HP clash shows director dysfunction
Surveillance disclosure could paint troublesome picture for computer maker's investors.
By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The latest clash between Hewlett-Packard's directors presents a close-up view of the usually closed-door affairs of its board, and observes think the picture isn't pretty.

At the center of the issue is the way the computer maker handled an internal investigation into company leaks, namely the manner in which it obtained phone records of its board members and others outside of the company.

The Palo Alto, Calif.-based company's methods are being examined by California's attorney general, whose investigation could result in criminal charges.

"The surveillance of a director, particularly one not accused of self- dealing, is very troubling," said Charles Elson, a governance expert and professor at the University of Delaware.

The drama dates back to 2005, before former chief executive Carly Fiorina was forced out by the board. After Fiorina left the company in February of that year, board chairwoman Patricia Dunn initiated a probe to find the source of leaks about internal board deliberations to the news media.

The investigation fingered director George Keyworth as the source. He was asked to resign, but refused to do so. Noted venture capitalist Thomas Perkins, another member of the board, immediately quit his position on the board to protest the way the investigation into the media leaks was handled, asserting phone and e-mail records were improperly recorded.

The SEC is looking at how HP disclosed Perkins' resignation.

Company leaks aren't healthy, but they do happen, Elson said. "The issue is how they responded. In this case, the damage done by this investigation is much more serious than any damage caused by the leak," he said.

HP (Charts) claims its investigators didn't record or eavesdrop on calls, and that its investigators used "pretexting," a practice where someone pretends to be someone else in order to access personal confidential information.

California Attorney General Tom Lockyer said the HP investigation is ongoing, and while it isn't clear whether HP's action was illegal, it was "colossally stupid."

The impact for investors

As the investigation proceeds, the individuals on the board who commissioned the probe will most likely be under the most scrutiny, said Edward Harmon, partner with the law firm Thorp Reed & Armstrong. That's likely to put the spotlight on Dunn, who initiated the internal investigation.

But when companies hire investigative firms, they usually include provisions in their contracts that protect them in case the investigators fail to comply with applicable laws.

Harmon, who counsels boards on corporate governance issues, said he'd be surprised if HP didn't have a similar agreement.

While the HP fracas raises several governance issues, at least one investor said he wasn't concerned about the investigation spilling over to impact the company's daily operations.

"There would have to be a significant ramp up in the investigation in order for it to impact operations and the ability to grow sales and earnings," said Joel Binder of Old Second Wealth Management, which owns shares of HP.

So far, chief executive Mark Hurd, who joined HP's board last April, has managed to distance himself from the fray. Binder said that's a good sign, but added he'd start to get concerned if the investigation began to draw time and attention away from management.

The furor over the investigation comes in the midst of HP's turnaround. The company's growth has been reinvigorated in the last year, and it's been gaining ground on top rival Dell (Charts). The company's success has largely been attributed to Hurd, who aggressively slashed costs when he took over the helm.

Besides a potential criminal investigation, the disclosure of company leaks is likely to spark ire among shareholders, who could sue board members for breaching their fiduciary duty.

In general board discussions are meant to be confidential, said George J. Terwilliger, a former deputy attorney general who heads up the corporate defense practice at White & Case. "The kind of information that should be shared with the investing public is pretty well determined by law and regulation," he noted.

From a shareholder standpoint, there's a growing wariness with this group of individuals and how they operate as a functioning board, Elson said. To regain their trust, HP needs to make it clear that it will not approach this issue in the same way in the future.

"Shareholders really need to do a lot of thinking about the operation and effectiveness of this group," he said.


Patricia Dunn should resign as chairman of HP Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.