disclosure, should they be compelled to resign? Legally, the duty of independent directors is not to fellow directors or management but to shareholders. Is good governance best served by practices that conceal board actions and create perverse incentives for leaks and lawsuits?
The answer is no. Clearly, leak-driven corporate politicking can be destructive. But forbidding meaningful public dissent short of resignation leads to Watergate-like boardroom fiascos where the “cover-up is worse than the crime”. If being a director means subjecting oneself to surveillance authorised by the chairman, a disturbing line has been crossed. It is easy to imagine a Russian or Chinese company justifying a crackdown on public boardroom dissent by pointing to HP.
Boards need to encourage more transparency, not less. There should be formal mechanisms where disagreements can be publicly disclosed instead of creating perverse incentives for leaks. Painful? Perhaps. But surely a better direction to go than HP’s bizarre example. The company will survive; the reputation of its board will not.
The writer is an MIT researcher; his earlier comment on boardroom transparency is at: www.ft.com/transparency