HP: Hewlett Packard's Corporate Governance Woes - 1

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1. The Origins of Hewlett Packard Corporate Governance Problems - the Carly Fiorina Years


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» Preface
» Background: HP's Founders and the HP Way
» The Demise of the HP Way
» The Founders' Heirs Lose Strategic Influence
» CEO Fiorina's Disdain for the HP Board
» Board Fires Chairwoman and CEO Carly Fiorina


HP, the Palo Alto technology giant was back in the spotlight in 2005 with the second replacement of a board chairperson in two years - and because of questionable methods it has used to locate the source of leaks on board matters to the Wall Street Journal and CNET.

Public knowledge of the origins of HP's corporate governance problems can be traced back to HP's controversial merger with Compaq, a merger which was pushed through by Carly Fiorina over the objections of Walter Hewlett, son of co-founder William Hewlett. The merger was announced on September 3, 2001.

The turn of the century marked the start of a tumultuous time for HP's board of directors. The first six years of the new millennium saw continuous board infighting, the summary firing of Carly Fiorina, Chairwoman and CEO from July 1999 to February 2005, leaks of board discussions to the press, the use of illegal monitoring tactics and pretexting of suspected board members, a senate hearing, felony (criminal) charges levied against Patricia Dunn, the Chairwoman who followed Fiorina, HP executives and contractors, and an insider trading suit against Mark Hurd, Chairman and CEO.

While the worst of the scandal appears to be behind HP, the episode is an object lesson on the corporate governance woes that can beset an organization.

Background: HP's Founders and the HP Way

HP's birthplace - a Garage at 369 Addison Avenue, Palo Alto, and Birthplace of Silicon ValleyHP was started in a one-car garage in 1938 by two Stanford University classmates, Bill Hewlett and Dave Packard, trying their hand at anything that could make a buck - with no business plan. Their initial investment of $538 included a used drill press and they assembled their contraption in a rented non-descript Palo Alto garage that is today considered to be the birthplace of silicon valley. They tried their hand at making and marketing an audio oscillator - an electronic test instrument used by sound engineers. The idea worked and Walt Disney Studios, ordered eight oscillators to use in developing and testing a new and exciting sound system for the movie Fantasia. Their initial success made them formalize their partnership between on January 1, 1939.   More information on HP's history can be found on the HP's history website.

As their company grew in size, HP's founders, William Hewlett and Dave Packard instituted a management philosophy called the HP Way. It included a value system that set the standard for ethical behaviour in Silicon Valley and beyond - a set of values that included integrity, respect for individuals, teamwork, employee retention, innovation, contribution to customers and the community.

Bill Hewlett & Dave Packard in 1963The HP Way included MBO: management by objective - "the antithesis of management by control." Workers determined how best to accomplish agreed-upon goals, thus fostering innovative thinking and an entrepreneurial spirit. Management and employees were part of a single team, information was shared, and discussions we characterized by the use of the word "we". While the founders stated that profitability was a primary objectives they also placed valuing the people who joined the HP team above a blind pursuit of profits. The result of the HP Way was a highly motivated, productive, loyal and fiercely dedicated work force that believed in the HP Way as others believed in a religion.

When Packard and Hewlett passed away in 1996 and 2001, respectively, their enduring legacy was not the technology giant they had created. Rather, it was the HP Way.

The Demise of the HP Way

Carly Fiorina HP CEO and Chair 99-05When Carly Fiorina assumed the roles of Chairwoman and CEO in July 1999, she felt that the ways of the founders were too old-fashioned. A new more dynamic style was needed to prepare the company for the 21st century and one of her initiatives was to negotiate the acquisition of Compaq.

When co-founder William Hewlett's son Walter Hewlett, felt that that the Compaq acquisition - and indeed, many of Fiorina's initiatives - violated the spirit of the HP Way. Dunn is quoted as saying that the Compaq deal was a way to "quit talking about the HP Way."

While the founders had shunned developing personality cults, Fiorina had her portrait placed beside portraits of the founders throughout HP offices.

After Compaq was acquired. Fiorina summarily fired over 15,000 employees.

The HP Way had, however, valued employee retention. During times of change, employees were reassigned rather than fired. If a suitable reassignment could not be found immediately, employees could search spend six months searching or waiting for a suitable position within the organization. During periods of low earnings, work days were shortened and work shared in order to retain employees. The founders even turned down short-term contracts in order to avoid laying off workers after the contracts finished. They said they didn't want a "hire-and-fire operation".

Fiorina's firings after the Compaq acquisition spelled the final demise of the HP Way and her decisions caused directors with links to the founders a great deal of concern.

