It’s ironic that the same week Jim McRitchie reports on lingering opposition to and attempts to circumvent the new proxy access rules Funds Preparing Candidate Pool and Proxy Access Avoidance: Subversive or Accelerating Preemption?, in part because of concerns that directors elected in this manner will focus on extraneous matters and private agendas, we see the HP board – having no significant minority shareholder representation – force out its CEO, Mark Hurd, over matters having little to do with the results of his stewardship. All of this illustrates the need for a sharpening of the focus of corporate law and corporate governance efforts to ensure they serve the purpose of incenting management to emphasize maximization of bona fide shareholder value.
I don’t deny the HP board had little choice under existing law. If they had left Hurd in place amid the scandalous revelations, they would have faced criticism and litigation at every turn on a multitude of theories. That’s the problem: as I have argued on this site and elsewhere, existing law places too much emphasis on process and matters having nothing to do with corporate performance (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule). We need changes in the legal regimen to force boards to evaluate management on its business strategy and performance, as well as corporate compliance with legal obligations.
I’m not condoning what Hurd did, and the board could not and should not ignore it under any legal regimen without compromising the company’s compliance posture, but it appears that by any overall metric he was a good CEO who, following the tumultuous, unfocused reign of Carly Fiorina, delivered excellent financial performance (H-P Chief Quits in Scandal, WSJ, 8/7/10) and created substantial shareholder value with the stock doubling during his tenure.
He was removed for what was ultimately a fairly minor personal indiscretion and de minimus problem with his expense reporting, which may have been handled by his assistant. I’m not sure what was accomplished through his removal other than an eight figure severance payout; the market cap of HP dropped by 8% (perhaps temporarily) when the news broke. One wonders if all concerned wouldn’t have been better off with a stern, private admonition from a board member to ‘knock off the garbage!’
Based upon what we have seen in the financial sector and the Delaware holding in the Citigroup case, it is doubtful if the board would have removed him this quickly if he had been pursuing a questionable business strategy resulting in poor results or heavy debt, encouraging aggressive accounting or overseeing activities resulting in legal claims by suppliers or customers. Witness the litany of cases where boards did nothing in the face of ever-more dubious strategy and results: AIG, Citigroup, WaMu, Merrill Lynch, Fannie/Freddie, Lehman, Bear Stearns, …. Need I ask which approach was better for society?
Indeed the board did not even remove him in the wake of the 2006 pretexting scandal, which in my estimation had more to do with the company’s integrity than the most recent episode.
As we move forward in the proxy access era, we all need to keep our eyes on the ball of corporate governance, namely, ensuring that firms are run for the benefit of shareholders. Of course, this means proper oversight of management compensation and ethical compliance. However, it also means keeping things in perspective when management is performing competently, in pertinent areas. There is no question that this will require changes in law to incorporate a more substantive perspective. With the new focus on governance as a key tool of social policy, one hopes that doctrine will evolve to change the emphasis to where it needs to be for the field to drive beneficial social change.
Publisher’s Note: Thanks for guest post from Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.
According to the above cited WSJ article, Charles Elson, head of the Weinberg Center for Corporate Governance, praised HP directors for forcing out Hurd rather than simply allowing him to repay the disputed expense money. By falsifying expense accounts, he “committed a serious, career-ending error and there should be some financial consequences,” said Nell Minow, of The Corporate Library. (Mark Hurd Neglected to Follow H-P Code, WSJ, 8/8/10) Minow also posted the following and much more (The Real Mark Hurd Scandal at HP, TCL Blog, 8/9/10):
In order to do any business with the government (including eligibility for certain licenses to do business abroad), companies need to be able to demonstrate that they have ‘tone at the top’ ethics and compliance in place. In the post-Enron, post-meltdown world, the government is not impressed with color brochures and fat books of guidelines. They insist on seeing how violators are treated. And if a middle manager would be fired for fiddling with his reimbursements, then the guy who’s been paid more than $100 million has to be fired, too… While most CEO contracts exempt poor performance as a reason for “termination for cause,” there is no reason to permit a departure following an ethics violation to be characterized as a resignation – when the result is a $50 million payout that would otherwise stay in the corporate bank account.
Minow later Tweeted: “HP settled a $50 million fraud claim with the government last week. http://www.wtop.com/?nid=111&sid=2017563. Why isn’t that the news story?” Activist John Chevedden says, “The conduct of Hurd was compounded by the HP board giving him a humongous going-away present.” In my own opinion, “termination for cause” is currently defined much too narrowly.
I’ll close with the following from my friend Dan Boxer who assembled a few talking points for his U.Maine School of Law, Fall 2010 Governance, Ethics and Corporate Responsibility Seminar. DBoxer, Aug. 9, 2010.
