"The Hewlett Board - Who Were They Representing?"

Sydney M. Williams

Thought of the Day

“The Hewlett Board – Who Were They Representing?”

August 12, 2010

The primary responsibility of a for-profit company’s board of directors is to the stockholders, to see that their interests are protected. It is not to the management; it is not to the employees; it is not to the community; it is to the shareholders, to protect their interests. The boards of not-for-profit entities are responsible for all stakeholders and the same is often true in Europe for for-profit businesses. But not in the United States.

For years boards of directors have seemed more interested in the benefits they receive and in acceding to the wishes of management than in representing the interests of shareholders. A friend recently pointed out that the auditors of many public companies, responsible to the board, increasingly bypass the board reporting directly to senior management. In too many cases these guardians of shareholders interests have abdicated their responsibilities.

During the 1990s and the first years of the current decade, many boards acquiesced to the issuance of lucrative option plans, even suggesting they aligned management’s interests with those of shareholders, which they did not. The size of some of these option grants allowed too many managers – not entrepreneurs or founders – to make hundreds of millions of dollars. If the underlying stock did well, existing shareholders were diluted; if it did not do well the options expired worthless, but no loss was incurred by the recipient, other than what “might have been.” In a few cases options were back-dated, an exercise in fraud.

The decision by the board of Hewlett-Packard last Friday to precipitously fire CEO Mark Hurd strikes me as a disservice to the stockholders. Larry Ellison, the founder and CEO of Oracle, both a competitor and partner of Hewlett, may have overreacted when he sent an open e-mail to the New York Times. Nevertheless, his point was clear. He argued that “the HP board failed to act in the best interest of HP’s employees, shareholders, customers and partners.” It was, he claimed, “the worst personnel decision since the idiots on the Apple board fired Steve Jobs several years ago.”

The firing stemmed from a lawsuit filed by a fifty-year old former actress, Jodie Fisher, who had been hired, under contract, by Hewlett in 2007 “to work at high-level customer and executive summit events held around the country and abroad” (her words). In other words, she was a conference planner or event coordinator, a function common among larger businesses. At some point, obviously, something happened (or allegedly did) and she filed a sexual harassment suit against Mr. Hurd. The suit was settled privately, without litigation. Ms. Fisher stated, “Mark and I never had an affair or intimate sexual relationship.” An investigation by the board found that Hewlett’s sexual harassment policy had not been violated. However, a presentation by the Washington, D.C. based public relations firm, APCO Worldwide suggested the possibility of months of bad publicity, so the board determined that Mr. Hurd had “exhibited a profound lack of judgment” and that he had to resign. A few “falsified” expense accounts were uncovered, providing the excuse.

According to Quentin Hardy, the Silicon Valley chief for Forbes, “Hurd left without either a chance to examine the expenses that got him fired, or a formal meeting with the board.”

Prior to Mr. Hurd’s elevation to CEO, Hewlett-Packard had a troubled time. Carly Fiorina (now GOP candidate for the U.S. Senate from California) was made CEO in 1999. She merged the company with Compaq Computer, which led to a proxy fight with some of the children of the company’s two founders. The board fired her in 2005 and elevated Patricia Dunn, who was fired the next year for allegedly hiring detectives to spy on directors, employees and journalists. Mr. Hurd, named CEO in October 2006, returned stability to the company and, more important, profitability and growth. During his four years as CEO, in a difficult market – the S&P 500 declined 21% – the stock of Hewlett has risen 5%, and that is after a 12% decline following the firing of Mr. Hurd last Friday! Earnings have risen, during his tenure at a compounded rate of 18% and sales at 8%, according to Mr. Hardy.

A clue to the board’s seemingly hasty decision might be seen in an interview with Mr. Hurd conducted by Quentin Hardy of Forbes, in April of this year. Mr. Hurd, who had arrived at Hewlett from NCR, had a reputation “for slashing costs (and heads)…” And HPQ had been known as a “warm and fuzzy” place to work. As Mr. Hurd wrote, “Wringing so much from so many people has a high cost, and Hurd has a reputation for being inflexibly demanding – even among admirers.” Nevertheless, the results, as Mr. Hardy points out, have been impressive and stockholders benefitted.

So, Mr. Hurd may have alienated some on the board and they may have been leaning toward replacing him anyway, but it is difficult to see how the decision will benefit shareholders – those for whom they are responsible.

Regardless, the sudden firing raises legitimate questions. How could a company of this size – 300,000 employees and an estimated $125 billion in revenues and $100 billion market cap – not have a succession plan? Interim CEO, Cathie Lesjak, the current CFO and a 24-year veteran of the company, has said she has no interest in the job. If Mr. Hurd was fired for cause why was he given an estimated $40 million severance package? Why was Mr. Hurd not given an opportunity to present his case to the board, once he had been vindicated of the sexual harassment charge? Did the board consider the effect of their decision on the stockholders?

If nothing else, the board’s action strikes one as rash and sanctimonious. As a good friend said to me on Wednesday, “I am sure I did worse things yesterday than Mark Hurd allegedly did, and I can’t even remember what I did.”