The Founders' Heirs Lose Strategic Influence

On November 6, 2001 Walter Hewlett, son of co-founder William Hewlett, announced his opposition to the merger. Then on the next day, David Packard who was not a director but a shareholder and son of HP's other co-founder, also announced his opposition to the deal. A divisive proxy battled followed and the shareholders agreed to the merger by a cliff-hanger. 49% were opposed. William Hewlett tried to bock the deal by launching a court challenge on March 28, 2002 - a challenge that was dismissed by a Delaware judge on April 30.

CEO Fiorina's Disdain for the HP Board

While William Hewlett was the sole board member opposed to the deal, the improved performance forecast by Fiorina failed to materialize and as HP's stock languished, Fiorina began to have disagreements with the board about HP's strategic direction. Her tenure was described as "a reign of terror and poor performance."

Fiorina also had little respect for HP's board of directors, or for their opinions. In her book Tough Choices, she agrees with HP's outside counsel Larry Sonsini, who in an assessment of the board concluded the personality conflicts with the board made it "dysfunctional." She goes on to say, "Some Board members' behaviour was amateurish and immature. Some didn't do their homework. Some had fixed opinions on certain topics and no opinion at all on others. Some members were bored and distracting during important agenda items like leadership development or corporate social responsibility."

Fiorina goes on to disparage individual directors. She describes Lucille S. Salhany, a former television executive, as someone who was "insecure and could be swayed by others," and someone who was "simply not qualified" to serve as chairperson of the board's nominating and governance committee. George Keyworth is described as "overwrought" and "impatient with practical details."

Board Fires Chairwoman and CEO Carly Fiorina

In the end, the board was not as dysfunctional as Carly Fiorina had presumed. When her sweeping changes failed to achieve the results she had forecast and as her relations with the board deteriorated, the board were united in their decision to fire her and they acted decisively. She now laments, "It turns out I wasn't as smart as I needed to be."

In her memoirs, Fiorina recollects the days leading up to her firing. Two days ahead of a board retreat in January 2005, directors George Keyworth, Patricia Dunn, and Dick Hackborn (a former HP executive), approached her with their concerns. "The group was odd and so was their timing," noted Fiorina.

Apparently, nothing came of the meeting or the concerns of the directors went unanswered, because the board's next step was to meet again on February 7, 2005, this time at an airport hotel in Chicago, a destination chosen to avoid the public spotlight. Fiorina writes: "When I arrived in the meeting room, the dynamics were clear. Despite his long-term disdain for her, I now saw Jay (Keyworth) whispering in Pattie's (Dunn's) ear and laughing with her at some private joke. Pattie kicked the meeting off. This in itself was strange. She was not the chair of any committee. Everyone but me seemed to know what was about to happen.

"Larry Sonsini mentioned a meeting that had apparently taken place the night before between some Board members and a governance expert. I hadn't been made aware of it or invited to it, despite my role as chairman of the Board. It was as if I weren't in the room at all. No one would look me in the eye. And then Pattie said, "Carly, do you have anything to say?";

"I was startled. This wasn't going to be a conversation; apparently the Board wanted a statement. I had made copies of a document I'd prepared the day before so now I passed them around the table."

"I finished reading, hoping to be asked a question. I was met with complete silence. And then Pattie asked me to leave the room. Having traveled two thousand miles, I was dismissed in about twenty-nine minutes."

"It would be three hours before I would be asked to return to the conference room." "When I finally received the call to rejoin the meeting, I thought about each Board member as I rode the elevator down past those twenty-four floors. I didn't know what to expect, but I assumed I would be facing them. I wasn't prepared for the empty conference room I entered. When I opened the door and realized all but two Board members had already left, I knew I had been fired. When Bob Knowling said, "The Board has decided to make a change. I'm very sorry, Carly" I knew he had opposed my ouster. When Pattie, who had become the new chairman of the Board, said they wanted to make an announcement immediately, I realized I would not be treated like other CEOs. The meeting lasted less than three minutes. I asked for a few hours to think, and I left the room."

"I expected the board to look me in the eye and tell me why. They did not have the courage to face me. They did not thank me and they did not say goodbye."...I was utterly devastated."

"I received a letter from Pattie Dunn in which she expressed her admiration for my leadership -'you will remain a hero' - and regret that her role had been 'misconstrued' by the press. She would not give me permission to publish the letter, fearing that it would be used in 'a context that would reflect negatively on [her] and/or the Board'."

After the announcement of Fiorina's departure, Dunn, the newly appointed chairperson, made an announcement to the media saying that the board had been discussing Fiorina's performance for several weeks. Fiorina confirmed that "the board and I have differences about how to execute HP's strategy."