And then there is the sad, and very recent, tale of HP and its now departed CEO and Chair, Mark Hurd, who resigned abruptly in early August of 2010. The governance and ethics experts are still sorting out the facts and the decisions which were made, or should have been made differently, by the Board. We will deal more with this in the ethics part of our class, but since we have already touched on required codes of conduct, some facts and commentary, followed by questions to ponder in class are appropriate at this point. Simply put:
- Mr. Hurd was viewed as wildly successful by the investment community and had done wonders for the stock price through tough financial discipline and new business efforts. He was also viewed as a non imperious, low ego kind of guy who stayed out of trouble and tolerated no inappropriate behavior.
- HP, and Mr. Hurd in particular, implemented, promoted and supposedly enforced with zero tolerance for violation, a model code of business conduct and ethics.
- A company contractor, through her attorney, sent a letter to Mr. Hurd alleging sexual harassment. He immediately turned the letter over to the General Counsel who sent it to the Board which began an investigation.
- The investigation found that Mr. Hurd did not harass the contractor, but that he had violated the code by having a nonsexual, non harassing dalliance (my word) with a female contractor and hiding the costs of dinner and travel in expense accounts (which he said were not prepared by him).
- The board immediately forced his resignation and he left with huge severance compensation. Here is a relevant excerpt from an HP official statement:
The H-P board asked for Mr. Hurd’s resignation in large part because of the conflict between his actions and the code of conduct, which he publicly championed in 2006 following a boardroom scandal, H-P said.
Mr. Hurd’s statement included a confession of sorts:
As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at H.P.
6. The company stock lost $10Billion in value the next day and a lot more today.
This situation could be a course in itself and there are many more interesting facts not laid out above, or which remain to be learned. Nevertheless, the whole mess raises some interesting questions and teaches some good lessons which we will discuss. Here are a few:
- Codes of conduct and tough ethical standards don’t mean much if they are not followed or equally applied. However—should they be equally applied if the result is a massive loss of shareholder income? But if they aren’t equally applied, does the ensuing reputation for unfair and arbitrary application of company standards ultimately undermine the integrity of the company and create a rogue mentality which is worse for the shareholders in the long run?
- Human frailty, weakness, greed, lust, etc. cannot be contained by laws (SOX, etc.) or rules. So are we wasting our time enacting them?
- The Board knew that the stock would take a big hit, but showed real courage in confirming a zero tolerance culture and demanding Hurd’s immediate resignation. This is refreshing since we have seen so many examples of CEOs hanging onto their jobs when they have demonstrated questionable conduct.
- It would have been interesting to be a fly on the wall and hear the Board discuss whether its duty was to protect/maximize shareholder wealth (e.g.,stock price) vs. the obligation to other stakeholders, vs. the obligation to the company as an institution to be preserved for the long term, vs. balancing responsibilities to shareholders (among which there are long and short term interests) for both the short and long term?
- Was this actually a fire-able offense? In similar situations employees might well be required to go through sensitivity training, reimburse the company for questionable expenses or be placed on some sort of probation. Would Hurd have been treated less harshly if he were a top performer but not the public persona of the company? A lower level employee? Did the Board overreact? Should the top person who can affect the future of the company be cut more, or less, slack since he can affect so many careers and pocketbooks?
- What would the public disclosure requirements have been had the board sought to deal with this as an internal matter?
- Cynically, was the Board only “cutting its losses,” since it looks like it concluded it could have a public relations disaster and an unmanageable work situation with an ineffective and distracted CEO under various scenarios of keeping Mr. Hurd in place and then having the facts come out? Very recent information seems to indicate that the contractor was a former “soft porn” actress appearing in R-rated films. In other words, was the decision a purely business/economics one, not an ethical one? Did the board do the right thing for the wrong reason?
- Would things have been different if HP had split the roles of CEO and Chair?
- Did the board show a lack of courage and send the wrong signal when it agreed to pay massive severance (recognizing that this is a contract issue depending on the terms and they may have had little choice)?
- Ms. Fisher, the contractor, is a case study all her own in disingenuous and unethical behavior. According to today’s reports (Aug, 9, 2010) Ms. Foster put out a statement: “I was surprised and saddened that Mark Hurd lost his job over this,” Fisher said in a statement. “That was never my intention.” What did she think could be a likely outcome when she put the whole thing in motion, she hires a lawyer with a reputation for tough, no holds barred, aggressive attacks on powerful people in order to get money for her client?
Here is just a sample of some articles with the facts as known to date and some speculation about facts and ethics:
- Boss’s Stumble May Also Trip Hewlett-Packard, New York Times, Aug. 8, 2010.
- Mark Hurd’s Leadership Failure, Business Ethics Magazine, Aug. 7, 2010
- Division of Roles Could Help HP, New York Times, Aug. 8, 2010
- The Shot ‘Hurd’ Round the Boardroom, Jeffrey M. Cunningham, NACD, Aug. 10, 2010
And here is the actual HP code of conduct.