HP’s Boardroom Drama and Divorce
IN RECENT YEARS, Hewlett-Packard (HP) lost its rank among the largest technology companies in the world. It started the 2010s as one of the largest, with revenues north of $127 billion at its peak in 2011. In 2014 (with revenues of some $111 billion), HP was still in the top five in size. Late in 2015 it became harder to keep score, because the company split into two companies, each going their own way. However, if you combine the 2016 revenues of HP and HPE, you are now south of $100 billion.
Decline in revenue was not HP’ s most difficult problem during this period. Worse was the huge eroÂsion in shareholder value, which was much more draÂmatic and which we will discuss soon. The company’s decline is in sharp contrast to most of its history. Indeed, HP was once so successful that it was featured as one of a handful of visionary Companies in the busiÂness bestseller Built to Last (published in 1994). These select companies outperformed the stock market by a wide margin over several decades. Built to Last opens with a quote by HP’s co-founder Bill Hewlett:
Hewlett passed away in 2001. Much has changed at HP since then. Within the 18 months from April 2010 to November 2012, HP’s market value dropped by almost 80 percent, wiping out $82 billion in shareholder wealth. Over the longer term, from early 2010 until summer 2015, HP’s stock price declined by 42 percent, while the tech-heavy NASDAQ-100, containing many firms that compete with HP, rose by 143 percent. This marks a whopping 185 percentage points difference in performance! It turns out that a perfect storm of corpoÂrate governance problems, combined with repeated ethÂical shortcomings, had been brewing at HP for a decade. The result: a sustained competitive disadvantage.
This development is even more astonishing given that, at one point, HP was much admired for its corporate culture:-known as ”the HP Way.” The core values of the HP Way include business conducted with ”uncomÂpromising integrity,” as well as ”trust and respect for individuals,” among others (see Exhibit MC21.1).
The HP Way guided the company since its incepÂtion in 1938, when it was founded with some $500 of initial investment in Dave Packard’s garage in Palo Alto, California. As one of the world’s most successful technology companies (think laser printing), HP initiÂated the famous technology cluster now known as SiliÂcon Valley. Over the past decade, however, HP’s board of directors-a group of individuals that is supposed to represent the interests of the firm’s shareholders and oversee the CEO-seemed to forget the HP Way as it violated its core values time and time again. In the proÂcess, HP’s board of directors acted out a drama rivalÂing House of Cards, with the season finale not yet in sight
The first season of the drama ”aired” in 2006. The online technology site CNET published an article on HP’s strategy. Quoting an anonymous source, the article disclosed sensitive details that could have come only from one of the directors or senior executives at HP. Eager to discover the identity of the leaker, Patricia Dunn, then chair of the board, launched a covert invesÂtigation. She hired an outside security firm to conduct surveillance on HP’s board members, select employÂees, and even some journalists. Although it is common for companies to monitor phone and computer use of their employees, HP’ s investigation went above and beyond. The private investigators used an illegal spyÂing technique called ”pretexting” (impersonating the targets) to obtain phone records by contacting telecom service providers. The security firm obtained some 300 telephone records covering mobile, ho1ne, and office phones of all directors (including Dunn), nine journalists, and several HP employees. Not to leave anything to chance, the security firm also obtained phone records of the spouses and even the children of HP board members and employees. The firm also conÂducted physical surveillance of the suspected leakerÂboard member George Keyworth-and his spouse, as well as two other directors.
In a May 2006 board meeting, Dunn presented the evidence gathered, implicating Keyworth as the source of the leak. Dunn’s disclosure of the investigaÂtion infuriated HP director Thomas Perkins, a promiÂnent venture capitalist, so much that he resigned on the spot. Perkins called the HP-initiated surveillance ”illegal, unethical, and a misplaced corporate priority.”2
Perkins also forced HP to disclose the spying camÂpaign to the Securities and Exchange Commission ( and thus the public) as his reason for resigning. Dunn and Keyworth were dismissed from the board along with six senior HP managers. Despite the boardroom drama, HP came out unscathed financially, largely due to the superior performance of then-CEO Mark Hurd.
