The Hewlett-Packard spy-pretexting fiasco will probably go down as a case study in flawed corporate governance.
Here's a board that tried fixing a problem about a director leaking, and made a mess of it. Then it tried to clean up that mess and made an even bigger one. This lot can't take a trick.
Nell Minnow from The Corporate Library argues that the situation reflects a deeply dysfunctional board, one that screwed up badly by selecting Carly Fiorina as the first CEO from outside the company and with no strategic or operational experience. Here was a board that showed itself to be incapable of defusing a damaging boardroom battle when board member Walter Hewlett, son of one of the co-founders, voted in favor of the merger with Compaq and then led the opposition to the deal. And then to add insult to injury, the directors gave Fiorina an obscenely massive departure package that rewarded her for her time when the share price performance was dismal.
Minnow's piece in MarketWatch says the media's preoccupation with the legality of the investigative techniques misses the point completely. The big issue, she says, is how the board handled a betrayal of trust in the context of Sarbanes-Oxley and heightened scrutiny from shareholders and regulators
"The most fundamental requirement for board effectiveness is trust, the ability to communicate in an atmosphere of candor and confidentiality. When a director chooses to leak proprietary information about strategic deliberations, including possible acquisitions, it damages the company's ability to plan and compete and destroys the ability of the board to function in any capacity…I am all in favor of more director accessibility to shareholders, but a rogue director's decision to tell the press about preliminary board discussions shows poor judgment and a lack of understanding about what it is to be a director…We need to know more about the investigation now. It seems clear that it crossed the boundaries of acceptable conduct. "Pretexting" is the wrong word. It should simply be called "fraud." But let's not lose sight of the original breach of trust, the unilateral decision by one director to reveal confidential information, deny that he had done so, and then refuse to resign when he was found to have been responsible."
Minnow has a point. But the media's focus on the legality of the investigative techniques can hardly be misplaced when the company's officials are facing indictment for the piece of boardroom espionage.
Still, the most fundamental issue is that this board has tried to fix the problem and has ended up making an even bigger hash of it.
It's a point raised by David Lazarus in the San Francisco Chronicle.
HP's board, he says, has mishandled the situation with chair Patricia Dunn and has now reverted back to the situation where the CEO is also going to be chairman. Nice work if you can get it but it's not exactly known as corporate governance best practice. Still, in defence of the board and CEO Mark Hurd, independence is pretty much a state of mind.
The other lesson for boards is about the handling of leaks. The problem is that companies generally don't seem well-equipped to deal with directors who breach boardroom confidentiality, writes Theresa Tedesco in the National Post.
In other words, the problems now besetting Hewlett-Packard might also reflect similar issues confronting other companies. Directors all over the world might well be nervous watching this case unfold.
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