Board games
A battlefield guide: Five lessons to be learned from the astonishing corporate soap opera at HP.
Justin Fox, Fortune editor-at-large

(Fortune Magazine) -- There are three flavors of publicly held corporation, Warren Buffett wrote in 1993. In one, the controlling owner is the manager, which is how things worked at Hewlett-Packard for the first two decades after its 1957 IPO, as founders Dave Packard and Bill Hewlett ran the show.

Then there are companies in which the controlling owner is not a manager. Buffett called this setup "logically ... the most effective in ensuring first-class management," and indeed, the years when Packard and Hewlett controlled but did not manage HP - 1978 through 1993 - were mostly glorious ones for the company.

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Patricia Dunn will step down as HP chairwoman next year, to be succeeded by CEO Mark Hurd.

Since then, HP (Charts) has joined Buffett's third category, that of corporations with no controlling shareholder. These pose the most ticklish governance challenge, as the board of directors is technically in charge but often lacks clout and commitment. HP's board has displayed more clout than most - firing CEO Carly Fiorina early last year, for example. But now it has gotten itself into a spectacular mess.

Upset by boardroom leaks, non-executive chairman Patricia Dunn unleashed -unwittingly, she says - company-paid identity thieves on her colleagues and a few journalists. The phone records thus obtained pointed to the company's longest-serving board member, George Keyworth, who was asked in May to resign but initially refused.

Another board member, Tom Perkins, quit in protest at the investigative tactics, then began pressuring the company to fess up. The story finally broke in early September, sparking a media frenzy and criminal investigations. So what can we learn from it?

Lesson 1: There are leaks, and there are leaks. Dunn and others at the company portray their missteps as minor compared with the dastardly behavior they were intended to halt. The board was trying to root out "persistent disclosure of confidential information from within its ranks," Dunn said.

But the CNET News article that sent HP's leak investigation into high gear in January doesn't fit that description. It was an account of a board retreat, with quotes about long-term HP plans from a "source" who turned out to be Keyworth, and it was neither embarrassing nor very revealing. Stanford law professor and corporate-governance expert Joseph Grundfest contends that Keyworth's "blabbing" was bad enough that it could expose him to a lawsuit for breach of fiduciary duty.

But was it as bad as using identity theft to obtain his phone records on behalf of a famously ethical company in a computer industry beset by customer fears about privacy invasion and identity theft? Not even close.

Lesson 2: Directors aren't great at directing. This is nothing new. (See William O. Douglas, "Directors Who Do Not Direct," Harvard Law Review, June 1934.) The problem is the separation of ownership and control outlined by Buffett. HP's outside board members, including chairman Dunn, are part-timers with insignificant ownership stakes.

HP's part-timers have taken their jobs seriously. But they bungled the leak investigation, and now the board has lost Keyworth, a member since 1986, and Perkins, who launched HP's computer business before co-founding the VC firm Kleiner Perkins Caufield & Byers in 1972. Dunn's allies portray the two as obstreperous, but they possessed independent authority that newcomers selected under the watchful eye of CEO Mark Hurd might not.

In January, Dunn plans to hand the chairmanship to Hurd, a step backward in the eyes of governance purists, which may make things run more smoothly but will leave directors even less apt to direct.

Lesson 3: Lawyers can't tell you what's right. Dunn and other board members relied heavily on Silicon Valley superlawyer Larry Sonsini to tell them how to proceed. Maybe things were different sometime in the hazy past, but these days it seems the job of a corporate lawyer is to divine your wishes and tell you whether you can get away with them, not judge right and wrong.

Lesson 4: If you get into a boardroom battle with the author of a novel titled Sex and the Single Zillionaire, don't expect him to keep quiet. After resigning in May, the outspoken Perkins sent an e-mail to HP directors and executives in July outlining his concerns. Yet they remained silent, allowing him to set the tone of press coverage.

Lesson 5: There's a winner in every scandal. A year ago, former HP CEO Carly Fiorina was a washout. Now the board that ditched her has handed her a gift: a high-profile blowup-just in time for the Oct. 9 release of her memoir, Tough Choices.

You can also read the latest Fortune stories on your handheld device at CNNMoney.mobi.

David Kirkpatrick contributed to this article.

The peculiar logic of Patricia Dunn.

HP phone sweep: The spokesman too. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.