Hurd was appointed Hewlett-Packard’s CEO in the spring of 2005. He began his business career 25 years earlier as an entry-level salesperson with NCR, a U.S. technology company best known for its bar code scanners in retail outlets and automatic teller machines (ATMs). By the time Hurd worked his way up to the role of CEO at NCR, he had earned a reputation as a low-profile, no-nonsense manager focused on flawless strategy execution. When he was appointed HP’s CEO, industry analysts p14aised its board of directors for its decision. Investors hoped that Hurd would run an effiÂcient and lean operation at HP and return the company to its former greatness and, above all, profitability.
Hurd did not disappoint. By all indications, he was highly successful at the helm of HP. The company became number one in desktop computer sales and increased its lead in inkjet and laser printers to more than 50 percent market share. Through significant costÂcutting and streamlining measures, Hurd turned HP into a lean operation. For example, he oversaw largeÂscale layoffs and a pay cut for all remaining employees as he reorganized the company. Wall Street rewarded HP shareholders with an almost 90 percent stock price appreciation during Hurd’s tenure, outperforming broader stock market indices by a wide margin.
Yet, in the summer of 2010, HP aired the second seaÂson of its boardroom soap opera. The HP board found itself caught between a rock and a hard place, with no easy options in sight. Jodie Fisher, a former adult movie actor, filed a lawsuit against Hurd alleging sexual harassment. As an independent contractor, Fisher had worked as a hostess at HP-sponsored events. In this function, she had screened attending HP customers and personally ensured that Hurd spent time with the most important ones. With another ethics scandal looming despite Hurd’s stellar financial results for the company, HP’s board of directors forced him to resign. He left HP in August 2010 with an exit package worth $35 million.
The third season of HP’s boardroom drama began in the fall of 2010 when HP announced Leo Apotheker as its new CEO. Apotheker, who came to HP after being let go from the German enterprise software company SAP, proposed a new corporate strategy for HP. He suggested that the company focus on enterprise softÂware solutions and spin off its low-margin consumer hardware business. HP’s consumer hardware business resulted from the $25 billion acquisition of Compaq during the tumultuous tenure of CEO Carly Fiorina, prior to Mark Hurd. The hardware business had grown to 40 percent of HP’s total revenues.
Under Apotheker, HP also exited the mobile device industry, most notably tablet computers. Many viewed this move as capitulating to Apple’s dominance. As part of his new corporate strategy, Apotheker was eager to make a high-impact acquisition to put his strategic vision of HP as a software and service company into action. He ended up acquiring the British software company Autonomy for $11 billion, which analysts saw as grossly overvalued. Shortly thereafter, HP took an almost $9 billion write-down due to alleged ”accounting inaccuracies” at Autonomy. HP’s stock went into free fall. During Apothekerâ€™s short 11 months at the helm of HP, the share price dropped by almost 50 percent. HP’ s due diligence process by the board was clearly flawed when acquiring Autonomy. The process itself had been truncated. Moreover, the HP board did not heed the red flags thrown up by Deloitte, Autonomy’s auditor. Indeed, a few days before the Autonomy acquisition was finalized, Deloitte auditors asked to meet with the board to inform them about a former Autonomy executive who accused the company of accounting irregularities. Deloitte also added that had it investigated the claim and did not find any irregularities.
Perhaps most problematic, the board fell victim to groupthink, rallying around Apotheker as CEO and Ray Lane, the board chair, who strongly supported him. In the wake of the Hurd ethics scandal, an outside recruiting firm had proposed Apotheker as CEO and Lane as the new chair of HP’s board of directors. The full board never met either of the men before hiring I them into key strategic positions! The HP board of directors experienced a major shakeup after the Hurd ethics scandal and then again after the departure of Apotheker. Lane stepped down as chair of HP’s board in the spring of 2013 but remains a director.
After Apotheker was let go, HP did not conduct a search for its next CEO. Instead, in the fall of 2011, the board appointed one of its directors, Meg Whitman, as CEO because the board me1nbers were ”too exhausted by the fighting.”3 Whitman had been the CEO at eBay, was appointed to HP’s board of directors in 2011, and was a director when the Autonomy acq11isition was approved. In an effort to regain competitiveness Whitman cut 55,000 jobs.
As noted above, in 2015 HP split into two firms, one focusing on consumer hardware (PCs and printers) and called HP Inc. ($48 billion in 2016 revenues), and the other on business equipment and services called Hewlett Packard Enterprise ($50 billion in 2016 revenues). This corporate strategy move is very similar to what Apotheker had suggested three years earlier and similar to what IBM, one of HP’s main rival, had undertaken a decade earlier. Whitman remained CEO of the new Hewlett Packard Enterprise, which is considered to have higher growth potential than the low-margin computer hardware business. By 2017, both standalone companies Hewlett Packard Enterprise and HP-were performing decently. Indeed, Hewlett Packard Enterprise outperformed the tech-heavy NASDAQ- 100 index over the past few years, while old-line HP Inc. performed roughly at the same level as the broader technology market. Both companies have avoided major boardroom drama in recent years.
EXHIBIT MC21.1 / The HP Way
We have trust and respect for individuals.
We approach each situation with the belief that people want to do a good job and will do so, given the proper tools and support. We attract highly capable, diverse, innovat1ve people and recognize their efforts and contributions to the company. HP people contribute enthusiastically and share in the success that they make possible.
We focus on a high level of achievement and contribution
Our customers expect HP products and services to be of the highest quality and to provide lasting value. To achieve this, all HP people, especially managers, must be leaders who generate enthusiasm and respond with extra effort to meet customer needs. Techniques and management practices which are effective today may be outdated in the future. For us to remain at the forefront in all our activities, people should always be looking for new and better ways to do their work.
We conduct our business with uncompromising integrity.
We expect HP people to be open and honest in their dealings to earn the trust and loyalty of others. People at every level are expected to adhere to the highest standards of business ethics and must understand that anything less is unacceptable. As a practical matter, ethical conduct cannot be assured by written HP policies and codes; it must be an integral part of the organization, a deeply ingrained tradition that is passed from one generation of employees to another.
We achieve our common objectives through teamwork.
We recognize that it is only through effective cooperation within and among organizations that we can achieve our goals. Our commitment is to work as a worldwide team to fulfill the expectations of our customers, shareholders and others who depend upon us. The benefits and obligations of doing business are shared among all HP people.
We encourage flexibility and innovation.
We create an inclusive work environment which supports the diversity of our people and stimulates innovation. We strive for overall objectives which are clearly stated and agreed upon, and allow people flexibility in working toward goals in ways that they help determine are best for the organization. HP people should personally accept responsibility and be encouraged to upgrade their skills and capabilities through ongoing training and development. This is especially important in a technical business where the rate of progress is rapid and where people are expected to adapt to change.
1 Who is to blame for HP’s shareholder-value destruction-the CEO, the board of directors, or both? What recourse, if any, do shareholders have?
2 Why did HP split itself into two firms, a move that was rejected just three years earlier? Do you think the corporate strategy move of splitting the ”old” HP into two companies (HP Inc. and Hewlett Packard Enterprise, HPE) will create shareholder value? Why or why not? Which of the two companies would you expect to be the higher performer? Why?
3 You are brought in as a corporate governance consultant or a business ethics consultant by the board of directors (of either HP or HPE). What recommendations would you give the board? How would you go about implementing them? Be specific.
4 Discuss the general lessons in terms of corporate governance and business ethics that can be drawn from this MiniCase.